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3P Turbo Cross Border Investment in Brazil.pdf
- 1. Group 62 3P Turbo—Cross- Border Investment in Brazil Case 008
- 2. Jens Martensson 2 GROUP PROFILE Group No 62 NAME ID NO Shaikh Saifullah Khalid 23-2027 Nusrat Jahan 23-2009 Md. Ullash Hossen 23-2227
- 4. Jens Martensson • Privately held turbocharger manufacturer based in the United States was founded in 1992 • 3P Turbo manufactures powerful, precise and high performing turbochargers for luxury and regular cars • An ISO9001:2008 certified company for its quality building and product performance • Have businesses in many countries like: Brazil, Mexico and so on COMPANY PROFILE 4
- 6. Jens Martensson • Brazil's economic and political condition seems highly unfavorable for investment • Economic growth rate declined by 3.8% and is expected to fall continuously • Inflation rate of the country is exceeding 10% and unemployment rate is over 10% • Political turmoil is taking place due to government’s involvement in corruption scandal • Economy has a good record to overcome economic problems and achieve economic stability • Central Bank’s interest is lowered to 7.25% to increase the growth of the country • Even with supportive govt. policies, the country is experiencing low growth of 8% ECONOMY ANALYSIS 6
- 8. Jens Martensson PESTLE ANALYSIS Your Logo Here 8 • Technology's impact on product offering • Impact on cost structure in this industry Political • Regulatory pressure from govt. • Increased tariff to 55% • Import quota on Mexico Economic • Economy is volatile • Low growth rate with high inflation • Interventionist policies of govt. Social • Consumer’s preference for high performing engines • Customers' prefer fuel efficiency in engines Technological • Regular technological upgradation is needed to rule • Capable workforce is needed for production Environmental • Reduction in fuel consumption by 12% is supported • Environment affecting companies pay high tax rate Legal • Inovar Auto act for tax incentives on eco-based companies • ICMS tax and exemption from it
- 9. Jens Martensson Porter’s Five Forces Analysis 9 Competitive Rivalry- Moderate Suppliers Bargaining Power- Low Buyers Bargaining Power- Low Threat of New Entrants- Low Threat of Substitutes-Low
- 11. Jens Martensson SWOT ANALYSIS • High Capital Expenditure • High risk for future. • Regulatory change WEAKNESSES • Has opportunity to influence the market. • Fast-mover advantage. • Lower cost opportunity OPPURTUNITIES • Provides full technical support for every single product it sold • Superior product quality and customer service • ISO9001:2008-certified company. STRENGTHS • Slow adoption of alternative fuel vehicles. • High operating costs. THREATS
- 12. Jens Martensson Country Risk of Brazil POLITICAL RISK COMPONENT(PR) 100 51.5 THE ECONOMIC RISK COMPONENTS(ER) 50 19.5 ASSESSING FINANCIAL RISK(FR) 50 23.5 Total = 0.5*(PR+ER+FR) 47 Country Risk is very high as composite risk is below 49 (USA’s country risk 72.5 - lower)
- 14. ➢ Should Jonson invest now or wait until the election in 2018? ➢ Would 3P Turbo’s superior quality, high-performance turbochargers have a competitive edge in Brazil? ➢ Would entering Brazil during this turbulent time give 3P Turbo first-mover advantage? Faced with uncompetitive regulation, the founder of 3P Turbo, Jason Starks, was contemplating setting up a facility to manufacture automobile turbochargers in Brazil. At that time, Brazil was experiencing huge political turmoil, resulting from the Petrobras scandal that involved prominent business and political leaders, and the impeachment of the country’s president, Dilma Rousseff. It was also hit with the worst recession in two decades, exacerbated by low commodity prices and the slow-down of the Chinese economy. PROBLEM STATEMENT
- 16. Jens Martensson Scenarios 16 Investing at 3:1 D/E level borrowing 90 million Real Debt Issue from Unrestricted Subsidiary Investing at 1:1 D/E level borrowing 60 million Real Liquidation Valuation 100% internal funding use
- 18. Jens Martensson Scenario 1: Borrowing 60 million BR from German Vendors • Average revenue and cost growth 9% (at Brazilian inflation rate) • Initial investment R$130 million • Tax rate 34% • Depreciation 24 million per year • Vendor subsidized interest cost 2% • Swap exchange rate (R$/Euro) 4.20 • US cost of capital (Adjusted with country risk) 10% • Brazilian cost of capital (country risk adjusted) 17.55% • Spot rate (R$/$) 3.56
- 19. Jens Martensson Borrowing 60 million BR from German Vendors 2016 2017 2018 2019 2020 2021 Total Operating Cash Flows (BR) 25716 28662.9 36468 43887 52413 Cost of building and equipment (BR) -120000 Cost of Training After Tax (BR) -6600 SalvageValue (BR) 30000 Capital Gain Taxes (30%) (BR) -9000 Value of Cheap Financing 6,510 Total Free Cash Flow (BR) -120090 25716 28663 36468 43887 73413 Expected Future Exchange Rate 3.56 3.80 4.07 4.34 4.64 4.96 Total Free Cash Flow (US$) -33733 6760 7050 8394 9453 14798 Discounting US CF with US Cost of Capital IRR ($) 10.19% NPV (US$000) $190.409 MIRR($) 10.12% Less: Financial distress cost $1.904 Add: Real option $9342.98 Adjusted NPV (S) $9531.49
- 20. Jens Martensson Borrowing 60 million from German Vendors • Coefficient of variations 3.01
- 21. Jens Martensson Scenario 2: D/E Ratio 1:1 Borrowing 60 million Real from the German vendor NPV (US$000) (419.136) Less: Financial distress cost (2.10) Add: Real option 9342.98 Adjusted NPV ($) 8,925.94 IRR ($) 9.58% MIRR($) 9.73% Value of Cheap Financing (BR) 4,340
- 22. Jens Martensson Scenario 2: D/E Ratio 1:1 • Coefficient of variations 0.649
- 23. Jens Martensson Scenario 3: 100% Internal Funding NPV (US$000) (5,852.731) Less: Financial distress cost Add: Real option 9342.98 Adjusted NPV ($) 3490.253 IRR (USD) 3.87% MIRR(USD) 6.11% • Price increase 6% • Production, selling and administration cost increase are 10%,9.5% and 11%
- 24. Jens Martensson Scenario 3: 100% Equity Funding • Coefficient of variations 0.475
- 26. Jens Martensson RECOMMENDATION & JUSTIFICATION 26 ✓Hold the project until election Scenarios Adjusted NPV MIRR CV Borrow 90 million (D/E 3:1) 9531.49 10.12% 3.01 Borrow 60 million (D/E 1:1) 8925.944 9.73% 0.649 100% internal financing 3490.253 6.11% 0.475
- 27. Thank You
- 28. Jens Martensson Appendix 1 28 Cost of capital
- 29. Jens Martensson Appendix 2 29 Estimating future exchange rates
- 30. Jens Martensson Appendix 3 30 Real Option Valuation Time to expiration 3 Exercise price (X) 35561.79 Current price (S) 38155.38 Volatility (σ) 6.95% risk free rate 7% d1 2.38 d2 2.26 N(d1) 0.991 N(d2) 0.988 Call option value 9342.98