156.

PROFILE ON VARNISH AND LAQUERES

156-2
TABLE OF CONTENTS
PAGE
I.

SUMMARY

156-3

II.

PRODUCT DESCRIPTION & APPLICATION

156-3

III.

MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY
B. PLANT CAPACITY & PRODUCTION PROGRAMME

156-4
156-4
156-8

IV.

MATERIALS AND INPUTS

A. RAW MATERIALS
B. UTILITIES

156-8
156-8
156-9

V.

TECHNOLOGY & ENGINEERING

156-10

A. TECHNOLOGY
B. ENGINEERING

156-10
156-11

VI.

MANPOWER & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT

156-14
156-14
156-15

VII.

FINANCIAL ANLYSIS
A. TOTAL INITIAL INVESTMENT COST
B. PRODUCTION COST
C. FINANCIAL EVALUATION
D. ECONOMIC BENEFITS

156-16
156-16
156-17
156-18
156-20

156-3
I.

SUMMARY

This profile envisages the establishment of a plant for the production of varnishes and
lacquers with a capacity of 544 tonnes per annum.
The major raw materials required for the production of varnish are alkyd resin (shellac),
linseed oil and calcium oxide which are available locally while the raw material required for
the production of lacquer which include butyl acetate, ethyl acetate, methyl ethyl ketone,
and butanol and petroleum nafta have to be imported.
The present demand for the proposed product is estimated at 865 tonnes per annum. The
demand is expected to reach 2,301 tonnes by the year 2020.
The total investment requirement is estimated at about Birr 7.69 million, out of which
Birr 1.56 million is required for plant and machinery. The plant will create employment
opportunities for 13 persons.
The project is financially viable with an internal rate of return (IRR) of 24.82% and a
net present value (NPV) of Birr 6.58 million, discounted at 8.5%.
The project will have a forward linkage effect with the furniture and wood working subsector. The establishment of such factory will have a foreign exchange earning potential
through exporting its products.
II.

PRODUCT DESCRIPTION AND APPLICATION

Varnish is a solution or a dispersion of synthetic and/or natural resins in oil or thinners.

Varnish is a chemical product, which imparts transparent film on the surface applied.
Varnishes are used as protective and decorative coating for various surfaces of goods
made from metal or wood.

156-4
Lacquer is a coating composition based on a synthetic, thermoplastic, film-forming
material dissolved in organic solvent, which dries primarily by solvent evaporation. Its
use is for coating furniture.
III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

past Supply & Present Demand

The country's requirement of varnishes and lacquers is met both from local production
and imports. The supply of varnishes from domestic production during the period 1997
2006 is given in Table 3.1.
Table 3.1
DOMESTIC PRODUCTION OF VARNISHES & LACQUERS ( TONNES)
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

Production
300
397
269
430
344
375
251
230
474

Source: CSA Statistical Abstract of Ethiopia.

156-5
As can be seen from Table 3.1, domestic production of varnishes & lacquers ranges from
230 tonnes in year 2004 to 474 tonnes in year 2006. The average production during the
time of analyses is calculated at 318 tonnes.
Varnishes and lacquers are also imported from various countries. However, the import
data obtained from the External Trade Statistics of the Customs Authority has lamped
varnishes and lacquers with paints. In order to arrive at the import figure of varnishes
and lacquers, knowledgeable people in the area have been consulted. Based on the
information from knowledgeable people, 25% of the import is assumed to be varnishes
and lacquers. Therefore, on the basis of this assumption, the supply of varnishes and
lacquers from the total import of paints varnishes and lacquers is worked out as shown in
Table 3.2.
Table 3.2
IMPORTS OF VARNISHES AND LACQUERS (TONNES)
Year

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

Paints Varnishes

Share of Varnish

and Lacquers

and Lacquers

41
324
306
1644
263
478
482
511
659
1042

10
81
77
411
66
120
121
128
165
261

Source: Customs Authority External Trade Statistics 1997-2006.

As could be seen from Table 3.2 import of the products though fluctuating from year to
year was generally rising. During the period of analyses, import has grown from 10
tonnes in 1997 to 261 tonnes in year 2006.

156-6

To estimate the current demand for the products the following methodology is adopted.

Assuming that supply is driven by demand, the total imported and

domestically supplied varnish and lacquers in the year 2006, i.e., 735 tonnes
is assumed to realistically reflect the effective demand for the same year,

The demand for the products under consideration is directly related with the
performance of the manufacturing sector specially the furniture manufacturing
sub sector. Therefore, the average growth rate registered by the manufacturing
sector during the past five years, i.e., 8.5% is used to estimate the demand for
the products in year 2008.

Accordingly by applying the above assumptions the present (2008) effective demand for
varnish and lacquers is estimated at 865 tonnes.
2.

Projected Demand

The demand for varnishes and lacquers is directly influence by the growth of the end
users, mainly the manufacturing sector. Considering the past development registered by
the manufacturing sector, an annual average growth rate of 8.5% is applied to project the
future demand (see Table 3.3).

Table 3.3
PROJECTED DEMAND, DOMESTIC SUPPLY & UNSATISFIED DEMAND
(TONNES)

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Year

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
3.

Total

Domestic Unsatisfied

Projected

Supply

Demand

Demand
938
1,018
1,104
1,198
1,300
1,411
1,531
1,661
1,802
1,955
2,121
2,301

474
474
474
474
474
474
474
474
474
474
474
474

464
544
630
724
826
937
1,057
1,187
1,328
1,481
1,647
1,827

Pricing and Distribution

The ex-factory price of varnish is about Birr 22.00 per kg. Thus, to be competitive Birr
20.00 per kg is taken as the factory-gate price. Distribution of the products could be
effected through the existing wholesale channels for building materials.

156-8
B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

Based on the market study, the envisaged plant will have a capacity of 544 tonnes per
annum to cover the unsatisfied demand of varnish and lacquer working single shift of 8
hours a day for 300 days per year.
2.

Production Programme

The production programme considers that for the first production year the plant will
utilize 80% of its capacity, and 90% in the second year. For the third year on ward, the
plant will utilize its full capacity.

Table 3.3
PRODUCTION PROGRAMME
Sr.

Product

Year of Production
2
3-10

No.
1

Capacity utilization rate (%)

Production(tonnes)

IV.

MATERIALS AND INPUTS

A.

RAW MATERIALS

80

90

435.2

489.6

100
544

Varnishes and lacquers are many in type; they require different kinds of raw materials
depending upon the end users. For the plant under consideration, considering 50 % varnish
and 50% lacquer production, the basic raw materials for manufacturing varnish and lacquer
are given in Table 4.1. Among these raw materials ;Alkyd resin, linseed oil and calcium
oxide can be obtained locally from Alkyd Resin Share Company, Modjo Oil Mill and

156-9
Caustic Soda Share Company, respectively; while other raw materials will be imported. The
total cost of raw and auxiliary materials is estimated at Birr 8,164,000, out of which Birr
2,783,700 will be required in foreign currency.
Table 4.1
ANNUAL REQUIREMENT OF RAW AND AUXILIARY MATERIALS & COST
(TONNES)
Sr.
No.

Description

1
1.1
1.2
1.3
2
2.1
2.2
2.3
2.4
2.5
3
3.1

Varnish
Alkyd resin(shellac)
Lin seed oil
Calcium oxide
Lacquer
Butyl acetate
Ethyl acetate
Methyl ethyl ketone
Butanol
Petroleum nafta
Auxiliary Materials
Plastic container (Pcs)
Grand Total

Qty.

Unit Cost
(Birr)

Cost in '000 (Birr)

FC

B.

LC

TC

198.0
71.0
14.0

16,899.3
22.0
2,650.0

3,346.1
1,562.0
37.1

3,346.1
1,562.0
37.1

72.0
22.0
42.0
34.0
104.0

12,340.0
11,500.0
12,350.0
1,660.0
10,260.0

888.5
253.0
518.7
56.4
1,067.0

888.5
253.0
518.7
56.4
1,067.0

108,800.0

4.0
2,783.7

435.2
5,380.4

435.2
8,164.0

UTILITIES

Utilities required for manufacturing Varnish and lacquer include electric power and water
(see Table 4.2).

156-10
Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST
Descriptio
n

Unit of
Measure

Qty.

Cost in '000 Birr

F.C

Electricity
Water

kWh
m3

134,64
0
5,225

Total

V.

L.C
T.C
63.765
63.765
16.981
80.746

16.981
80.746

TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY
1.

Process Description

The basic process involved in the production of varnish is mixing. It is the core unit
operation because various raw materials are mixed and homogenized by employing
mixers of disperser type. The actual process of varnish production involves dissolution
of film-forming component, adding & mixing other liquid components, quality inspection
and quality improvement, filtering of the final product and final product packing with
appropriate container.
Method for preparation of transparent lacquers is almost the same as that for spirit
varnish the basic technological production process involves mixing of the various raw
materials using mixers mainly of the disperser type. It is better to mix all the gradients in
a small amount of solvents and then churning be carried out and then mix the rest of the
solvent bit by bit and the solution should be filtered to remove impurities present in it.

156-11
The production process of varnish and lacquers is mixing of different ingredients and
filling to the desired amtainer sizes. The waste can only be generated if there is leakage
of these organic chemicals. So, controlling leakage is the best way to avoid any pollution
on environment but if leakage occurs, it has to be washed, collected in a wash basin and
treated before disposal. The cost of this wash basin is included in the civil construction
cost.

2.

Source of Technology

Machinery and equipment can be obtained from an Indian company, named:M/S Atlas Engineering works
8. Deewall Hall, Chandini, Chowk, Delhi

B.

ENGINEERING

1.

Machinery and Equipment

The list of production machinery and equipment required for the plant is provided in Table
5.1. The total cost of plant machinery and equipment is estimated at Birr 1,562,770 out of
which Birr 1,328,350 will be required in foreign currency.

156-12
Table 5.1
MACHINERY & EQUIPMENT REQUIREMENT AND COST
Sr.
No.
1
2
3
4
5
6
7
8

1.

Description
Dissolvers
Wall mixer
Pearl mills
Mixing tanks
Scales
Filling
Pump
Movable vessels
Grand Total

Qty.
1
1
1
1
1
1 set
1
1

Cost in '000 Birr

LC
77.82
29.18
38.912
23.91
3.98
38.91
11.95
9.72

FC
441.012
165.379
220.506
135.49
22.58
220.50
67.74
55.12

234.41

1,328.35

TC
518.83
194.56
259.41
159.40
26.56
259.41
79.70
64.85
1,562.77

Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 1,000 m 2, out of this
650 m2 is built-up area. Out of the total built up area, 400m 2 is covered by production
facility, while 130m2 is for store and 120m2 for office building. Cost of building
construction with a rate of Birr 2,300 per m2 amounts to Birr 1,495,000.
According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No. 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.
The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

156-13
Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.
However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.
In Addis Ababa the Citys Land Administration and Development Authority is directly
responsible in dealing with matters concerning land.

However, regarding

the

manufacturing sector, industrial zone preparation is one of the strategic intervention

measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.
Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the Citys Investment Authority. However,
if the land request is above 5,000 m 2 the request is evaluated by the Citys Investment
Authority and passed

with recommendation to the Land Development and

Administration Authority for decision, while the lease price is the same for both cases.
The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the citys Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.
Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for this
profile, which is a manufacturing project, a land lease rate of Birr 346 per m2 is adopted.

156-14
On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.
Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Scored Point
Above 75%
From 50 - 75%
From 25 - 49%

Grace
Period
5 Years
5 Years
4 Years

Payment
Completion
Period
30 Years
28 Years
25 Years

Down
Payment
10%
10%
10%

For the purpose of this project profile the average, i.e., five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.
Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 20.76 million, of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years, i.e.,
Birr 667,286 annually.
VI. MANPOWER AND TRAINING REQUIREMENT
A. MANPOWER REQUIREMENT
In order to run the envisaged plant efficiently, it needs 13 employees. The estimated
annual cost of manpower is Birr 156,750. The detail of which is shown in Table 6.1.

156-15

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED ANNUAL LABOUR COST
Sr.
No.
1
2
3
4
4
5
6
7
8

Description
Plant manager
Secretary
Cashier
Production supervisor
Operator
Purchaser/Sales man
Laborers
Driver
Guard
Sub-Total
Employees benefit (20 %)

Req.

Monthly

No.
1
1
1
1
2
1

Salary (Birr)
3,000
700
600
1,200
1,200
1,500

3
1
2
13

1,050
500
700

Total
B.

Annual Salary
(Birr)
36,000
8,400
7,200
14,400
14,400
18,000
12,600
6,000
8,400
125,400
31,350
156,750

TRAINING REQUIREMENT

The operation is carried out according to a prescribed recipe. In addition the equipment
set-up is very simple. On-job training will be sufficient.

156-16
VII.

FINANCIAL ANALYSIS

The financial analysis of the varnishes and lacquers project is based on the data presented
in the previous chapters and the following assumptions:Construction period

1 year

Source of finance

30 % equity
70 % loan

Tax holidays

2 years

Bank interest

8.5%

Discount cash flow

8.5%

Accounts receivable

30 days

Raw material local

30 days

Raw material foreign

90 days

Work in progress

1 days

Finished products

30 days

Cash in hand

5 days

Accounts payable

30 days

Repair and maintenance

5% of machinery cost

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
7.69 million, of which 17 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.

156-17
Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
Sr.
No.

Cost Items

Local
Cost

Foreign
Cost

Total
Cost

Land lease value

2,076.00

2,076.00

Building and Civil Work

1,495.00

1,495.00

Plant Machinery and Equipment

1,328.35

1,562.76

234.4
100.00

100.00

Office Furniture and Equipment

Vehicle

450.00

450.00

Pre-production Expenditure*

504.05

504.05

Working Capital

1,504.28

1,504.28

Total Investment cost

6,363.74 1,328.35

7,692.09

* N.B Pre-production expenditure includes interest during construction ( Birr 404.05

thousand) and Birr 100 thousand costs of registration, licensing and formation of
the company including legal fees, commissioning expenses, etc.

B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 8.99
million (see Table 7.2).

The raw material cost accounts for 90.81 per cent of the

production cost. The other major components of the production cost are cost of finance,
depreciation and utility which account for 3.14 %, 2.54 % and 0.90 % respectively. The
remaining 2.61 % is the share of direct labour, repair and maintenance, labour overhead
and other administration cost.

156-18

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
Items
Raw Material and Inputs
Utilities
Maintenance and repair
Labour direct
Labour overheads
Administration Costs
Land lease cost
Total Operating Costs
Depreciation
Cost of Finance

Cost

8,164.00
80.75

90.81
0.90

78.14
75.24

0.87
0.84

31.35
50.16

0.35
0.56

8,479.64
228.19

94.32

282.46

3.14

8,990.29

100

2.54

Total Production Cost

C.

FINANCIAL EVALUATION

1.

Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 1.31 million to Birr
1.84 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 14.50 million.
2.

Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other

156-19
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.
3.

Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.
BE =

Fixed Cost

29 %

Sales Variable Cost

4.

Payback Period

The pay back period, also called pay off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
projects initial investment will be fully recovered within 4 years.
5.

Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater

156-20
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 24.82 %
indicating the vaiability of the project.
6.

Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value.

It is a

standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.
Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 6.58 million which is acceptable.
D.

ECONOMIC BENEFITS

The project can create employment for 13 persons. In addition to supply of the domestic
needs, the project will generate Birr 3.44 million in terms of tax revenue.

The

establishment of such factory will have a foreign exchange earning potential through
exporting its products. The project will have a forward linkage effect with the furniture
and wood working sub-sector.