Project Appraisal An Overview

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• Project Appraisal- An Overview

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Agenda

• Introduction
• Aspects of Project Finance
• Managerial Appraisal
• Technical Appraisal
• Commercial Appraisal
• Selected financial indicators
• Case Study

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Project

• A non repetitive activity
• Involves large capital expenditures
• Returns over a long period of time
• Requires significant managerial bandwidth
• Varied risks
• Uncertainty of future business environment

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Project Finance

• Level of funding raised based purely on the
  merits of the relevant project
• Lender is satisfied to look initially at the
  cashflows and earnings of a economic unit
• Debt would be repaid from the economic unit
• The loan and equity returns are tied to the cash
  flows and fortunes of the project rather than
  being dependant on the parent company/companies.

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Project Appraisal

• The purpose of Project Appraisal is to ascertain
  whether the project is sound technically,
  economically, financially and managerially and is
  ultimately viable as a commercial proposition.
• Multifaceted activity Requires skills of
• Psychologist
• Engineer
• Financial Analyst
• Economist

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Project Appraisal

• Each and every project is based upon assumptions,
  necessarily involve capital expenditure in the
  hope of a reasonable return on investment over a
  future period of time.
• Project Appraisal necessarily involves validation
  of various assumptions
• Appraisal of
• Management/ Sponsor/ Promoter
• Technical aspects
• Market Selling Arrangements
• Financial viability

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Initial Screening 1/ 3

• WHAT IS THE PRODUCT (General industry structure)
• WHO IS SETTING UP THE PROJECT (Promoters and
  their experience)
• Our experience from similar units
• Banks lending policies
• Government/ RBI Regulations
• Past business financials
• Collaterals

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Initial Screening 2/ 3

• Distance of unit from branch
• RBI/ CIBIL/ AML Lists
• ECGC Specific Approval List
• Discussions with banks
• Independent Market Enquiry

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Initial Screening 3/ 3

• Prudential Exposure norms
• Individual Group Exposure norms
• Industry Exposure norms
• Scheme Eligibility Norms DER, PC, DSCR, Asset
  coverage
• Takeover norms, if applicable
• Profitability Projections
• Credit Risk Rating norms

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Management Appraisal 1/ 5

• Who are the promoters KYC
• Cohesiveness - relationship
• Competence - Age, Qualifications
• Experience general or similar line
• Net-worth of promoters
• IT/ Wealth tax status

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Management Appraisal 2/ 5

• Associate concerns in which interested
• Associate Concerns
• When established
• Which industry Products
• Financial performance
• Visit to associate concerns
• Role of promoters in the associate concerns

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Management Appraisal 3/ 5

• Bankers report of unit and associate concerns
• Written
• Discussions
• Independent Market Enquiries
• Our own customers,
• Suppliers, Customers
• Employees
• Prominent businessmen
• Statutory Checks
• RBI Caution Advice
• Wilful defaulters database RBI and CIBIL
• RBI and CIBIL Defaulters list
• AML list - UN website

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Management Appraisal 4/ 5

• Shareholding pattern
• stake of promoters Majority shareholder
• Stake held by investment companies
• Stake by foreign funds/ FDI/ Overseas investors
• Examine shareholders agreements restrictive
  covenants
• Partnership deed/ Society/ Trust deed to be
  examined for any restrictive clauses
• Memorandum AoA to be examined for objectives,
  borrowing powers, security, nominee directors etc.

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Management Appraisal 5/ 5

• Composition of Board
• Chief Executive Organisational set up
• In case promoters not qualified/ experienced,
  critically examine line management
• Adequacy of personnel for project implementation
  and each of functional areas viz. finance,
  marketing, technology, production, materials, HR
  etc.

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KYC

• Companies Memorandum and articles of
  association object clause, borrowing powers,
  power to mortgage, authorized share capital,
  directors and board of directors, nominee
  directors provision, Pvt or public ltd
• Partnership concerns Partnership deed
  (registration), no of partners, powers to borrow
• Trusts, HUFs, Co-operatives necessary
  safeguards
• Address and Identity proof, Networth statements,
  ITRs, Signature attestation from bankers,
  PAN/Sales tax/ EPF registration

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Technical Aspects 1/3

• Scope of project
• Plant scale, product mix
• Capacity
• Bottlenecks in upscaling
• Location
• Approach road
• Infrastructure facilities
• Power distance from substation
• Raw materials
• Availability of skilled/ unskilled labour

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Technical Aspects 2/3

• Mfg process - Selection of technology
• Technical consultants/ collaborators
• Similar technology used by other units
• Selection of machinery cost and quality
• Performance guarantee
• Training personnel
• Imported After sale service
• Second hand/ fabricated

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Technical Aspects 3/3

• Major Raw Materials
• Availability (Quantity Quality)
• Price fluctuations
• Imported or Indigenous - duty structure
• Proximity
• Power, Water, Fuel
• Effluent Disposal
• Manpower availability
• Implementation Schedule ????

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Market Analysis 1/ 2

• Target customers
• Market prospects - Market Survey
• Demand Supply scenario
• Price trends
• Competition - local
• Competition foreign - duty structure
• Firm tie ups (collaborator off take !!!)

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Market Analysis 2/ 2

• Selling arrangements
• Industry practices
• Credit period
• Payment defaults
• Advance payments
• Ancillary units Tripartite agreements

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Financial Appraisal - Cost of Project Means of
Finance
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Capital Cost Validation

• Land
• Cost as per Sale / Lease deed, Registration cost
• Cost of Land Development, as estimated by a Civil
  Engineer
• Land use permission
• Building Civil works
• Approval of construction plan by Local
  Authorities
• Types of construction Estimates by a Civil
  Engineer
• Plant, Machinery Equipments
• Selection criteria i.e. Technical specifications,
  Capacity, Quality, After sales service,
  Guarantee, Delivery schedule, Cost, Terms of
  payment
• Quotations / Offer letters from manufacturers
• Excise Duty, Sales Tax, Transportation
• Foundation, Erection Commissioning

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Financial Viability 1/ 2

• Assumptions underlying projections
• Installed capacity Capacity utilisation
• Selling Price
• Raw material, power, manpower and other direct
  costs
• Administration and selling costs
• Interest and Depreciation, Taxation structure
• Projected profitability
• Projected cash flow
• Projected balance sheet
• Working capital calculations

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Financial Viability 2/ 2

• DER
• GPM and NPM comparison with peers
• DSCR
• Project IRR
• BEP
• Cost of Capital (CoC)
• Return on Capital Employed (RoCE)
• Sensitivity analysis
• Variations in capacity utilisation, selling
  price, raw material and other key costs
• Test the performance of key parameters
• Inter-firm comparison
• Project Cost, Means of finance, Projections of
  income and profitability and DSCR

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Others

• Repayment schedule EMI/ Balooning
• Moratorium
• Capital/ interest subsidy
• Internal Risk Rating
• External rating
• Primary and collateral security
• Security Margin/ Asset Coverage
• Pre-disbursement conditions

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Thank You