Nirma Limited Capital Expenditure Plans


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Nirma Limited Capital Expenditure Plans

  1. 1. Nirma Limited-Capital Expenditure Plans Nirma Limited’s Capital Expenditure (Capex) has been increasing for the past few years as shown below: Trends Nirma Ltd. FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 Very Good Decrease Decrease Drastic Capex Increase(29) Increase(52) (102) (48) (26) Increase(311) Salient Points on Nirma’s Capex: There is a drastic increase (around 6 times) in the capex of the company from FY 2007 to FY 2008. The Company successfully completed the acquisition of Searles Valley Minerals Inc., the USA based Soda Ash producer in FY 2008 for USD 225 million which explains the sudden rise in capex activity. 1
  2. 2. With this acquisition, the Company has become one of the largest producers of soda ash in the world, with a combined soda ash capacity of nearly 2 million tpa. and has started establishing a strong presence in the international market. The Company has six plants, mostly located in backward areas of Gujarat. The company has investments in Government Securities, Equity Shares, Debentures and in shares of subsidiary companies- Karnavati Holdings Inc. and Nirma Consumer Care, which forms around 87% of the total investments of worth Rs. 45.85 Crores in FY 2008. The Company has multiple product lines with principal products as Detergents, Soaps and Edible Salt. As a part of the integration strategy the Company has, in stages, set up facilities to manufacture the required key raw materials. Its strong backward-integrated operations are a source of a strong competitive advantage. Accordingly, the plants have already been set up to manufacture N-Paraffin, Linear Alkyl Benzene, Linear Alkyl Benzene Sulphonate, Sulfuric Acid, Alpha Olefin sulphonate, Glycerine, Fatty Acid and printing and packing facilities for Detergents, Soaps and Salt. Soda Ash and Industrial Salt are other key products of the Company. The products being manufactured at Healthcare division include I.V. fluid, Injectable, Medical devises and I.V. sets. The various Capex projects by Nirma (on-hand) are tabulated below: Nirma Ltd. Capacity Cost (Rs. Project Name Location Product Tonnes/day Tonnes/annum Status Crore) Sodium Soda Ash Under Porbandar GUJ 300 carbonate (Soda 1200 438,000 Project Implementation Ash) Caustic Soda Kalatalav Sodium hydroxide Under 170 40 14,600 Project Bhavnagar GUJ (Caustic Soda) Implementation Pure Water Kalatalav Under 80 Waters 80 29,200 Project Bhavnagar GUJ Implementation Mahua Bhavnagar Coke Project 100 Electricity Unit 1 30 Mw - Announcement GUJ Out of the above projects, let us consider the case of the Soda Ash Project for analysis of Capex Plans of Nirma. 2
  3. 3. Nirma’s Soda Ash Project Type of project: Expansion of capacity of the existing plant in Porbandar of 650,000 tpa by approx. 450,000 tpa to a total capacity of 1,100,000 tpa. Soda Ash Industry in India: The performance of India's Rs.22-billion Soda Ash industry depends heavily on end user segments, such as glass and detergents. Driven by the high growth in the construction industry (key consumers of glass), Soda Ash demand in India is estimated to have registered a compounded annual growth rate (CAGR) of 4 to 5 percent during the past five years. Indian Soda Ash prices will continue to be linked to international prices, which were depressed until 2004. However, due to growing demand and limited capacity additions, prices are picking up steadily. The Company is second largest producer of Soda Ash in India. Soda Ash is a basic input for glass, detergent and other chemicals. With the strong economic development and growth in automobile and housing sector, the demand for Soda Ash likely to grow at a CAGR of 5% in the coming years. During the financial year 2007-08, the Detergent, Soaps, Soda Ash and LAB continued to be leading products for the company. Nirma’s Soda Ash Projects- A Snapshot: Nirma Ltd. Project Name Soda Ash Project 1 Soda Ash Project 2 Soda Ash Project 3 Project Status Completed Completed Under Implementation Project Cost (Rs. Crore) 1037 95.73 300 Event (1) Date of announcement Date of announcement Date of announcement Date (1) 1995.06.01 2001.09.01 2007.01.13 Event (2) Expenses incurred till Expenses incurred till MoU signed Date (2) 1997.06.10 2002.03.31 2007.01.13 Event (3) Completed Completed Completion by Date (3) 2000.09.30 2002.09.30 2009.04.30 Event (4) Commercial Prod Commercial Prod Date (4) 2000.09.30 2002.09.30 * The current capacity of the Soda Ash Plant is 650,000 TPA. 3
  4. 4. The past trends in Soda Ash Production and Turnover by Nirma are tabulated below: Soda Ash 2004-2005 2005-2006 2006-2007 2007-2008 Capacity (tpa) 650,000 650,000 650,000 650,000 Production (Tonnes) 542,378 527,912 465,364 358,742 Turnover (Tonnes) 545,459 519,206 474,864 351,958 Turnover (Rs.) 270.81 323.19 395.65 341.62 Observations: Both the production and the turnover (in tonnes) have been falling for the past few years for Soda Ash. Turnover (in Rs.) has been rising, with a slight fall in FY 2008 clearly indicating that company’s operational efficiency is improving. Assumptions for analysis of the project: The life of the project is assumed to be around 6 years (considering the fact the company increased its capacity by nearly 70 % after 7 years from 2002). After 7 years, either a new project to increase the capacity will have to be introduced (depending on the status of the demand for Soda Ash) or the plant will have to be scrapped off. 4
  5. 5. The demand for Soda Ash likely to grow at a CAGR of 5% in the coming years. The turnover is expected to grow @ 10% pa in the first few coming years (considering the fact that now Nirma has become a global player); however, with the increased competition, the turnover increase would reduce towards the last few years. The operating margin is assumed to be 20% considering the fact that with the acquisition of SVM, Nirma is expected to improve its operations by in- sourcing the advanced technology. Depreciation on fixed assets is provided on Straight Line method. Tax rate is assumed to be @ 33 %. Total Capex cost = Rs. 300 Crore (Including Working Capital) Nirma Limited Capex (All Fig. in Rs. Crores) 2009 2010 2011 2012 2013 2014 2015 Nirma Limited Additional Sales 300 330 363 399.3 359.37 323.433 Estimated operating margins 20% 20% 20% 20% 20% 20% Initial Investment Fixed Asset Investment -240 Working Capital Investment -60 Periodic Cash Flows Depreciation -40 -40 -40 -40 -40 -40 Change in Operating Profit before Tax Due to Capex 60.00 66.00 72.60 79.86 71.87 64.69 Tax @ 33% 19.80 21.78 23.96 26.35 23.72 21.35 Profit after Tax 40.20 44.22 48.64 53.51 48.16 43.34 Operating Free Cash Flow 80.20 84.22 88.64 93.51 88.16 83.34 Terminal Value 60 5
  6. 6. FY 2009 2010 2011 2012 2013 2014 2015 Free Cash Flow -300 80.20 84.22 88.64 93.51 88.16 143.34 Thus, we have: Payback period= Around 3.5 years NPV @ 15.5 %= Rs.45.91 Crores IRR = 21% PI= 1.15 Comments: The NPV of the project is positive. The IRR is greater than the discount rate (assumed to be around 15%) PI > 1  Hence, Nirma should go ahead with the project References: 1. Nirma’s Annual Reports 2. CMIE-PROWESS 3. 6