Presented By:

Richa Priya (16)

Tejashree Thorat (46)
Ankita Parab (59)
Jatin Dalvi (05)
Pritesh Maniar (10)
Makarand Sinkar (36)
Amitvikram Toraskar (47)
 ROADMAP
• Project Finance
• Technical Appraisal
• Commercial Appraisal
• Financial Appraisal
• Economic Appraisal
• Appraisal of Management
• Disbursement, Supervision & Follow- Up
What is a project
?
NEED FOR PROJECT FINANCE
• Demand innovative financial structures

• Building credible structures

• Commonly used fields

 Project Finance
Project finance is the financing of
long-term infrastructure and
industrial projects based upon a
complex financial structure where
project debt and equity are used to
finance the project, rather than the
balance sheets of project sponsors.

• Sponsors and syndicate of bank

• Non re-course loans
• Special purpose entity
PROCESS OF PROJECT FINANCE
Project
company
(SPE)

Sponsor
3

R Loan Sponsor Sponsor

2 1 Government
Lender Concession
contract
Repayment
Services

User
 Multiple Sponsors

• Financial or technical capabilities

• Risks

• Economies of scale

• Maximum equity position

 Contractual Relationship

• Risk identification and allocation

• Relationship between multiple parties

• Distribution of risks and profits

 Direct Finance
Project Finance
 Direct Finance
V/s Project Finance
Criteria Direct Finance Project Finance

 Organised in Corporate  Assets and cash flows are

Organisation form segregated from sponsors
 Cash flow from different other activities
assets/projects are mixed

 Risk diversified across  Contractual agreements

Risk Allocation sponsors portfolio of assets redistribute the project
related risks
 Direct Finance
V/s Project Finance
Criteria Direct Finance Project Finance
 Financing can be arranged  Higher financing costs and
quickly time consuming
Financial Flexibility  Internally generated funds  Internally generated funds
can be used to finance other can be reserved for projects
projects itself

 Under Managers discretion  Managers have limited

 Cash flow is mix and then discretion
Free Cash Flow allocated as per the  By contract free cash flow
corporate policy must be distributed among
the equity investors
Project FINANCE – Steps Involved
Project Identification

Project Selection

Project Appraisal

Project Implementation

Follow up
Project Appraisal
Technical Appraisal

Commercial Appraisal

Financial Appraisal

Economic Appraisal

Appraisal of Management
Technical
Appraisal
 Selection of
Procurement
Product Mix /
Size ofofthePlant and
Arrangement
plant
Technical Range of Plant and
Plant Layout of
Technical machinery Location
machinery
Know how Schedule of
Process the Project
Project
Technical Implementation
Appraisal
 Technical Process / Technology
• Comparison of Conventional and Alternatives
available

• Depends on Quality, Cost, End use

• Adoption feasibility

• Newbie technology
Arrangements for Technical Know - how

Sources
 Size of the plant
• Can be expressed with respect to :
A. output
B. input
C. no. of machines used

• Economic size of the plant

• Future prospects
 Product Mix / Product Range

• Product flexibility

• Demand fluctuations
 Selection of Plant and Machinery
• Depends on manufacturing process and size

• Proper balance of Capacity

• Utility Equipments

• Standby arrangements
 Procurement of Plant and Machinery
• Estimation of cost
• Sources:
- On a turnkey basis
- Placing orders with different machinery
suppliers
- Through Agents
- Formal Quotations
• Guarantees and Maintenance contract
• Second hand Equipment
- Deputing an Engineer
 Plant Layout
• Reduces Manufacturing cost

• Types
- Line Layout
- Batch Layout
- Group/Product Layout

• Importance to the project

 Location of the Project
Land

Proximity of Raw Material

Proximity of the Market

Availability of labour

Utilities

Effluent Disposal

Transportation and Communication facilities

Location of industries in backward areas

Schedule of the Project Implementation

• CPM and PERT

• Evaluation of Implementation Schedule

 Implications
• Exploring ways to do the project.

• Selection best alternative for cost

minimization.

• Feasibility of the project to produce

goods.
COMMERCIAL APPRAISAL
 APPRAISAL OF DEMAND
• Commercial Risk
• Demand- Supply Appraisal
– Import Substitution Method
– Past Trend Method
– End Use Method
– Correlation & Regression
– Export Markets
• Market Structure
 APPRAISAL OF DEMAND
• Depth of Competition

• Pricing

• Life Cycle of Product

• Distribution Channels

• Other Factors
FINANCIAL APPRAISAL
 CAPITAL COST OF PROJECT
• Land & Site Development

• Buildings

• Plants & Machinery

– Imported Plants
– Indigenous Plants

• Engineering & Consultancy Fees

 CAPITAL COST OF PROJECT
• Miscellaneous Fixed Assets

• Preliminary & Pre- operative Expenses

• Provision for Contingencies

• Margin Money for Working Capital

 Sources of Finance

• Issue of Ordinary/Preference Shares

• Issue of Secured Debentures
• Issue of Convertible Debentures/Bonds
• External Commercial Borrowings
• Deferred Credit
• Leasing Finance, etc..
 Financial Projections

• Profitability Estimates

• Cash Flow Estimates

• Projected Balance Sheets

• Sensitivity Analysis
 Profitability Estimates

• Estimation of Expected Sales Realizations and

Expenses to be incurred

• Borrower tempted to give a bright picture

• Basis of various figures should be ascertained

Estimated Profit
 Cash Flow Estimates
• to ensure Liquidity of the Project

• Net Profit is shown as Source of Funds

• Level of production, CL and CA presumed to remain in same

proportion

• Use of funds should be in accordance with requirements of the project

• INDICATES NET CASH SURPLUS OR DEFICIT

 Projected Balance Sheets

• Prepared on the basis of Profitability Estimates and

Cash Flow Estimates

• Projected Balance Sheet is a snap shot of the

financial position
 Sensitivity Analysis

• Financial Projections important to test the viability of the project

• Separate Profitability estimates for expected changes in sensitive

areas

• indicates the degree of cushion in profitability to withstand

changes
 Ratio Analysis

• Indicates the relationship between two or more

variables
• Ratios can be calculated for the past as well as future
• Significant when compared to an appropriate standard
 Types of Ratios

I. Loan Safety or Appraisal Ratios

II. Profitability Ratios

III. Growth Ratios

IV. Turnover Ratios

V. Operating Ratios
 Ratios Vital for Lending Institutions

• Debt – Equity Ratio

• Debt – Service Ratio

• Current Ratio
 BREAK EVEN POINT
• Definition

• Bread Earning Point

• Cost of Production viz. F.C & V.C

• Uniform policy
 FORMULAE FOR B. E. P.
• Contribution = S.P - V.C

• B.E.P = _Fixed Cost_

Contribution

• B.E.P= _Fixed Cost_ X No. of Units Produced

Contribution
 FORMULAE FOR B. E. P.

• B.E.P= _Fixed Cost_ X % of installed capacity

Contribution

• B.E.P= _Fixed Cost_ X Sales realization in amt.

Contribution
 B.E.P for Project Appraisal

• B.E.P = Fixed Cost X % of capacity utilization

Contribution at which total cont. is arrived at

• Cash B.E.P

• Why B.E.P in Project Finance?

Discounted Cash Flow Techniques
• Pay Back Method

• Average Rate of Return

• Net Present Value

• Internal Rate of Return

 Pay Back Method

• Objective

• Advantages

• Disadvantages
 Average Rate of Return

• Return on = Average Profit_

Original Invt. Original Invt.

• Return on = Average Profit_

Average Invt. Average Invt.
 Net Present Value

• NPV = pv of cash inflows- pv of cash outflows

• Profitability index=
PV of Cash inflows
PV of Cash Outflows
 INTERNAL RATE OF RETURN

• I.R.R. AT LOWER DISC. RATE + Difference bet. 2

disc. Rates x (npv at lower disc. Rate/ absolute
difference bet. Npv at 2 disc. Rates)

• NPV is Zero at this point

ECONOMIC APPRAISAL
 Economic Appraisal
What is Economic appraisal?

Objective of Economic Appraisal

Types of Economic Appraisal

-Social - cost Benefit
-Social - cost effective
 Methods of Economic Appraisal

• Internal Rate of Return

• Economic Rate of Return

• Domestic Resource Cost

Internal Rate of Return Economic Rate of Return

Calculated From Cash flow estimates Calculated From Cash Flow estimates

Based On market Price Based On Shadow Price

 should be Above cut-off  should be Above cut-off

 Decision Criteria
Internal Rate of Return Domestic Resource Cost DECISION

High Low Very Good

High Avg. Good

High High Consider

Avg. Avg. Satisfactory

Low Low Satisfactory

Low Avg. Consider

Low High Reject

APPRAISAL OF
MANAGEMENT
 Appraisal of Management
Based on—
1)Existing Entrepreneur
Past Performance/Record.
Past balance-Sheet & P/L Account.
Credit Record with bankers
Dividend Policy.
2)New Entrepreneur
Regular contact With Appraising Officer.
Interview 2-3 times
Units Approaching For Assistance

Proprietary Concern.

Partnership Firm.

Corporate Sectors.
 Check-List For Promoting Project
Excellent(20) Good(12) Poor(4)

1.Character Honest & Keep His Make sincere efforts Does not bother much
Words abt. Words

2.Involvement Highly—only source of Has other source of Part-time

income income

3.Financial Resources Enough Sufficient May borrow

4.Initiatives Highly alert to Performs work with Waits for guidance

opportunities guidance

5.Frankness Talk Frankly abt the Prepared to talk on weak Avoid Talking on weak
weak points. Points. points.

6.Self-Abilities Believes Strongly in Has faith In His abilities. Believes in luck.

himself
DISBURSEMENT,SUPERVISION & FOLLOW-UP
 DISBURSEMENT

INFORMATION FURNISHED BY THE

BORROWING UNIT TO THE TERM LENDING
institutions

PHYSICAL PROGRESS

FINANCIAL PROGRESS
PROMOTERS CONTRIBUTION

CERTIFIED COPY OF RESOLUTION

OPINION FROM COMPANY’S LEGAL ADVISER

CERTIFICATE FROM AUDITORS

LETTER FROM BORROWING COMPANY’S

BANK
 BRIDGING FINANCE

LIQUIDITY CONSTRAINT

COMPLIANCE WITH CERTAIN

CONDITIONS
 UNDERWRITING
POINTS TO BE Checked BEFORE ISSUING
FINAL LETTER

CONSENT FROM SEBI

CONSENT LETTERS FROM BROKERS…

BOARD’S CONSENT

LISTING REQUIRMENTS
 SUPERVISION AND FOLLOW-UP
METHODS FOR SUPERVISION AND FOLLOW-UP

 SCRUTINY OF PROGRESS REPORTS

 ANALYSIS OF ANNUAL FINANACIAL

STATEMENTS

 VISIT/INSPECTION

 APPOINTMENT OF NOMINEE DIRECTORS

 REGULATORY CONTROL

 DISCUSSION WITH THE MANAGEMENT

 ADVANTAGES OF PROJECT finance

ALLOWS promoters TO UNDERTAKE

TRADITIONAL PROJECTS

LIMITS FINANCIAL RISKS

MORE DEBT CAN BE RAISED

PROVIDES WITH STRONGER INCENTIVES

CAREFUL TECHNICAL AND ECONOMIC REVIEW

DISADVANTAGES OF PROJECT finance

MORE COMPLEX

VERY EXPENSIVE

NEGOTIATIONS CONTENTIOUS

DOCUMENTATION Required COMPLEX

AND LENGTHY
THANK YOU