Industry Profile

Introduction

Without a sound and effective banking system in India it cannot have a

healthy economy. The banking system of India should not only be hassle free but it

should be able to meet new challenges posed by the technology and any other

external and internal factors. Banking in India has its origin as early as Vedic

Period. It is believed that the transition from money lending to banking must have

occurred even before Manu, the great Hindu Jurist who has devoted a section of his

work to deposits and advances and laid down the rules relating to rates of interest.

During the days of East India Company it was the turn of the agency houses to

carry on the banking business.

History

The banking system of India should not only be hassle free but it should be

able to meet new challenges posed by the technology and any other external and

internal factors. For the past three decades India's banking system has several

outstanding achievements to its credit. The most striking is its extensive reach. It is

no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian

banking system has reached even to the remote corners of the country. The first

bank in India, though conservative, was established in 1786. From 1786 till today,

the journey of Indian Banking System can be segregated into three distinct phases.

They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

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Nationalisation of Indian Banks and up to 1991 prior to Indian

banking sector Reforms.

New phase of Indian Banking System with the advent of Indian

Financial & Banking Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of Bengal

(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units

and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank of India

was established which started as private shareholders banks, mostly Europeans

shareholders. In 1865 Allahabad Bank was established and first time exclusively

by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at

Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of

Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve

Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced

periodic failures between 1913 and 1948. There were approximately 1100 banks,

mostly small. To streamline the functioning and activities of commercial banks, the

Government of India came up with The Banking Companies Act, 1949 which was

later changed to Banking Regulation Act 1949 as per amending Act of 1965.

Phase II

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Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalised Imperial Bank of India with extensive

banking facilities on a large scale specially in rural and semi-urban areas. It formed

State Bank of india to act as the principal agent of RBI and to handle banking

transactions of the Union and State Governments all over the country.

By the 1960s, the Indian banking industry has become an important tool to

facilitate the development of the Indian economy. At the same time, it has emerged

as a large employer, and a debate has ensued about the possibility to nationalise the

banking industry. Indira Gandhi, the-then Prime Minister of India expressed the

intention of the GOI in the annual conference of the All India Congress Meeting.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on

19th July, 1969, major process of nationalisation was carried out.

A second dose of nationalization of 6 more commercial banks followed in

1980. The stated reason for the nationalization was to give the government more

control of credit delivery. With the second dose of nationalization, the GOI

controlled around 91% of the banking business of India. Later on, in the year 1993,

the government merged New Bank of India with Punjab National Bank. It was the

only merger between nationalized banks and resulted in the reduction of the

number of nationalised banks from 20 to 19.

Phase III

This phase has introduced many more products and facilities in the banking

sector in its reforms measure. In 1991, under the chairmanship of M Narasimham,

a committee was set up by his name which worked for the liberalisation of banking

practices.

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The country is flooded with foreign banks and their ATM stations. Efforts

are being put to give a satisfactory service to customers. Phone banking and net

banking is introduced. The entire system became more convenient and swift. Time

is given more importance than money.

The financial system of India has shown a great deal of resilience. It is

sheltered from any crisis triggered by any external macroeconomics shock as other

East Asian Countries suffered. This is all due to a flexible exchange rate regime,

the foreign reserves are high, the capital account is not yet fully convertible, and

banks and their customers have limited foreign exchange exposure.

Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy

of liberalisation, licensing a small number of private banks. These came to be

known as New Generation tech-savvy banks and included Global Trust Bank. This

move, along with the rapid growth in the economy of India, revitalized the banking

sector in India, which has seen rapid growth with strong contribution from all the

three sectors of banks, namely, government banks, private banks and foreign

banks.

The next stage for the Indian banking has been setup with the proposed

relaxation in the norms for Foreign Direct Investment, where all Foreign Investors

in banks may be given voting rights which could exceed the present cap of 10%,at

present it has gone up to 49% with some restrictions. Currently, banking in India is

generally fairly mature in terms of supply, product range and reach-even though

reach in rural India still remains a challenge for the private sector and foreign

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banks. In terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets relative to other

banks in comparable economies in its region. With the growth in the Indian

economy expected to be strong for quite some time-especially in its services

sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong. One may also expect M&A,

takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed

Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector

bank) to 10%. This is the first time an investor has been allowed to hold more than

5% in a private sector bank since the RBI announced norms in 2005 that any stake

exceeding 5% in the private sector banks would need to be vetted by them.

Indian Banking system

The Indian Banking Industry can be categorized into non-scheduled banks

and scheduled banks. Scheduled banks constitute of commercial banks and co-

operative banks. There are about 67,000 branches of Scheduled banks spread

across India. As far as the present scenario is concerned the banking industry in

India is in a transition phase. The Public Sector Banks (Pubs), which are the

foundation of the Indian Banking system account for more than 78 per cent of total

banking industry assets. Unfortunately they are burdened with excessive Non

Performing assets (NPAs), massive manpower and lack of modern technology.

On the other hand the Private Sector Banks are witnessing immense

progress. They are leaders in Internet banking, mobile banking, phone banking,

ATMs. On the other hand the Public Sector Banks are still facing the problem of

unhappy employees. There has been a decrease of 20 percent in the employee

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strength of the private sector in the wake of the Voluntary Retirement Schemes

(VRS). As far as foreign banks are concerned they are likely to succeed in India

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Co-operative BanksRegional Rural BanksCommercial Banks

State Bank Group

Private Sector Banks

Indian Banks Foreign Banks

Public Sector Banks

Nationalized Banks

State Bank of India Associate Banks

State Co-operative Banks

Central Co-operative Banks

Primary Credit

Reserve Bank of India

Indusland Bank was the first private bank to be set up in India. IDBI, ING

Vyasa Bank, SBI Commercial and International Bank Ltd, Dhanalakshmi Bank

Ltd, Karur Vysya Bank Ltd, Bank of Rajasthan Ltd etc are some Private Sector

Banks. Banks from the Public Sector include Punjab National bank, Vijaya Bank,

UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank etc.

ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd;

Citibank etc are some foreign banks operating in India.

Commercial banks

Commercial banks have been in existence for many decades. Commercial

Banks mobilize savings in urban areas and make them available to large and small

individual and trading units mainly for Working Capital requirements. After1969,

Commercial Banks are broadly classified into nationalized public sector banks and

private sector banks. The State Bank of India and its associate Banks along with

another 20 banks are the public sector banks. The private sector banks include a

small number of Indian Scheduled banks which have not been nationalized.

Public Sector Banks

Public sector banks are those which are owned by the Central Government

either directly or through the Reserve Bank of India. They are also known as

Nationalised Banks. Eg: State Bank of India and its subsidiaries, Allahabad Bank,

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Corporation Bank, Vijaya Bank, Canara Bank, Bank of Baroda, Punjab National

Bank, Syndicate Bank, the Oriental Bank of Commerce.

Private Sector Banks

Private Sector banks are those which are owned and controlled by private

entrepreneurs. Private sector banks are classified as Private sector Indian Banks

and Private Sector Foriegn banks.

Private Sector India Banks are those which are owned and controlled by

Indian Entrepreneurs. Indusland Bank was the first private bank to be set up in

Inda. IDBI, ING Vyasa Bank, HDFC Bank, ICICI Bank, UTI Bank (Now Axis

Bank), Centurion Bank.

Private sector Forign Banks are those which are owned and controlled by

foreign entrepreneurs. ANZ Grindlays Bank, ABN-AMRO Bank, American

Express Bank Ltd; Citibank etc are some foreign banks operating in India

Regional Rural Banks

The Regional Rural Banks (RRB) came into existence since the middle of

1970’s with the specific objective of providing credit and deposit facilities

particularly to the small and marginal farmers, agricultural laborers and artisans

and small entrepreneurs.

Co-operative banks

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In India, co-operative Banks has assigned an important role in the

development of vital areas such as agriculture, rural and small-scale industry, retail

distribution; housing etc. the co-operative banking sector has been developed in the

country to replace the village moneylenders. They also promote savings of the

farmers and meet their credit needs for cultivation. The co-operative banking

sectors are not only in rural areas but now they have spread to urban areas also.

Scheduled banks and non-scheduled banks

Under the RBI Act, 1934, banks were classified as Scheduled banks and

non-scheduled banks. the scheduled banks are those which have are included in the

schedule(second)of RBI Act,1934.these banks have a paid up capital and reserves

of an aggregate value of not less than Rs.5 lakhs and which satisfy RBI that their

affairs are carried out in the interest of their depositors. Scheduled Banks comprise

commercial banks and the cooperative banks, In terms of ownership, Commercial

banks can be further grouped into nationalized banks, the State Bank of India and

its group banks, Regional Rural Banks and Private sector Banks (old, new,

domestic and foreign).These banks have over 67,000 branches spread across the

country. Non-scheduled banks are those which have not been included in the

second schedule of RBI Act, 1934.at present, there are three non-scheduled banks

in India.

Company Profile

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Corporation Bank is one of the oldest Banking Institutions in the Dakshina

Kannada district of Karnataka and one of the oldest banks in India. As the saying

goes on “A thousand mile journey starts with small step”. A step was taken by Shri

Khan Bahadur Haji Abdullha Haji Kasim Saheb Bahadur, a businessman of Udupi

way back on the 12th of March 1906 with a group of philanthropist founded the

‘Canara Banking Corporation of Udupi Limited’.

A handful of people representing the various interests decided to

promote the ‘Canara Banking Corporation of Udupi Limited’. Eleven persons who

included 4 pleaders, 2 educationist, 1 insurance agent and 1 retired sub magistrate

where the first signatories of the Articles of Association and Memorandum of

Association of the bank who had in all 111 shares.

The need to start this bank was felt because there was no such facility at

Udupi, an important trading centre next to Manglore in Dakshin Kannada district.

The indigenous banking was largely in the hands of few rich private individuals

and some thing had to be done to provide relief to the common man from the

clutches of the money lenders who held fully swey. What inspired the founding

fathers was the fervor of swadeshism, for promoting the bank, the founder

president made an appeal saying, the primary object in forming the ‘Corporation

Bank’ is not only to cultivate habit of thrifts amongst all classes of people, without

distinction of the cast or creed, but also habit of co-operation amongst all classes.

This is swadeshism, pure and simple and every lover of the country is expected to

come forward and co-operate in achieving the end in view. It was called through

co-operation of all, shorn of distinction of caste and creed “ The Canara Banking

Corporation Limited” as the institution was called then, started functioning as a

“Nidhi” with a humble beginning. The initial capital was Rs 5000.

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Corporation Bank which was founded in 1906 and today it is a “100 year

young bank”. The bank had its origin in the temple town, Udupi which was then a

part of Dakshin Kannada district. The credit of introducing the bank goes to the

Canara Banking Corporation of Udupi Limeted. Corporation Bank is a public

sector bank which has been silently creating waves among the domestic banks in

India. It is one of the Nationalised Banks in India.

The bank withstood the challenges of the financial sector reforms and has

emerged as the one of the financially and fundamentally strong, well capitalised,

technological sophisticated, efficient, effective and one of the most profitable bank

in India.

In the year 1952, Corporation Bank became the third bank in the country to

receive license from the Reserve Bank of India as ‘Scheduled Bank’. In the year

1961, the bank of citizens was merged with the Corporation Bank. It was

nationalised in April 1980, which triggered the growth of the bank in terms of

geographical reach and business volumes. The name of the bank was changed from

Canara Banking Corporation of Udupi Limited to Corporation Bank in the year

1973 and the corporate office of the bank was shifted to Manglore.

Corporate Vision

“To evolve into a strong, sound and globally competitive financial system,

providing integrated services to customers from all segments, leveraging on

technology and human resources, adopting the best accounting and ethical

practices and fulfilling corporate and social responsibilities towards all stake

holders.”

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Corporate Mission

To become a provider of World-Class financial services.

To meet customer expectations trough innovation and technological

initiatives.

To emerge as a role model with distinct culture identity, ethical values

and good corporate governance.

To enhance share holder’s wealth by sustained, profitable and

financially sound growth with prudent risk management systems.

To fulfill national and social obligation as responsible corporate

citizen.

To create environment, intellectually satisfying and professionally

rewarding to the employees.

Service Profile

The Corporation Bank will provide the different services with CARE

approach to the customer’s. The service profile of the Corporation Bank is as

follows:

Personal Products

a. Deposit Products

i. Corp Pragathi Account: The account can be opened with an initial deposit of

Rs 10/- and will provide the account holder the basic banking facilities. No

penalty will be levied even if the balance in the account drops below Rs 10.

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ii. Centenary Year Gold coin: It is 8gm Centenary Year Gold coin of 999.9

purity, 24 carat. This gold coin is available at Corp Bank branches in select

cities across India to individuals or retailers at a competitive price.

iii. Saving Bank: Corp Bank SB account holder will get the facilities like any

Branch banking. Corp power cheque, Corp convenience card, Corp junior

account, Corp senior account.

iv. Kshemanidhi Cash Certificates: KCC is a money multiplier deposit. It is a

reinvestment Term Deposit scheme that can be opened for a period ranging

from 6 months to 10 years. The rate of interest depends on the period of deposit.

v. Money Flex: The flexible term deposit- it allows the customer to withdraw

money whenever he/she wants. The deposit can be made for a period ranging

from 6 to 120 months. The minimum deposit is Rs 5000.

vi. Fixed Deposit: The deposit can be made for period ranging from 15 days to 10

years. The rate interest depends on the period of deposit.

vii. Corp classic: It is an innovative technology-based account that combines

the hi-liquidity of a savings bank account and the high-returns of a Terms

deposit. The account works simply by fixing by fixing your savings from a

savings bank account to a term deposit and vice versa.

viii. Recurring Deposit: Best suite to the salaried class, the customer can save a

fixed sum every month for a period ranging from 12 months to 120 months.

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ix. Janatha Deposit: This deposit is for a period from 1 to 5. Our collection agent

will call at customers place to collect your savings at regular intervals even

daily.

b. Personal Loans Products

i. Corp Plus: It is a loan facility to meet the short term financial requirement.

This loan can be availed by professionals having gross income of Rs 80000 p.a.

The loan amount will be limited to the extent of 25% of borrower’s net annual

income.

ii. Corp Rental: The loan may be availed for any productive purpose such as

taking up new projects, business or to meet domestic/personal/any other

commitments. The minimum loan amount is Rs 5 lakh.

iii. Education Loan: Under this scheme the bank finances the financial

requirements of the student for higher studies.

iv. Consumer Loan: This is a financial arrangement to finance the purchase of

consumer durables. This loan can be availed to any person having an income of

Rs 50000 p.a.

v. Home Loan + Insurance: Corp bank in association with the life insurance

corporation of India gives life insurance cover to the housing loan taken by the

customers. Maximum term assure under the scheme will be 3 years.

vi. Vehicle Loan: Corp Mobile offers the customer easiest motor cycle/car loans

with absolutely no hassles.

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vii. Corp Mortgage: Under this scheme an individual can avail a loan minimum

of Rs 1 lakh and maximum of Rs 25 lakh by mortgaging an asset as security.

viii. Other Personal loan Products: Corporation bank also offers few more

personal loan products such as Corp Mitra, Loan against shares and Corp Home

etc.

c. Corporate Products

Corporation Bank offers several corporate banking services. The bank offers

unique services tailor- made for the requirement of Corporate and large business

houses as well as small and medium enterprises.

i. Corp Fast: Corp fast is an innovative solution which facilities speedy

realization of outstation cheques and instruments using latest communication

technology.

ii. Project Finance: Corp Bank also finances the financial requirements for

certain projects on the basis of economic a technical feasibility of the project.

iii. Corp Rental: This facility helps the customer to encash the rent receivable

from the commercial properties.

iv. Forex: Corp Bank also offers Forex services to its customers.

v. Working capital: Corp Bank also provides the short term financial facility to

finance the working capital requirements.

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vi. Term Finance: The bank extends term loans for capital investment being made

by the clients on account of expansion of existing enterprises for establishment

of a new enterprise.

d. NRI Schemes

i. Corp Express Money: The bank has entered into a tie up with UAE Exchange

Center LLC for facilitating global money transfers into India from Gulf region.

With a view to facilitating the NRIs in the Gulf and Middle East to transfer their

earnings back home swiftly.

ii. NRI Loans: Corp bank is granting loans in rupees to NRIs against security of

shares, immovable property in India corp. It also provides housing loans to

NRIs.

iii. Forex Facility for Residents: Indian residents can get foreign exchange

assistance from Corporation bank for study in abroad, foreign travel, purchase

of air tickets and investments.

e. Internet Banking

i. Corp-E-cheque: It is an innovative product developed by Corp bank by

combining the power of Corp net the bank’s Internet Banking Services with

EFT scheme.

ii. Corp Net: In the niche area of collection and payment services Corp bank has a

leadership presence in the country and caters exclusively to the cash

management requirements of the corporate.

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f. Other Services

i. Online Railway Reservation: The Bank has entered into a tie up with the

Indian railway catering and tourism corporation for online booking of railway

tickets.

ii. Corp Mediclaim: This is a group medical claim insurance offered by the Corp

Bank to its account holders. This product has been devised to meet the medical

insurance needs of banks customer.

iii. Corp Junior: It enables parents whose children are studying away from them

to remit money at periodic intervals in a hassle free manner.

iv. Corp Mobile Recharge: Electronic Recharge of pre-pad mobile phones is a

facility which customers having prepaid mobile phones to electronically

recharge their mobile phones cards by debiting their account through Corp bank

ATMs or through SMS from their mobile phones.

v. Corp Bullet RTGS Facility: It is a remittance facility, which enables customer

to transfer funds to anybody anywhere within India. The facility works on the

Real Time Gross Settlement (RTGS) platform developed by the RBI.

vi. Corp Power cheque Multi city cheque Facility: Multi city cheque is a facility

wherein the customer can issue cheques drawn at the base branch and payable

at selected remote centers. This cheques will thus, be treated as local cheques in

the remote center selected by the customer.

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Financial Results of the Bank

Table No 1: Financial Results of the Bank

(Rs in crores)

Particulars 31st

March

2006

31st

March

2007

31st

March

2008

Interest Earned

Other income

Total Income

Interest Expended

Operating Expenses

Total Expenditure

Operating Profit before provision

and

contingencies

Provisions (other than tax)

PBT

Tax

PAT

Capital

Reserves

2659.69

461.34

3121.03

1413.88

751.05

2164.93

956.10

283.88

672.22

229.22

443.00

143.44

3231.45

32876.53

3367.53

635.57

4003.10

2054.46

804.47

2858.93

1144.17

323.46

820.71

304.57

4516.

58

702.

08

5218.16

3063.09

892.

26

3955.35

1263.31

185.74

1077.57

327.16

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Deposits

Advances

Investment

23962.43

10651.99

516.19

143.44

3622.01

42356.89

29949.65

14417.49

750.41

143.44

4139.78

55424.42

39185.57

16512.38

Key Ratios

Table No 2: Ratio analysis of Bank

Particulars 31st

March

2006

31st

march

2007

31st

March

2008

Capital Adequate Ratio (%) 13.92 12.26 12.09

Return on Avg Asset (%) 1.28 1.16 1.34

Return on Equity (%) 13.12 13.71 17.51

Earnings per Share (Rs) 30.89 35.98 52.31

Book Value per Share (Rs) 235.29 262.51 294.79

Yield Spread 3.56 3.08 2.71

Non-interest income to total income 14.78 15.87 13.45

Gross NPA to Gross Advances 2.56 2.05 1.49

Ratio Analysis

1. Capital Adequacy Ratio

Capital adequacy ratio is the ratio that signifies the amount of capital on

Risk Weigted Asset of the Bank.

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Chart No 1: Capital Adequacy Ratio

2006 2007 200811

11.5

12

12.5

13

13.5

14

Capital Adequacy Ratio

The banks should have 9% capital adequacy ratio, the corporation bank has

much more than the standerd rate. Even the ratio is decreasing it is above the

standerd.

2. Return on Average Asset

Return on average asset signifies that the ratio between net profit after

interest and tax to the average asset utilised by the bank to earn the returns.

Profit after Tax

Return on Average Asset = 100

Average Asset

Chart No 2: Return on Average Asset

20

2006 2007 20081.05

1.1

1.15

1.2

1.25

1.3

1.35

Return on Avg Asset

In the year 2006 the ratio was 1.28, but in the year 20 07 there was decrease

in the ratio. But in the year 2008 it goes to 1.34. It clearly shows that there is

increase in the returns. In the year 2008 there is only 25.5% increase in the asset

but there is a 45% increase in the returns.

3. Return on Equity

Return on equity shows the relationship between profit earned and equity.

Chart No 3: Return on Equity

2006 2007 20080

5

10

15

20

Return on Equity

Profit after Tax

Return on Equity = 100

Equity + Reserves

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Return on equity is increasing every year. The ratio is 13.12, 13.71 and

17.51 in the year of 2006, 2007 and 2008 respectively. There is increase of 45% in

returns against only 13% increase in the equity.

4. Earnings per Share

Earnings per share signify that the earnings available for the each share held

by the shareholder.

Profit after Tax

Return on Equity = 100

No of shares

Chart No 4: Earnings per Share

2006 2007 20080

10

20

30

40

50

60

Earnings per Share

The ratio is increasing year by year. That shows the bank is earning

sufficient funds to its shareholders. From 2006 – 2008 the ratio has almost

increased by 70%, this is good indicator for its shareholders of the Bank.

5. Book value per Share

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Book value per share signifies the value of the book of each equity share of

the bank. Book value consists of equity share capital and reserves of the bank.

Equity Share Capital + Reserves

Book Value Per Share =

No of shares

Chart No 5: Book Value per Share

2006 2007 20080

50100150200250300

Book Value per Share

There is increasing trend in the ratio, it because of the increase in the

reserves of the bank. It is good indication from the investor’s point of view.

6. Yield Spread

It is the difference between yields on advances over cost of deposits. It is

useful to know the spread of yields over cost of deposit; more the spread bank is

more efficient in lending and accepting deposit.

Yield Spread = Yield on Advances- Cost of Deposits

Chart No 6: Yield Spread

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2006 2007 20080

1

2

3

4

Yield Spread

The yield spread is decreasing year on year basis. This is because the

percentage increase in yield on advance is less than percentage increase in cost of

deposits of the bank. The bank is inefficient in earning high yield on the advances

granted by them.

7. Non Interest income to Total Income

This ratio indicates the relationship between non interest income and total

income. Non-interest income arises out of the activities other than the lending.

Chart No 7: Non Interest Income to Total Income

2006 2007 200812

12.513

13.514

14.515

15.516

Non Interest Income to Total Income

The ratio was 14.78 in the year 2006, but there was slight increase in it in the

year 2007. It shows the bank earnings are increased out of lending business. But in

the year 2008 the ratio has decreased.

8. Gross NPA to Gross Advances

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This ratio shows the relationship between Gross NPA to Gross Advances of

the bank. It states that the percentage of Non Performing Assets out of total

advances granted by the bank.

Chart No 8: Gross NPA to Gross Advance

2006 2007 20080

0.51

1.52

2.53

Gross NPA to Gross Advance

The ratio is decreasing from 2006 – 2008. It means the NPAs are decreasing

from year to year. It is good indication for the bank.

Research Design

It is the conceptual structure within which the research is conducted. It

constitutes the blue print for the collection, measurement and analysis of data. The

design includes an outline of what the researcher will do from writing the

hypothesis and its operational implication to the final analysis of data. It constitutes

the steps taken beginning with the collection of data, classifying, analyzing and

interpretation, processing and finally putting in textual form. This is one important

chapter of project and can be considered as skeletal of project.

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Statement of the Problem

Progressive deregulation and liberalization of the Indian financial sector

have offered banks tremendous business opportunities and brought in competition.

As there is growth in the economy many industry sectors like, Manufacturing and

Infrastructure etc are growing up. This provides a good business opportunity of

financing them. The long term or short term loan providing to the project is known

as Project Financing.

The banks should see the various risk related to the project before

sanctioning the loan for the project. The bank should see uncertainty involved in

the project. These risk and uncertainty may have an adverse impact on the Bank’s

capital and earnings.

The project financing involves detailed and indepth analysis of the results of

the project. In this process the technical, the marketing, the organizational, the

financial, the economic and the social aspects of the Projects are examined to

ensure technical feasibility, market necessity, financial viability, economic strength

and social desirability. The project financing is to identify measures, monitor and

control various risk arising for its lending.

When fierce competition is the rule, the banking sector is no exception.

Banks compete with each other to attract quality borrowers. In this scenario, a

hasty or adequate project appraisal will result in growth of NPA. There fore the

banks should have proper appraisal methods.

Objective of the study

To understand the analytical framework of project financing and to

analyze the existing project appraisal mechanism at bank.26

To study the project financing of Corporation Bank

To familiarize with the interrelationship among various aspects of

project finance.

To understand the importance of project appraisal in sharpening the

ability of the bank to identify investment opportunities of the project

undertaken.

To study the assessment of the various aspects of investment

proposition to arrive at a financing decision

Need for the study

To have practical knowledge and experience towards project

financing.

To sharpen the ability of identification of various attractive

investment opportunities.

To value the options embedded in the project

To familiarize with the inter relationship among the various aspects of

project appraisal.

To evaluate the project in order to give suggestions to the bank

Scope of the study

The scope of the study is limited to Project Finance Department of

Corporation Bank Head Office, to the area of project financing. It will give an

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indepth theoretical and practical knowledge about the project financing. This study

also covers ratio analysis, cash flow from proposed project, risk involved in the

project, analysis of the financial statement and the data found in the appraisal

statement.

Methodology of Data Collection

As regarded to methodology, normally both quantitative and qualitative

approaches are adopted. In order to collect the data, this study brings a live

analysis based on the live data collected from secondary type of data. The

techniques of ratio analysis have been made use for the analysis of the financial

statement of the bank.

Interacting with executives, functional in charge of various areas and

departments discussing informally.

Referring to the secondary that is, various project reports prepared by

the bank and desk guides available with the bank.

Visiting official website of the bank and other related websites.

Referring to news papers and various business magazines.

Limitation of the study

The study is limited to the Project appraisal department of

Corporation Bank. The investigator could not cover all the banks, who

are providing similar services.

The data recorded was presumed to be authentic

This study curtails comparison, as it is within the purview of only one

organization.

28

The study is conducted on the data that are made available to the bank

by the concern.

Project Appraisal

Introduction

Project appraisal involves detailed and in-depth analysis of the results of the

project. In this process the technical, the marketing the organizational, the

financial, the economic and the social aspects of the projects are examined one by

one to ensure technical feasibility, market necessity, financial viability, economic

strength and social desirability.

It is a process where by a lending financial institution makes an independent

and objective assessment of the various aspects of investment proposition for

arriving at a financial decision. Appraisal exercises are aimed at determining the

viability of a project and some times helps in reshaping the project to upgrade its

viability. It is most crucial stage of project cycle at which the bank makes a critical

29

evaluation of all the parameter to determine the feasibility of the project and to

make a decision whether to finance or not.

Need for Appraisal

During recent times, not only have the number of projects increased, but the

size of projects have gone up substantially. The lenders are also concerned about

debt equity ratio and insist on promoters bringing in equity so that they have a

stake in the project. Now the ratio hovers at 4:1 for the infrastructure sector and 1:1

in other projects. This is opposed to the situation in the 1990’s when the ratio used

to go even as high as 15.

Mega projects like Power Projects, Infrastructure are very common these

days. When the project is of such size, it is easy desirable that the project

Technical, Feasibility and Commercial possibility are assessed by the committee

member of lending institution to ensure to lend funds for the projects. Corporation

Bank is one such institution and has a vibrant and efficient team of professionals,

which are most capable in appraising projects.

Steps in Project Appraisal

The steps which are followed by the bank in appraisal of a project are as

follows.

The borrower (promoter) approaches the bank with his project report

and gives a written request to bank to appraise the project.

30

Bank quotes a fee for the appraisal (usually 0.25% of the total cost of

the project). Along with it bank also gives a questionnaire to

borrower. Questionnaire will cover all financial, economical and

technical factors of the project.

If the borrower agreed over fee charges, term and condition of the

payment of fees as it is indicated by bank along with the reply of

questionnaire, then the bank has to study the report that is submitted

by the borrower.

The appraising staff should visit the project site to make physical

verification.

Functions of Project Appraisal Group

Undertake detailed techno-economic appraisal of large projects

seeking financial assistance from bank and preparation of appraisal

report by evaluating technical, managerial, financial and commercial

aspects of the project.

Undertake regular evaluation of progress of implementation of large

projects assisted by the Bank.

Peruse and furnish views/observations on project appraised by other

banks/reputed consultants, submitted by Cos/other groups of the wing.

To undertake monitoring agency activity of companies going for IPO

as per SEBI guidelines.

Upgrade project evaluation skills.

Undertake unit visits and hold discussions with the official of the

company.31

Guiding User Sections of the wing on project appraisal skills.

Undertake detailed techno-economic merchant appraisal of projects

going for IPO as per SEBI guidelines.

Project Appraisal – An Overview

Table No 3: An Overview of Project Appraisal

Technical

Appraisal

Marketing

Appraisal

Financial

Appraisal

Economic

Appraisal

Management

Appraisal

Manufacturing

Process/Technology

Demand

techniques

for

forecasting

Capital

cost of

project

Ratio of

economic

appraisal

Qualities of an

entrepreneur

Technical

Arrangements

Supply

depth of

competition

Sources of

finance

Economic

rate of return

Various forms

of

organization

Size of plant Pricing

policy

Financial

projections

Exchange

rates of the

project or

resource cost

Organizational

setup

Product Mix Life cycle of

the product

Ratio

analysis

Comparative

study of

financial and

economic

rate of return

Management

problems

Selection of P/M Brand name

for the

product

Break Even

Point

32

Plant Layout Distribution

channels

Location of the

Project

Sales

promotion

Schedule of Project

Implementation

Sources of

market

information

Publication

to study

various

aspects of

mktg

Bank’s way of Appraisal:

The Branch should call for from the applicant an ‘Application’ in the

prescribed format covering full particulars. The application should contain the

following essential data/information.

a. Particulars of the project along with the copy of project report

furnishing details of the Technology, Manufacturing Process,

Availability of Raw Material, Construction, Production facilities etc.

b. Estimate of costs of the project detailing assets acquired, to be

acquired inclusive preliminary expenses and working capital.

c. Details of the proposed means of financing, indicating the extent of

promoter’s contribution, the share capital is to be raised from public

and borrowings.

33

d. Working capital requirement at the initial year

e. Project implementation schedule

f. Organization setup with list of Board of Directors, Qualification,

Experience and Competencies.

g. Demand projection based on the overall market prospectus together

with copy of market survey report if any.

h. Estimate of sales, cost of production, profitability.

i. Projected profit and loss a/c, balance sheet for the operating years

during banks assistance.

j. Proposed amortization schedule (repayment program)

k. Projected fund flow statement

l. Details of the nature and value of securities of fund.

Due deligence report shall be submitted in the prescribed format. Consent

from the authorities of the Pollution Control Board and any other information.

Brief History

In case of already existing company the bank will collect following

information,

Essential particulars about its promoters and background

Its incorporation

Its subsequent corporate growth to the date

Major developments/changes in its management

34

If the borrowing unit is new to the bank a credit report will be obtained by

bank to ascertain the credit worthiness of the company. The banks will carefully

scrutiny the MOA and AOA to ensure there is no limitations have been placed on

the companies borrowing power and operations.

Past Performance

A summery of company’s past performance in terms of operating capacity,

sales, operating profit and net profit for the past 3 year will be analyzed by the

bank. The bank will analyze the sales and profitability for last 3 years. If the trend

is in ascending order the performance can be consider satisfactory.

Capacity Utilisation

If the actual production is less than the rated capacity, the reason for the

under-utilisation of the capacity should be examined. The bank will examine the

steps taken by the company to improve the capacity utilization. The bank will

examine the special important aspects relates to company’s management labour

relation. Whether there was any strike, lock-outs or shut down during the past 3

years and how the labour disputes were settled.

Present financial position

The bank will analyze the company’s Audited Balance Sheet and Profit and

Loss a/c for the last 3 years. A careful analyze and interpretation of the financial

statement would provide a reasonable clear picture of the company’s financial

history, present position and future trend. The bank will look into Debt/Equity ratio

and Current Ratio.

The bank also collects the information regarding the following,

35

The method of Depreciation

Record of major defaults by the company

The position regarding the company’s tax assessment

Pending suits by or against the company and their financial

implication

Qualification/adverse remarks if any, made by the statutory auditors

on the company’s accounts.

Technical Feasibility

If the project involve a new process or new technology, a technical

feasibility report by a competent agent will experienced in the line will be

essential. The bank will examine the technical feasibility of new project from the

following angle.

i. The suitability of the Technology

The bank will examine whether the proposed technology can be

successfully employed in local condition with regard to the availability of

resources, men and materials.

ii. The size of the Plant

The bank will examine the size of the plant in relation to the optimum

size warranted be technical factors, economies of scale and production cost

factor.

iii. The location of the plant

The bank will examine that whether it has ready accessibility to

critical inputs and utilities like raw materials, supplies, fuel, water etc.

36

iv. Technical arrangements

The arrangement made for obtaining the technical know how, design

and detailed engineering of plant and selection of suppliers of

machinery/equipment will be examined by the bank.

v. The bank will also examine the manufacturing process of the product.

Financial feasibility

a. Cost of the Project

Correct estimation of the total cost of the project is an important fact of

appraisal as it has bearing on the means of financing and profitability. The bank

will scrutinize the estimated cost with a view to ensuring that they have been

arrived at realistically after taking into account all relevant cost factors.

b. Total cost of the project

The various components of the total cost of given below will be studied by

the bank.

i. Land

The bank has to examine the suitability of the site. Topographical

features, Availability of Transport and the sources like water, power, labour,

raw materials and market for finished goods. Bank will examine that the

land will be sufficient to take care of present needs. The bank has to satisfy

itself that the price paid/payable for the land is comparable.

ii. Building

The bank will examine whether the building will be sufficient having

regard to the layout and it will permit and it will permit further addition if

needed.37

iii. Plant and Machinery

The bank will examine the stated plant and machinery is required or

not according to the recommendations made in the technical feasibility

report in the project report and will see they will be suitable and adequate for

the production programme. The cost of the plant and machinery will be

examined by bank to ensure that the price paid is reasonable.

iv. Technical know-how

The bank will examine the basis of selection of technical consultants.

It should ensure that the promoters will not get any benefit out of it by

selecting subsidiary concern of the promoter as technical consultants. The

bank will ensure that the fees paid are reasonable to the service.

v. Preliminary Expenses

These are the expenses incurred before the incorporation of the

company. Expenditure incurred on project report, market survey in the initial

stage. The bank will examine the cost estimated are reasonable to the

organization.

vi. Working Capital

The bank has to estimate the working capital requirement of the

company during the 1st year operations and the provision has to be made to

meet the requirements.

Means of Financing

The bank will examine the mean proportion of debt and equity components

of means of financing of the project. The bank will comment on the project

38

debt/equity ratio is satisfactory and acceptable. As per group credit policy the

debt/equity ratio shall not exceed 2:1.

i. Share Capital

The bank will ensure that the promoter’s of the company have

invested atleast 25% of the total cost. The investment should be made in

share capital.

ii. Internal cash accruals

The bank will examine whether the company will be able to meet its

expenses and working capital requirements. It will ensure that the remaining

part of the profit(cash accrual) will be possible to use it as part of financing

for project.

iii. Debenture

The bank will examine the terms of proposed issue of debentures such

as the nature of debenture, rate of interest, date of redemption and security

offered.

iv. Term Loans

The power of public company to borrow by way of term loans is

restricted to the amount of its paid-up capital and free reserves. The bank has

to ensure that the loan taken by the company under those limits only. If the

loan is provided by many lenders the information regarding that to be

collected.

v. Deferred payment facilities

The bank has to get the details of the deferred payment guarantee.

vi. Any other(Central/state sales tax loans, development loans)39

Bank has to specify whether it is central/state sales tax loan and will

examine the term and conditions of granting the loan.

Project Implementation Schedule

The bank will examine the project implementation schedule with reference

to Bar chart or PERT/CPM chart by referring to actual implementation of similar

projects. The bank has to ensure that the t5ime schedule for construction of

building, installation of plant and machinery and commencement of commercial

production is reasonable and acceptable.

Production Factors

i. Manufacturing Process

The bank has to examine the basis of selection of the process in

relation to the other alternative process. If the technology is new to the

country, the appraiser has to ensure about the suitability of the

manufacturing process.

ii. Raw Material

The bank will list out the major raw materials required for the

company production programme. The bank will examine the continuity of

supply of the raw materials. The bank also examines the prices of the raw

material to ascertain whether the fluctuations in the past years have taken

into account while projecting the cost of production and profitability.

iii. Utilities and Essentials

40

The bank will examine the requirements of power, fuel, water,

transport and the arrangement made by the company.

Market and Demand Analysis

This constitutes a crucial aspect of project appraisal as the basic viability of

the project and consequently the repayment of the Bank’s loan depends on the

marketability of its product. The bank will study this aspect under following heads.

i. Sales Prospectus

The bank will examine the company sales projections and the

underlying assumption with reference to the demand forecast made in the

publications and through market survey. It will examine also through past

consumption from imported sources and likely future trend. The bank will

examine the nature and extent of competition likely to be faced by the

project from the principal competitors. Bank also examines the competitive

ability of the company to penetrate the market and earn market share based

on price, quality etc.

ii. Selling price

The bank will examine the industry’s general price trend to see that

the prices were stable in the past and will continue to be same in the future.

iii. Prospectus for export

The bank has to comment on the prospectus for export. The bank

should state how the company would meet the export commitments. The

bank should state whether any subsidy/cash incentives will be available to

company.

41

iv. Marketing organization

The appraiser has to give brief description of the company’s

marketing organization. If the company selling its products through

distributors and selling agents bank has to examine the term of arrangement.

Commercial Viability and Profitability

Appraising profitability is the most crucial exercise in project appraisal. The

bank will examine estimated sales, cost of production and net profit furnished for

the project.

Inter firm comparison

The reasonableness of the financial projection may be cross checked by the

comparing the key financial parameters of the project with those of a similar

project or with the industry average.

Debt Service Coverage Ratio

The Debt Service Coverage Ratio is the ‘core test’ ratio in project financing.

This ratio indicates the degree of viability of project and influence in fixing the

repayment period and the quantum of annual installments. Here ‘Debt’ means

installments payable during the year and ‘Service’ means cash accruals comparing

net profit plus depreciation and non cash write-off. It measures the extent of cash

accruals(service) available to cover the maturing term obligation(debt) during each

year.

42

Interest due and chargeable can be fully paid even in a year where the

project undergoes in loss. The bank will ensure that the profitability the project

does not fall to that extent where the interest can not be paid by the company. The

bank will ensure because of any genuine or valid reason the installment can be

post-phoned, but the project should be able to pay the interest as and when falls

due. The Bank Group Credit Policy is that the project shall give an average debt

service coverage ratio of 1.5:1.

Break Even Analysis

Fixed + Semi Fixed Expenses Production value

Break Even Sales =

Contribution

Fixed + Semi Fixed Expenses Capacity

Utilisation 100

Break Even Installed Capacity =

Contribution

Fund Flow and Cash Flow Statement

The statement which shows various sources of funds and their uses is called

fund flow statement and it’s different from revenue statement of balance sheet. The

FFS can be based on two concepts, those are as follows.

43

i. Change in Working Capital concept

It is derived from the need for availability of liquidity and need for the

liquid funds. That is current assets and current liability.

ii. Change in Financial Position

A promoter/banker concerned with funds not only for the working

capital but for the entire funding needs. Their concern is to adding fixed

asset/repayment of long term loans as per their pre-fixed repayment schedule.

Movement of all the funds in the business has to be considered.

The fund flow statement should be carefully examined and

reasonableness of the various assumptions underlying the project should be

ascertained. On the long term side, it should be ensure that fund outflow for

essential expenditure on fixed asset, repayment obligation, taxes and dividends are

fully provided for that the cash generation will be adequate. On the short term side,

the projected increase in current liabilities/bank borrowings should be matched by

projected increase in the inventories/receivables.

Cash flow estimates

It is prepared to ensure that the unit will have necessary cash with it and it

will not face liquidity problem. It is necessary for the construction period also to

ensure availability of cash according to the requirement of the project.

Projected Balance Sheet

In the case of cost of production and profitability estimates and fund flow

projection, the projected balance sheet should be furnished by the company for the

entire period. While appraising the following points will be checked by the bank.

44

The cost of the project, means of financing, the profitability estimates and the fund

flow projection.

Others (Brief Comment)

i. Quality of Management

Appraiser will briefly comment on the company’s management setup, the

composition of the board and the chief executive in-charge of the day-to-day

operations.

ii. Credit Rating

The bank will do the overall assessment of the company and rate the

company according to the assessment.

Disbursement:

Execution of loan agreement and other necessary legal documents is not

sufficient for disbursing the amount. Branch will ensure that the amount disbursed

is utilised for the purpose for which it has been sanctioned.

Supervision and Follow-up

Projected supervision and follow-up of assisted project during and after

implementation is indeed a important exercise to performed periodically by bank.

It not only safeguard the interest of the bank but also to ensure optimum returns on

the total investment in project. Even a project well accepted at the appraisal stage

may go bad due to lack of adequate care. There fore supervision and control during

implementation is necessary during and after project implementation it will be

done by the bank by following methods.

45

Scrutiny of progress chart

Analysis of annual financial results

Visit/Inspection, regulatory control

Discussion with management

Murali Industries Limited

The Murali Industries Limited, a Nagpur based company was initially

established on 2nd December 1991, in the name of Murali Agro Products Pvt Ltd to

process soyabean in a Solvent Extraction Plant to produce vegetable Oil and De-

oiled cakes with an installed capacity of 150 tonnes per day. On 5 th January 1993

the company was renamed as Murali Industries Limited when it raised funds from

capital market through its public offer.

The company entered capital market in the year 1993 through IPO and

expand the capacity of Solvent Extraction Plant to 250 tonnes per day. In the same

year the company acquired another soya plant to strengthen its stake in the

industry.

In the year 1997 MIL diversified into paper manufacturing by setting up 40

tonnes per day. Kraft paper manufacturing plant, which was sold in the year 2004

to SBM industries pvt ltd. In the year 2000 the company established Duplex paper

manufacturing unit with an established capacity of 60 tonnes per day.

46

In the year 2002 the company also set up a 70 tonne per day new print paper

manufacturing unit, along captive power plant with 3 MW capacity to meet the

power requirements of its paper units. In the year 2004-05 the company set up 150

tonne per day writing and printing paper unit along with 15 MW co-generation

units.

The company is also setting up a 2.14 million tonnes per annum cement

manufacturing plant together with 30 MW captive power plant at Chandapur in

Maharastra with capital outlay of Rs 578 cr, this plant is reportedly in the advanced

stage of implementation and the commercial production is expected in the current

financial year (2008-09).

MIL is has already into cement industry by setting up a 2.14 million tonnes

per annum cement manufacturing plant together with 30 MW captive power plant

at Candapur in Maharastra. In addition to this, company is also going in for setting

up of three more cement plants of 3 million tonnes per annum capacity each, along

with these 50 MW captive power plant in the state of Rajastan (village Barana),

Karnataka (Aloora) and Gujarath (Jujarpur).

The Rajastan plant shal have out lay of Rs 862.55 cr, Karnataka Rs 837.98 cr

and Gujarath 865.73 cr. The project will be financed by banks at these plants shall

be 575.04 cr, 558.65 cr and 577.15 cr respectively.

Present proposal

The credit sanctioned by the bank as under:

Sl No Nature of Limit Sanctioned Rate of Interest

Existing Proposed Existing Proposed47

Facility

1 Fund Based 150 13%

Banking Arrangements

The following Banks financed for the project.

Table No 4: Banks arrangements for Financing

Name of Banks Loan Amt Interest Rate

%

Corporation Bank

State Bank of India

State Bank of Mysore

State Bank of Patiala

State Bank of Bikaner and Jaipur

Punjab National Bank

Dena Bank

Bank of Baroda

Allahabad Bank

State Bank of Travancare

150

300

90

150

90

300

50.84

300

150

130

8.76

17.54

5.26

8.76

5.26

17.54

2.92

17.54

8.76

7.66

Security Coverage

Bank will change on the project specific factory Land & Building and Plant

& Machinery. The Corporation Bank share is 183.36 cr out of the total cost

48

2139.51 cr. The finance made by bank, interest there on and all amounts in respect

there of shall be secured inter alia by,

A first mortgage/hypothecation and charge on all the project

immovable and movable properties both present and future infavour

of Bank

Security interest by way of first mortgage/hypothecation, performance

bonds and any letter of credit in relation to the project that may be

provided by any party.

A first mortgage/hypothecation of all insurance policies taken in

respect of the project asset.

A first mortgage/hypothecation and charge in favour of the bank on

all the bank account in relation to the project.

Key Indicators

Table No 5: Key indicators

(Rs in

Crores)

Particular 31/3/2007

Audited

31/3/2008

Provisional

31/3/2009

Projected

Net Sales 523.93 646.47 931.15

% of Growth -- 23.39 44.04

Operating Profit 46.13 70.82 156.02

Operating Profit to Net Sales

%

7.84 8.61 14.89

Cash Accruals 59.5 77.17 169.47

Share Capital 9.61 10.24 21.40

49

Tangible Net Worth 129.53 221.63 911.90

Net Owned Funds 129.53 224.71 821.74

Debt/Equity Ratio 1.3 2.81 1.81

Current Ratio 1.78 2.79 1.79

NOF/ TFD % 29.27 23.61 30.39

Share Holding Pattern: The company has Paid-up Capital of Rs10.24 crores.

Table No 6: Share Holding Pattern of the company

Share Holder Category % Holdings

Promoters 51.77

Bodies, Corporate and Public 33.58

Individuals 9.82

Others 4.83

Compliance with Group Credit Policy Guidelines

Table No 7: Compliance with Group Credit Policy

Parameters Banks

Norms

Actual

Position

Entry Level per Borrower Exposure for FB and

NFB Facilities

200 cr 150 cr

Maximum per Borrower Exposure (corporate)547 cr 151.80

Exposure to Industry/Sector10% of

NBC

2.6% of

NBC

Current Ratio1.25 2.79

Current Ratio for Export Orient Units1.1 --

Debt/Equity Ratio2 2.81

50

DSCR1.5 1.66

TOL/TNW4 3.28

Promoters Contribution to Project cost25% 19.66%

In this the company current position of Debt/Equity ratio is 2.81, where as

the banks norms are 2. It is less than the standard, which is not acceptable. But for

the project taken up by the company the Debt/Equity ratio will be below the norms.

So the project can be acceptable.

Summary of Financials

a. Financials

Table No 8: Financial Results of the company

Particulars 2007 2008 2009 2010

Net Sales 523.93 646.47 931.25 1688.69

% growth in net sales -- 23.39 44.04 81.36

Raw Material 371.22 457.59 555.72 764.17

RM consumed as % of COP 85.10 85.35 81.71 72.12

Cost of Sales 441.51 527.77 673.12 1059.03

Cost of Sales as % of Net

Sales

84.27 81.56 72.29 62.71

Operating Profit 46.13 70.82 156.02 355.28

Operating Profit % 8.80 10.95 16.76 21.04

Other Income 1.13 0.61 0.82 --

PBT 47.26 71.43 156.84 355.28

PAT 41.1 55.63 138.61 312.57

51

Net Profit Margin % 7.84 8.61 14.89 18.51

Cash Profit 59.50 77.17 169.47 372.17

Retained Profit 41.1 55.63 138.61 312.57

Paid-up Equity capital 9.61 10.24 21.40 21.40

Tangible Net Worth 129.53 221.63 911.90 1228.38

TOL/TNW 2.42 3.28 2.04 2.14

The company has achieved a sales growth of 23.39% during the year ended

31/3/2008, operating profit margin has improved from 8.80% to 10.95%, and net

profit margin has also improved from 7.84% to 8.61% as on 31/3/2008. Cash

accruals has improved substantially from Rs 59.50 cr to 77.17 cr. Total Net worth

of the company improved substantially from Rs 129.53 cr to 221.63 cr. Liquidity

position of the company is comfortable with net working capital showing Rs

188.84 cr and liquidity parameters may be considered satisfactory for financing the

project.

b. Financial Observation

i. Sales

Table No 9: Sales of products of the company

(Rs in crores)

Name of the Product 2006 2007 2008

Duplex Paper Unit 39.59 45.52 41.86

News Print Unit 54.76 69.37 70.27

Power 30.36 33.09 36.12

Pulp Mill Unit -- -- 25.5

Solvent Extraction Units 266.04 277.34 349.70

Writing and Printing Units 119.70 148.52 123.00

52

The company achieving a growth in the sales (except Duplex Paper Unit and

Writing & Printing Unit). The performance of the company in Solvent Extraction

Unit has been satisfactory with 53% growth. Even though there is negative growth

in the units. However overall growth in the turnover of the company with 23% will

be considered satisfactory.

ii. Production

Table No 10: Production and Capacity utilisation

Name of the Product Production

2007

%

Utilisation

Production

2008

%

Utilisation

Solvent Extraction

Units

1253 98.66 1480 116.54

Duplex Paper Unit 26530 100.49 24757 93.78

News Print Unit 32647 123.66 32153 121.79

Writing and Printing

Units

54475 110.05 42080 85.01

Power Generation 82970 58.2 88786 62.28

Pulp -- -- 18444 37.26

The capacity utilised by the company is satisfactory except in the pulp

production unit.

iii. Profitability

During the year ended 31/3/2008 the company has earned operating profit of

70.82 cr at margin of 10.95% compare to Rs 46.13 cr at margin 8.8% for the

previous year. Net profit for the year ended 2008 is Rs 55.63 (8.61%) compared to 53

earlier year 2007 of Rs 41.1 cr (7.84%). Cash accrual for the year ended 31.3.2008

was Rs 77.17 cr compared to previous year 2007 of Rs 59.5 cr. The profitability of

the company during the year 2008 has increased and it is satisfactory.

iv. Net Owned Funds

Table No 11: Net Owned Fund

Particulars 2007 2008

Net Worth 133.07 224.46

(-) Intangible asset 3.54 2.83

Tangible Net Worth 129.53 221.63

(-) Used for unrelated to Business (3.08)

Net Owned Funds 129.53 224.71

Total Funds Deployed 442.50 951.94

NOF/TFD % 29.27 23.61

The ratio of the NOF as a percentage of total funds deployed has come down

from 29.27% in 2007 to 23.61% in 2008. This is below the Banks norms which is

not acceptable for financing for the project. However the position is expected to

improve to 29% in the coming years.

v. Debt/Equity position

The debt/equity ratio as on 31.3.2007 stood at satisfactory level at 1.3.

However the same has increased to 2.81 on 31.3.2008 is below the less than the

banks norms. It is not good to provide finance to the company. However by

considering the projected balance sheet the ratio will be within the desired level for

the project in future years.

54

vi. Fund Flow Statement

The position of movement of funds is furnished as under.

Table No 12: Fund Flow Statement of the company

Particulars 2007 2008

Long Term Sources 301.77 548.21

Long Term Uses 188.62 472.52

Long Term Surplus/Deficit 133.15 75.69

Short Term Borrowings Excluding bank

Borrowings

76.70 --

Short Term Uses 257.42 67.01

Short Term Surplus/Deficit -180.72 -67.01

Net Surplus/Deficit -67.57 8.68

Increase/Decrease in Bank Borrowings 67.57 -8.68

The overall long term funds deployment in the company is considered

satisfactory. It has adequate sources of funds to deploy in the company as and

when required.

vii. Liquidity Position

The position of current asset, adequacy of Net Working Capital and Current

Ratio discussed as under.

Table No 13: Liquidity position of the Existing Company

Particulars 2007 2008

Total Current Asset 247.94 287.53

Min required NWC 49.59 57.51

55

Actual NWC 113.15 188.87

Surplus/Deficit in WC 63.56 131.33

CR 1.78 2.79

Liquidity position of the company is controllable and satisfactory throughout

with the ratio showing above the Bank’s bench mark ratio of 1.25.

viii. Debt Servicing Obligation

Debt Service ability of the company as a whole, as well as project on

standalone basis is satisfactory with debt service coverage ratio showing the bench

mark ratio of 1.5.

There is no adverse features reported on the notes forming part of audited

accounts for the year ended 31.3.2008.

Details of the Project

The company has taken up setting up of 3 projects of 3 million tones per

annum along with 50 MW captive power plant each, in the state of Karnataka,

Gujarath and Rajastan. Company intends to manufacture Portland Cement at these

location along with co-generation plans of 50 MW capacity at each of these

location.

Technical Feasibility

i. Raw Materials

56

The major raw material for cement manufacturing is Lime Stones mines.

These three plants are being located near to the Lime Stone mines. Thus this

will be logistic advantage for the company. The mining will be done by

conventional method. The company has installed 1050 tph capacity crusher in

mines.

Material Transportation

The company to deliver the crushed Limestone and Marl to the Raw

Material yard at cement plant, the transportation conveyor has been chosen

amongst the several methods and possibilities. The distance between Quarries

to plant yard is 1000 meters and plan of using of two 1000mm wide rubber belt

conveyers.

ii. Power

The company plans to set up captive thermal power plant of 50 MW at

each of the 3 locations. The required coal for power generation will be supplied

by the Indian coal. This will supplement the power requirement of the plants.

iii. Building

The necessary buildings for main Factory Shed include Godown,

Stores, Electric room, Blower Room and Work shop. The building also required

for management offices, official departments, laboratories, services and welfare

facilities have been estimated up to 12000 square meters.

57

Financial Viability

a. Project Cost

Table No 14: Cost of the Project

(Rs in Crores)

Name of each Cash Component Estimated

Cost

Cost to be

incurred in

future

Land and Site Development 31.59 31.59

Building 328.12 328.12

Plant and Machinery 1024.51 1024.51

Captive Power Plant 58.33 58.33

Miscellaneous FA 171.99 171.99

Preliminary Exp 53.35 53.35

Upfront fees 4.32 4.32

Working Capital Margin 83.38 83.38

Misce and Contingencies 285.5 285.5

b. Means of Finance

Table No 15: Means of Finance

(Rs in Crores)

Sources Amount % of Total

Equity 450.00 17.54

Internal Accrual 351.00 13.68

Term Loan From Banks 1710.84 66.67

Unsecured Loan 54.42 2.11

58

The company proposes to bring on its margin for the 3 projects as detailed

below.

Table No 16: Margin brought by the Promoters

(Rs in Crores)

Project LocationUnsecured

Loan

Internal

Accruals

Private

Equity

Karnataka 21.58 117 150

Gujarath 12.33 117 150

Rajastan 20.52 117 150

Total 50.43 351 450

The company has projected to generate sufficient internal accruals as

detailed below.

Table No 17: Internal accruals of the company

Particulars 2009 2010

Net Profit 238.20 313.33

Add: Depreciation 61.00 59.69

Gross Cash Accruals 299.20 373.02

Decrease in term loan 134.21 118.08

Dividend 2.74 --

Others 13.33 51.29

Surplus 148.93 203.65

The balance margin would be bought in through equity investment by

private equity investor (450 cr) as well as in the form of unsecured loans by the

promoters.59

The company states that the negotiations are at advanced stage for private

equity. The loan provider has stipulated a condition that the private equity. The

bank has stipulated condition that the private equity amount has to be tied up

before disbursement of loan.

Project implementation schedule

As for the information furnished by the company, the Rajastan project shall

commence commercial production during the month of April 2010, that of

Karnataka in July 2010, and that of Gujarath in October 2010. The company is

confident of finishing the project according to the schedule.

Business Projections and DSCR

Project (On standalone basis)

Table No 18: Projected DSCR for the Project

Particular

s

2011 2012 2013 2014 2015 2016 2017 2018

Net Sales 1634.6

3

2452.6

6

2458.3

5

2458.3

5

2458.3

5

2458.3

5

2458.3

5

2458.3

5

PAT 141.18 255.95 275.90 298.75 320.55 343.41 365.47 371.33

Cash

Profit

234.77 380.38 400.33 423.18 444.98 467.84 489.90 495.76

Interest

on TL

160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Total (a) 394.84 567.50 551.81 539.02 525.18 512.39 499.92 495.76

Installme -- 214.54 285.14 285.14 285.14 285.14 285.14 70.60

60

nt Due

Interest

on TL

160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Total (b) 160.07 401.66 436.62 400.98 365.34 329.69 295.16 70.60

DSCR 2.47 1.41 1.26 1.34 1.44 1.55 1.69 7.02

Avg

DSCR

1.66

Company as whole

Table No 19: Projected DSCR for the whole company

Particular

s

2011 2012 2013 2014 2015 2016 2017 2018

Net Sales 3398.5

7

4267.2

8

4323.5

7

4344.2

5

4377.3

4

4392.8

8

4392.8

8

4392.8

8

PAT 487.92 630.47 677.76 716.13 759.20 787.55 809.41 819.43

Cash

Accrual

639.92 812.23 858.82 895.98 934.62 962.20 983.39 993.37

Interest

on TL

160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Total (a) 799.99 999.35 1010.0

0

1011.8

2

1014.8

2

1006.7

5

993.37 993.37

Installme

nt Due

86.18 300.72 369.08 363.87 336.46 285.14 285.14 70.60

Interest

on TL

160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Total (b) 246.25 487.84 520.56 479.71 416.66 329.69 295.16 70.6061

DSCR 3.25 2.05 1.94 2.11 2.44 3.05 3.36 14.70

Avg

DSCR

2.75

Detailed Balance Sheet and Cash Flow Statement for the projects on

standalone basis and company as whole is furnished by way of Annexure.

The business projection and profitability working furnished by the company

may be considered reasonable and achievable, as the same is based on the market

study, capacity being created and the demand-supply gap.

The projects are individually and severally viable as revealed by the DSCR

which is above the bench mark ratio of 1.5.

Sensitivity Analysis of DSCR

If the project’s sale decreased by 10% in that the average DSCR will be 0.89

which is risky for the banks to lend. If there is increase in the expenditure by 10%

then the DSCR will be 1.12. Even though the standard ratio is 1.5 the company is

able to pay its debt with the ratio 1.

If the company sale decreased by 10% the average DSCR will go to 1.55

from the existing 2.75 but it is more than the bank norms. And if there is increase

in the operating expenses by 10% the average will be 1.99 so it is good for the

bank to lend. Even adverse situation also the company can pay its debts.

Profitability Analysis

Project

Table No 20: Project Profitability Analysis (Rs

in crore)

62

Particulars 2011 2012 2013 2014 2015 2016 2017 2018

Gross sales 1992.8

0

2990.0

6

2997.0

0

2997.0

0

2997.0

0

2997.0

0

2997.0

0

2997.0

0

(-) Excise duty 358.17 537.40 538.65 538.65 538.65 538.65 538.65 538.65

Operating

Income

1634.6

3

2452.6

6

2458.3

5

2458.3

5

2458.3

5

2458.3

5

2458.3

5

2458.3

5

Raw Material 454.62 667.08 667.08 667.08 667.08 667.08 667.08 667.08

Stores

consumed

16.20 24.30 24.30 24.30 24.30 24.30 24.30 24.30

Power and Fuel 134.51 201.76 201.76 201.76 201.76 201.76 201.76 201.76

Direct Labour 12.76 17.86 18.75 19.69 20.68 21.71 22.80 23.93

Other Mfg Exp 234.56 348.67 348.67 348.67 348.67 348.67 348.67 348.67

Depreciation 93.59 124.43 124.43 124.43 124.43 124.43 124.43 124.43

(Inc)/Dec in

WIP

-6.04 -5.23 -0.06 -0.02 -0.03 -0.03 -0.03 -0.03

(Inc)/Dec in FG -4.53 -3.92 -0.04 -0.02 -0.02 -0.03 -0.02 -0.02

Total Cost of

Sale

935.67 1374.9

5

1384.8

9

1385.8

9

1386.8

7

1387.8

9

1388.9

9

1390.1

2

Selling &

Admin

302.93 467.99 469.09 469.09 469.09 469.09 469.09 469.09

Op profit before

Int

396.03 609.72 604.37 603.37 602.39 601.37 600.27 599.14

Interest on WC 23.45 34.86 34.92 34.93 34.93 34.94 34.94 34.95

Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Profit Before

Tax

212.51 387.74 417.97 452.60 487.26 521.88 555.31 564.19

Tax (Current) 23.78 43.93 47.36 78.60 165.68 183.49 199.95 207.31

63

Tax (deferred) 47.55 87.86 94.71 75.25 1.03 -5.02 -10.11 -14.45

PAT 141.18 255.95 275.90 298.75 320.55 343.41 365.47 371.33

Cash Profit 234.77 380.38 400.33 423.18 444.98 467.84 489.90 495.76

The profit after tax to net sales of the project is projected at rate of 8.63% in

the first year and it is increasing every year. The average profit after tax to net sale

for the project is 12.46%, which are satisfactory returns. From the above table it

shows that the company has got cash accruals to pay its loan obligation every year.

Whole Company

Table No 21: Whole Company Profitability Analysis

(Rs in crore)

Particulars 2011 2012 2013 2014 2015 2016 2017 2018

Gross sales 4037.9

6

5101.8

7

5175.4

4

5201.3

3

5244.5

7

5262.3

8

5262.3

8

5262.3

8

(-) Excise duty 639.39 834.59 851.87 857.08 866.93 869.50 869.50 869.50

Operating

Income

3398.5

7

4267.2

8

4323.5

7

4344.2

5

4377.6

4

4392.8

8

4392.8

8

4392.8

8

Raw Material 1245.3

2

1464.2

3

1476.7

5

1483.9

2

1492.2

3

1499.6

7

1499.6

7

1499.6

7

Stores

consumed

38.51 47.17 47.75 47.85 48.97 48.97 48.97 48.97

Power and Fuel 321.48 394.40 399.39 398.95 400.13 400.55 400.55 400.55

Direct Labour 32.43 38.72 40.91 43.25 45.76 47.96 47.96 50.17

Other Mfg Exp 141.53 201.89 202.19 202.55 202.93 203.01 203.01 203.01

Depreciation 152.00 181.76 180.76 179.85 175.82 174.65 174.65 173.94

(Inc)/Dec in

WIP

-6.39 -5.56 -0.08 -0.06 -0.05 -0.03 -0.03 -0.03

64

(Inc)/Dec in FG -4.53 -3.92 -0.04 -0.02 -0.02 -0.03 -0.02 -0.02

Total Cost of

Sale

1920.1

3

2321.4

8

2347.4

4

2356.0

8

2365.1

7

2374.7

6

2374.7

6

2376.2

5

Selling &

Admin

642.72 873.44 886.32 890.02 897.19 898.59 898.59 898.59

Op profit before

Int

835.72 1072.3

6

1089.8

1

1098.1

5

1115.2

8

1119.5

3

1119.5

3

1118.0

4

Interest on WC 68.91 71.60 63.27 54.95 49.24 48.27 48.27 48.13

Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 44.55 --

Profit Before

Tax

606.74 813.64 875.06 927.36 985.84 1026.7

1

1026.7

1

1069.9

1

Tax (Current) 118.82 183.17 197.30 211.23 226.64 239.16 239.16 250.48

PAT 487.92 630.47 677.76 716.13 759.20 787.55 787.55 819.43

Cash Accrual 639.92 812.23 858.82 895.98 934.62 962.20 983.39 993.37

The profit after tax to net sales for the company as whole is projected

14.35% at the first year and it is increasing every year. The average profit after tax

to net sale for company is 16.64%. The returns are satisfactory to provide the loan.

Management

The management of the company is having a full fledged Board comprising

of Promoters, Directors, Executive and Non-Executive Director and Professional

Director, who have required qualification and adequate experience in different

areas. Mr Shobhagmal B Maloo is the chief promoter and chairman of the

65

company. Other promoter directors are Mr N B Maloo, Mr L B Maloo and Mr S K

Maloo. Executive director Mr Yashpal Dhiman and independent directors Mr B P

Ganu, Mr R P Gupta and Advocate M Mani are on the board.

The Board of Directors are supported by team of experienced and well

qualified executives from different area of functioning, like production, marketing,

finance and accounts etc. The company being a listed one in Bombay stock

exchange, National stock exchange and Culcutta stock exchange, they are

governed by the directive of SEBI for the implementation of corporate governance,

which they have implemented in their spirit. The relations with

employees/labourers have been maintained very well by the company.

Industry Analysis

The cement industry has continued its growth over the past seven years.

Domestic cement demand growth has surpassed the economic growth rate of the

country for the past couple of years. The growth rate of the cement demand over

the past five years at 8.37% was higher than the rate of growth of supply at 4.84%

as also the rate of growth of capacity addition during the same period.

Cement Industry in India is on a roll at the movement. With the boost given

by the government to various infrastructure projects, road network, housing

facilities, a booming real estate sector and global demand, growth in the cement

consumption is anticipated in the coming years. Due to the enormous population of

India, there has been a perpetual focus on the development of civic infrastructure

as well as housing facilities. The high demand for cement is coupled with

66

favourable Governmental policies has been favourable factors driving the growth

of the cement industry in India.

Production capacity has gone up and top cement companies of the world are

vying to enter the Indian market, there by sparking off a spate of mergers and

acquisitions. India is the world’s second largest producer of cement after China

with industry capacity of over 200 million tonnes. The present scenario of cement

industry is very good in terms of demand and with the prices going above Rs 160

to Rs 180 everywhere.

i. Demand Supply Gap

The cement industry witnessing high growth, in the last 2 years (2005-06

& 2006-07) demand for cement has grown at a compounded annual growth rate

of over 10%. CRISIL research expects demand to grow at CAGR of 9% over

the next 4 years, due to growth in the end user segment. Going forward, CRISIL

research expects a major thrust to cement demand to come from Higher

Infrastructure Investment.

ii. Cement and Cement Products

In the last 4 years the cement industry’s demand supply gap narrowed,

leading to higher operating rates of over 90%. In the next 2 - 3 years, CRISIL

research expects nearly 70 – 80 million tonnes of cement capacities to come on

stream and majority of them are expected to bunch up in 2008-09 and 2009-10.

Going forward this is likely to result in the lowering of operating rates and

easing of demand-supply gap. CRISIL research expects prices to decrease from

the fourth quarter of 2008-09 onwords, due to incremental capacity addition

that are expected.

67

iii. Government Policies

Till mid 2007, the cement industry shows a lot of struggle between

cement players and the Govt. The Govt took various steps to control cement

prices. It announced a differential excise duty and removal of all duties on

import of Portland cement. All these steps have not resulted in any price

reduction, on the contrary, they have increased during this period. The cement

industry will continue to enjoy the pricing flexibility in the short to medium

term, due to a tight demand-supply situation. However, price increase will not

be as significant as seen in the last 12 – 15 months.

Input related risks

Lime stone, fuel (coal and lignite) and power are the main inputs in the

manufactures of cement. The industry is dependent on the Govt for the pricing and

availability of these inputs, which accounts for a significant portion of the total

production cost.

In the last 10 years, Lime Stone cost has not increased significantly. But as

more capacities come on stream, it is expected to exert pressure on the country’s

limited mineable Lime stone resolves. Going forward, prices of lime stones are not

expected to rise significantly. However, increased level of blinding is likely to help

cement players lower their consumption norms of Limestone, there by mitigating

the risk of a price hike.

Energy cost, which account for nearly 26-30 % of net sales have been rising

steadily. In 2006-07, energy cost decreased to 21% from 26% in 2005-06. This has

been primarily on account of the increasing focus of companies on captive power

68

plant. Currently 52% of the total production of cement is through captive power

plant.

Demand-Supply position of cement during 2007-08

Table No 22: Demand Supply Position (in million

tonnes)

Name of the StateInstalled

CapacityProduction Demand

Karnataka 12.41 10.80 11.80

Gujarath 17.76 15.40 11.68

Rajastan 24.82 25.70 10.33

Demand-Supply position in India during 2007-08

(in million tonnes)

Particulars Demand Supply

North India 49.79 43.61

West India 40.21 48.29

East India 25.33 26.55

South India 48.67 55.80

Total 164.00 174.25

However the average per capita consumption of cement in India has

increased from the level of 97 Kgs during 2001-02 to 148 Kgs during 2007-08.

CRISIL research expects the domestic cement consumption to register a

CAGR rate of 8% in the next 5 years as against the 8.2% CAGR recorded in the

preceding 5 years owing to the following factors.

i. Housing Sector

69

This sector accounts for 60-65% of the total cement consumption, is

likely to be the key demand drivers. CRISIL estimates the total housing stock to

increase by 3% (CAGR) from the level of 146.3 million units during 2008 to

164.7 million units during 2012.

ii. Infrastructure Sector

In recent years the investment in infrastructure increasing, this sector

accounts for 20-22% of the cement consumption, is expected to double from the

level of Rs 4.7 trillion during the period from 2002-07 to Rs 9.2 trillion during

the period from 2007-12, this is expected to push up cement consumption.

iii. Industrial Projects

Due to capacity expansions undertaken by industrial such as steel,

cement, paper and petrochemicals, investment in industrial projects in India are

expected to surge nearly three fold form Rs 2867 billion during the period from

2002-07 to Rs 7841 billion between 2007-12. This is also expected to increase

the demand for cement.

iv. Commercial construction

It is estimated that the commercial construction (Retail, Office space,

Hotels, Hospitals, Multiplexes, Schools etc) is estimated to take place at slower

pace in the forth coming year when compare to previous years.

In order to meet the demand, capacity addition to the 115 million is expected

to take place during the period from 2008-09 to 2012-13. As against 37 million

tonnes added during the preceding 5 years. Due to the lower capacity addition,

cement prices have been on an upword trend (CAGR of 11%) over last 5 years.

However due to the large capacity expansion that are taking place.

70

CRISIL research expects cement prices to fall by as much as Rs 15-20/bag

over the next two years, once these units becomes operational.

The company is implementing the most modern state of the art technology in

setting up of the cement plants at the strategic location in Karnataka, Rajastan and

Gujarath. Further, the cement industry being power intensive in nature, they are

going in for setting up in parallel captive power plant of 50 MW each, which will

support the power requirements of these units. The captive power plant also helps

in reducing pollution and reducing the production cost. Thus the company shall

have advantage to face stiff competition from the market. The company also has

the advantage of utilizing the existing selling and marketing set up for marketing

cement and cement products. There is also possibilities that the company may be

eligible for Carbon Credit in future.

Business Analysis

i. Production and Infrastructure Facilities

Company is setting up the production and infrastructural facilities with

the able guidance of National Council for Cement and Building Materials

(NCB), who have prepared Techno-Economic feasibility reports. Company has

made arrangements to get mining lease for quarrying Limestone, which is the

main raw material for the cement manufacturing. They have well planned for

housing production infrastructure with all the required amenities like, Mining,

Cement plant and Labour colony. They have obtained/ in the process of getting

clearance from the statutory agencies including pollution clearance.

ii. Selling and Marketing arrangements

71

With the Government of India giving thrust in the infrastructure

development in the country, the demand for the cement is ever increasing;

quality cement at affordable prices as proposed by the company can be easily

sold in the market with a suitable brand name.

The promoter/company has already earned good name for their brand for

their soya meal and soya refined oil in central India. The company may encash

this strength for developing good brand for cement also. Thus the market

position of the company may be considered favorable for the company.

Marketing Position and Competitiveness

Table No 23: Company Market Position

(Rs in Crores)

Name of the Company ROCEOperating

profit Margin

%

Industry Average 12 17.2

Other Companies

Sri Vishnu Cement Limited 82.68 22.57

Zuari Cement Limited 27.49 30.61

Murali Industries Limited 10.31 10.95

ACC 11.00 5.5

Birla White 10.40 6.25

Anjani Portland Cement Limited 24.56 18.63

Cement Manufacturing Company

Limited

44.23 39.90

Dalmia Cement Bharath Limited 18.62 14.5372

Deccan Cement Limited 33.68 25.91

J K white Cement works 18.57 15.21

Jaiprakash Associates Limited 13.83 14.05

Madras Cement Limited 26.30 31.06

Penna Cement Industries Limited 11.05 7.68

Ramco Industries Limited 10.29 8.22

Sagar Cement Limited 15.53 21.99

In this analysis the company operating profit margin(10.95%) is below the

industry average (17.2%), which is not acceptable by the banks appraiser. But

company yet to enter into cement production. Hence industry average of cement

industry may not be comparable with the company’s financial/profitability

parameters.

Risk Analysis

Risk Factor Mitigation

Marketing RiskCompany proposes to use its existing as

well as Brand recognition to sell its

products.

Employee Risk

The states where the cement plants are

being set up has adequate skilled and

unskilled human resources.

According to CRISIL research the industry

73

Off take risk/ Market Risk

is expected to add capacities equivalent to

50 MTPA in the next 2-3 years. The

company is confident of leveraging on

present brand recognition as well as

contacts to secure firm clients for the

product.

Power availability risk

Company plans to set up captive power

plant of 50 MW at each of the 3 locations,

which will supplement the power

requirement.

Availability and

Transportation of Lime stone

The plants are being located adjacent to the

Lime Stone mines (major Raw Material),

hence there will be logistic advantage.

Cost Over run

Adequate contingency provision of around

10% has been provided in the project cost.

This will be useful for to pay extra cost

Construction Risk/ Time

over run risk

Company has proposed to hire reputed

engineering consultants and contractors for

the execution of the project. More over it is

also proposed to have a well chosen team

of experienced persons and in house task

force to co-ordinate the implementation of

74

the project

Operating Risk

Company is already into cement business

by setting up 2.14 MTPA cement plant

along with a 30 MW CPP at Chandrapur,

which is likely to be commenced in this

year, in the schedule time.

Management Risk

The promoters are well experienced

businessmen, who have shown

commitment to the company and have

successfully implemented many projects in

the past. It is also expected that they will

show the same commitments and zeal to

this projects as well. Suitable stipulation in

the sanction term not to sell stake of

promoter share mitigate this risk.

Funding Risk

Lenders are stipulating for 19.66% upfront

equity from the promoters. Considering the

past record of the promoters, no difficulty

is involved in the tie up of debt funds for

the project. Also the internal accruals of the

company are considered adequate to part

finance the project.

75

Environmental RiskCompany does not face any problem in

obtaining the clearance.

Ratio Analysis

a. Net Profit Ratio

This ratio shows the relationship between net profit and net sales which

indicates efficiency of management.

Table No 24: Net Profit Ratio

Chart No 9: Net Profit Ratio

76

Year PAT Sales NP Ratio %

2011 141.18 1634.63 8.63

2012 255.95 2452.66 10.43

2013 275.90 2458.35 11.22

2014 298.75 2458.35 12.15

2015 320.55 2458.35 13.03

2016 343.41 2458.35 13.96

2017 365.47 2458.35 14.66

2018 371.33 2458.35 15.10

2011 2012 2013 2014 2015 2016 2017 20180

2

4

6

8

10

12

14

16

Net Profit Ratio

As per the projected Profit and Loss A/c it is estimated that the profit will be

Rs 141.18 cr in the year 2011. This ratio increasing every year, it shows the

operational efficiency of the company. It shows that the company is earning

enough money to meet its obligations.

b. Debt/Equity Ratio

The debt equity ratio is determined to ascertain the soundness of the long-

term financial policies of the company.

Table No 25: Debt/Equity Ratio

77

Year Debt Equity DE Ratio

2011 1781.12 855.42 2.08

2012 1654.44 855.42 1.93

2013 1464.01 855.42 1.71

2014 1254.12 855.42 1.46

2015 970.01 855.42 1.13

2016 679.85 855.42 0.79

2017 384.60 855.42 0.44

2018 299.53 855.42 0.35

Chart No 10: Debt/Equity Ratio

2011 2012 2013 2014 2015 2016 2017 20180

0.5

1

1.5

2

2.5

Debt/Equity Ratio

The bank norm for the ratio is 2, the current position of the ratio is 2.81. But

the company’s promoters in the projected balance sheet ensured that the ratio will

be below the bank norms. Only in the first year it was above the norm, after that

the ratio decreasing. It is because of the decrease of the term loan. The average of

the ratio is 1.25 which is below the norms.

c. Current Ratio

It measures the relationship between current asset and current liability. The

ratio is an indicator of the firm’s commitment to meet it’s short – term liabilities.

Table No 26: Current Ratio

78

Chart No 11: Current Ratio

2011 2012 2013 2014 2015 2016 2017 2018012345678

Current Ratio

The standard for the ratio is 2, but the ratio is less in the first year. But still

the company has sufficient funds to pay its creditors and current liabilities. The

ratio is increasing year by year, it shows that the company has high capable of

paying its creditors. the ratio is more in the later years it shows that less efficient

use of funds.

79

Year Current Assets Current

Liabilities

Current

Ratio

2011 753.24 575.32 1.68

2012 1255.21 609.05 2.06

2013 1465.61 609.55 2.4

2014 1678.95 609.59 2.75

2015 1839.87 609.62 3.01

2016 1946.29 538.37 3.61

2017 1927.13 324.56 5.93

2018 2337.88 324.60 7.2

d. Debt Service Coverage Ratio

The Debt Service Coverage Ratio is the ‘core test’ ratio in project financing.

This ratio indicates the degree of viability of project. Here ‘Debt’ means

installments payable during the year and ‘Service’ means cash accruals comparing

net profit plus depreciation and non cash write-off. It measures the extent of cash

accruals (service) available to cover the maturing term obligation (debt) during

each year.

Table No 27: Debt Service Coverage Ratio

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Year Cash Accruals Debt DSCR

2011 234.77 160.07 2.47

2012 380.38 401.66 1.41

2013 400.33 436.62 1.26

2014 423.18 400.98 1.34

2015 444.98 365.34 1.44

2016 467.84 329.69 1.55

2017 489.90 295.16 1.69

2018 495.76 70.60 7.02

Chart No 12: Debt Service Coverage Ratio

2011 2012 2013 2014 2015 2016 2017 20180

1

2

3

4

5

6

7

8

DSCR

It is projected that the cash accrual will be 2.47 more than the debt

obligation, which is more than the bank’s norm 1.5. But from 2012 the projected

ratio came down to below the bank’s norm. Any way the ratio is more than 1, it

shows that the company will be able to repay its term loan and the interest arise on

the loan. The average DSCR is 1.66 which is more than the Bank’s norm.

e. Interest Coverage Ratio:

Table No 28: Interest Coverage Ratio

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Year PBIT Interest ICR

2011 396.03 183.52 2.15

2012 609.72 221.98 2.74

2013 604.37 186.40 3.24

2014 603.37 150.77 4.00

2015 602.39 115.13 5.23

2016 601.37 79.49 7.56

2017 600.27 44.96 13.35

2018 599.14 34.95 17.14

Chart No 13: Interest Coverage Ratio

2011 2012 2013 2014 2015 2016 2017 201802468

1012141618

Interest Coverage Ratio

The ratio is very important from the lender’s point of view. It indicates

whether the business would earn sufficient profits to pay periodically the interest

charges. The project’s projected profit before interest and tax to interest is only

2.15, it has increasing trend in the future period. It shows that the company is

earning sufficient funds to pay the interest arising for the loan taken to put up

project. In the year the PBIT is will be 17 times to its interest payment, it is

because of the decrease in the interest and increase in the profits.

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FINDINGS

Project appraisal methods try to reduce the subjectivity involved in assessing

the capacity of the borrowers with respect to repayment capacity. The availability

of computerised software makes the technicalities of the assessment much simpler

as compared to earlier. The project can be appraised by using some of the methods

like healthy discussion can be held with the members of management of

borrowings firms to get better idea about the business, its viability and the capacity

of management to take decision in exceptional situation.

The study revealed that the different aspects of a project are not independent

entities but are highly inter-related and a meaningful project appraisal depends

upon the appreciation of these fundamental facts. The appraisal of a project is

undertaken by the bank with the objective of determining the market potential of a

project, to determine repayment capacity of sanctioning unit and selecting an

optimal strategy. The methods of analysis vary from project to project, but there

are certain common aspects of study from the angle of technology and engineering.

An analysis of a region economy provides a general framework within

which the assessment of any project is made. This analysis indicates whether the

project is in a potential environment, which enjoys priority for economic

development of the region/state concerned. This exercise itself usually involves the

investigation of six different aspects; Economic, Technical, Organizational,

Managerial, Operational and Financial. The relative importance of these different

aspects can vary considerably according to circumstances and type of project.

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The study also revealed that in a large majority of cases, it is possible to

quantify project costs and benefits. Future costs and benefits are calculated, using

either market are shadow prices and on the basis of past performance in case of

expansion projects. Further both costs and benefits are put under subsidence to

initiate the projects estimated rate of return. The latter is then compared with the

minimum earning power. While the rate of return is an important test that all

projects with quantifiable costs and benefits must pass, importance and

significance is usually overestimated.

The rate of return is a necessary confirming test of projects that have to be

justified within a much wider frame of reference, in which basic project objectives

and the nature of project benefits increased employment and improved income

distribution play major roles.

It was found that technical feasibility study is mainly done to consider the

adequacy and suitability of the plant, the equipments and their significations, plant

layout, balancing of different sections of the plant, proposed arrangements for

procurement of the plant and equipments, reputation of the machinery suppliers

etc. The feasibility study also considers the technology required for a particular

project, evaluate technological alternatives and select the most appropriate

technology in terms of optimum combination of project components.

The study revealed that the market analysis gives a comprehensive account

of the market opportunity, as well as of the marketing strategy appropriate for

converting the opportunity into a reality. An intensive scanning and analysis of the

proposed environment in which the industrial unit has to function should from the

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basis for analyzing market opportunities as well as for specifying the marketing

strategy. This is because the ever changing environment, in which the industry

sector functions, restricts or expands the opportunities available to and the threats

to be faced by an industrial unit.

The purpose of the appraisal of financial aspects of a project is generally to

ensure its initiation of financial conditions for the sound implementation and

efficient operation. The scope of this aspect of appraisal varies, of course,

considerable with the nature of the project and whether it is revenue producing or

not. For projects, which involve the marketing of a product or services by an entity,

the appraisal includes in investigation of the availability and cost of raw material,

power, labour and services needed for production and the prospects for marketing

the product or services profitability.

In every case, it is necessary to ensure that satisfactory accounts are

maintained for effective control over expenditure and revenue and to disclose the

project and entity carrying it out also. Since the banks finance only a part of the

investment cost of a project, it is necessary to ensure that funds from other sources

are available on acceptable terms to meet the balance of the cost.

This may be relatively simple where the government is able to provide the

rest of the necessary funds from budgetary sources or it may be complicated, as in

a project to expand or modernize a revenue earning concern where all the financial

requirements of the concern during the construction of the project must be

considered.

Financial appraisal also evaluates capacity of revenue producing investments

from the stand point of the entity. Industrial sponsor or other investors, who would

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make them in order to ascertain whether it is sufficiently attractive to warrant their

participation establishing that the entity carrying out the project is in a position to

manage its business in a cost-effective fashion is another important aspects.

The efforts made by the Corporation Bank to constantly update its

evaluation procedures indicate its high level professionalism and explains why it is

in a leading position amongst all nationalised banks and incase of Murali Industries

Limited cement project bank has done efficient appraisal. The project is to set up 3

cement plants at Karnataka, Rajastan and Gujarath with a capacity of 3 million

tonne per annum.

The current DER is 2.81 where the banks norm is 2, it is less than the bank

norm. But in coming year the ratio will be improved. For the project the average

DER is 1.25. Sensitivity analysis shows that the debt servicing capacity if the

Murali Industries Limited would be adequate in the adverse scenario assumed. The

promoter/management risk, project implementation risk, operational risk, market

risk and finance risk are considered to be normal. The overall DSCR of the

company and project are 2.75 and 1.66 respectively, which indicates viability and

its above the Bank norms.

SUGGESTIONS

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i. Net Present Value of the project should be calculated. NPV is considered as one

of the best method for evaluating the capital investment projects. It is the

difference between the total present value of future cash inflows and the total

present value of future cash outflows. The project should be accepted if the

NPV is positive. If the bank would have calculated the NPV it would have

made better appraisal. Because present value methods always provides for

correct ranking of investment projects.

ii. All critical assumption could be valued in the light of actual parameters for

similar understanding in the same industry and sensitivity analysis can be

undertaken by varying these factors accordingly. Relative comparison with

other players in the industry would provide a better estimation and analysis of

the project. It also helps to assess the impact of adverse changes in the operating

conditions of the project on its viability.

iii. In recent years, environmental concerns have assumed a greater deal of

significance. The bank has to do Ecological analysis as the new project like

drug and chemical industry impact the Environment.

iv. The Bank should also consider the capability of management and its analytical

skills of the top management in the company.

v. The Costs, Profits are predicted only on the basis of the past trends. But same

trend may not continue in the future. They may vary depending upon the

Economic conditions, Business cycles, Government policies etc. So there

should be a provision for all these contingencies. This exercise is critical as it 87

calls for a multi-dimensional analysis of the project that is, a complete scanning

of the project.

CONCLUSION

Project Appraisal is a science as well as an art. While the basic principles of

appraisal could be mastered in a short time span, the successful practice of the art

of carrying out of appraisal requires keen observation, objectivity and decision

making. It is also necessary to took ahead of the project. Project appraisal is a key

to broad based, balanced industrial growth of the country. In a way, it calls for a

judicious judgment and perspective outlook.

The lending institutions examine the project to study its soundness on

Technical, Economic, Commercial and Management grounds. If the appraisal

report is found satisfactory, the loan application will be favourable considered. The

manager then communicates his decision to the borrower and terms and conditions

will be negotiated.

The most important areas for the borrower and lender to negotiate are timing

in relation to negotiation method of financing based on certificates of work done,

repayment schedule, rate of interest, commitment fees, security options and

monitoring and control requirements. Financial institutions also pay attention to

political environment and labour conditions of the area where the project is to be

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located. Strikes, Lockouts, Industrial Peace and Communal Harmony in the area

play a decisive role in examining success or failure of the project.

As a lender and a development institution, the bank places particular stress

on the need for an efficient organisation and responsible management for the

execution of the project. It is, therefore natural that financial institutions very

carefully appraise the managerial aspects before sanctioning assistance for a

project. If a proper appraise of the managerial aspects is made in the beginning

itself, future problems in these areas can be avoided to a very large extent. It is

therefore necessary that the overall background of the promoters, their academic

qualification, business and industrial experience and their past performance are

looked into in greater detail to assess their capabilities for implementing the

projects for which financial assistance has been sought.

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