Evaluation of Investment Proposal


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Evaluation of Investment Proposal:

Evaluation of Investment Proposal Presented By: Anupam Kumar Reader, School of Management Sciences, Varanasi. Email: anupamkr@gmail.com 1 © Copyright 2013 Anupam Kumar

Ex Ante Evaluation:

Ex Ante Evaluation A structured analytical tool to take a credit decision. The basic premises of an appraisal are to assess/ analyze: The Promoters. Viability of the business – Macro & Micro Environment of the Business. Business financials Various Risk & its mitigation. Permission & Approvals from Regulatory Bodies. 2 © Copyright 2013 Anupam Kumar

Promoter Evaluation:

Promoter Evaluation Track record of promoters Net worth/Availability of funds Management Experience of Management Ownership Pattern Check RBI Defaulters List Check CIBIL (Credit Information Bureau of India Limited) Records 3 © Copyright 2013 Anupam Kumar

Viability of the Business:

Viability of the Business The business viability through an evaluation of the micro and macro aspects of the business environment may be done through a SWOT analysis. The Strengths and Weaknesses determine the internal aspects of any business The Opportunities and Threats determine the external aspects. 4 © Copyright 2013 Anupam Kumar

Viability of Business:

Viability of Business Strengths Areas of considerations may be Competent Management Distinctive competitive edge in terms of cost, product differentiation, R&D, skills etc Good Brand Image – Strong & growing customer base. Industrial relations – low attrition rate. Sufficient Financial Resources. Weaknesses Areas of considerations may be Lack of Management Depth/ Talent Deteriorating competitive position Newcomer with unproven track record. Short on Financial Resources Technology Obsolescence. 5 © Copyright 2013 Anupam Kumar

Viability of Business:

Viability of Business Opportunities Areas of considerations may be Industrial Scenario Faster market growth Entry to new market or new customer segments Expansion of Product line Vertical Integration Movement up the value chain to meeting growing customer aspirations Threats Areas of considerations may be Growing competitive pressures Growing bargaining power of customers and suppliers Changing buyer needs and tastes Rising sale of product substitutes Adverse Government Policies Vulnerability to Recession 6 © Copyright 2013 Anupam Kumar

Business Financials:

Business Financials The criteria for evaluation of an investment proposal consists of appraisal of Manufacturing efficiency Operating efficiency Is the unit turning over the assets efficiently? Cash Flow pattern. Liquidity to meet day to day operations What is the quality of current assets? Can the unit sustain in difficult times? Can the unit service our interest and repayments? 7 © Copyright 2013 Anupam Kumar

Business Financials Aspects:

Business Financials Aspects Indicators Implications Growth in Sales Shows Prosperity Raw Material Content in Sales Indicates Cost Efficacy Gross Profit / Sales Indicates Manufacturing Efficacy PBDIT * / Sales Indicates Operating Efficacy Cash Accruals / Sales Indicates Ultimate Earnings Current Ratio Will the Project Meet Its Commitments TOL * / TNW * Indicates Resilience in Difficult Times Sales / TTA * Asset Turn Around Capacity ROCE Overall Efficacy *Financial Terms 8 © Copyright 2013 Anupam Kumar

Financial Terms:

Financial Terms FINANCIAL TERMS MEANINGS PBDIT Profit Before Depreciation Interest & Tax TOL Total Current Liabilities + Total Term Liabilities + Deferred Tax Liability TNW (Tangible Net Worth) Paid up share capital + Reserve – Revaluation Reserves – Intangible Assets (Patents, Goodwill, Preliminary Expenses, Bad / Doubtful Expenses not accounted for, etc) Sales / TTA Measures the firm’s efficiency to generate sales using its assets EBIDA Earnings before Interest, Depreciation and Amortization Gearing Ratio of Company’s Long term debt and its equity capital. It is expressed in percentage form. 9 © Copyright 2013 Anupam Kumar

Quantum & Type of Debt:

Quantum & Type of Debt Debt is required by the Project Ventures for the following reasons. Capital Investment (Project Finance) Working Capital The debts / advances may be fund type or non fund type. Fund Based Facilities Term Loans Cash Credit Bills Discounted/ Purchased Demand Loans, Overdraft etc Non Fund Based Facilities Letter of Credit (Domestic/ Foreign) Guarantee Deferred Payment Guarantee/ Co- Acceptance of Bills 10 © Copyright 2013 Anupam Kumar

Project Financials:

Project Financials Capital Structure a ) Desired Debt/Equity Ratio < 2:1 b) Min. Promoter Contribution at 20-25% Fixed Asset Coverage Ratio ( Fixed Assets (WDV)/Term Liabilities) Fixed Asset Coverage >1.25 is preferred. Debt Service Coverage Ratio (DSCR) EBIDA * /( Interest + Principal Amount) Desired DSCR is > 1.50 *Financial Terms 11 © Copyright 2013 Anupam Kumar

Project Financials:

Project Financials Break Even Point Lower the level, the better it is for the project. Sensitivity Analysis Impact study on the cash flows due to adverse changes in the ‘Cost’ or the ‘Sales’ side. Repayment Period Normally repayment term of 7 years is preferred. 12 © Copyright 2013 Anupam Kumar

Working Capital Financing:

Working Capital Financing The focus while evaluating the working capital financing is on: Volumes/ Sales growth Operating efficiency Liquidity Gearing * Quality of current assets. Efficiency in asset turn over. The method involved in evaluation of the working capital financing are: Turnover Method Working Capital Gap Method Cash Flow Method 13 © Copyright 2013 Anupam Kumar

Turnover Method:

Turnover Method Usually employed for working capital up to Rs. 5 Crores. Annual turnover as projected by borrower. Turnover as accepted by Bank. Working Capital requirements [25% of sales i.e. item 2] Minimum margin required [5% of sales i.e. item 2] Actual margin available (Net Working Capital). Maximum permissible Bank Finance is lower of the (item 3 – item 4) and (item 3 – item 5) 14 © Copyright 2013 Anupam Kumar

Working Capital Gap Method:

Working Capital Gap Method 1 st Method of Lending 2 nd Method of Lending (MPBF) Current Assets 1000 1000 Current Liabilities excl. Bank 400 400 Working Capital Gap 600 600 Min. Stipulated Net Working Capital 150 (25% of WC Gap) 250 (25% of CA) Bank Finance 450 350 15 © Copyright 2013 Anupam Kumar

Cash Flow Method:

Cash Flow Method Prepare a cash flow statement for the next 12 months Arrive at the maximum requirement. Obtain documents for the max. amount. Operation based on monthly requirements. Monitoring at periodical intervals. 16 © Copyright 2013 Anupam Kumar

Risk Appraisal:

Risk Appraisal Risk Head Description Promoter Risk Capability to implement projects Ability to Infuse Capital Market Risk Demand Risk Tariff Risk Financing Risk Financial Closure Risk , Equity Infusion Risk Construction Risk Capability to construct, Technology Used, Equipment Quality, Land Acquisition Risk, Environmental Risks Fuel Supply Risk Availability of Requisite quantity and Quality of Fuel at Budgeted Cost Regulatory Risk Risk of not getting approvals Policy Risk Risk of Change in Policy Operations and Maintenance Risk Risk of unsatisfactory Operations & Maintenance, 17 © Copyright 2013 Anupam Kumar

For further details,…:

For further details,… Contact Anupam Kumar Reader, School of Management Sciences, Varanasi. Email: anupamkr@gmail.com 18 © Copyright 2013 Anupam Kumar


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