Professional Documents
Culture Documents
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Case Outline
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Background on the Textile Industry
Required competencies Success = Low input cost base + high productivity + improved
for globalizing textile quality + transportation infrastructure for fast shipment
industry
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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India – Country Background
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Raymond - Company Background
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Company’s Foreign Expansion Strategy
Why Exports?
Export target of 32% of production by 2007.
• Stagnant domestic market in terms of market size and market share
constraining future growth.
• Lowering of import restrictions in January, 2005 would lead to
increased competition domestically and make exports more
competitive.
Why foreign investment?
• Increasing price competitiveness of products
– Export prices are lower than domestic prices where Raymond
commands a high premium due to its brand recognition.
– Increased competition from China has driven export prices down.
• High operating costs and longer delivery lead times in India
• Develop overseas manufacturing expertise as a long term strategy.
• Diversify operational risk – Currently 100% in India
• Access to ASEAN markets
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Case Outline
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Raymond: Global Value Chain & Location Countries
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Country Selection Criteria
China Malaysia Thailand
Business environment
Fiscal incentives
Flexibility of labor
Infrastructure facilities
Clarity in policies
Political risk
Currency risk
Best
Economic stability
Better
Good
Domestic market-worsted
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Case Outline
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Investment Project - Project Description
The proposed project will be the first of its kind in the nature of a
composite and vertically integrated worsted textile mill in Thailand.
Facility:
Inputs: Major raw materials are imported, manpower and utilities are local
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Investment Project - Project Description
Investment incentives:
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Capital Requirements and Financing Structure
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Raymond’s Project Evaluation
• STEP 1: Raymond laid out financial projections (in real terms) till
Year 13
Financial projections Year 0 Year 1 Year 2 Year 3 Year 4
Revenue US$ 657,954 1,066,791 1,066,791 1,066,791
Raw material cost
Domestic THB (3,750) (5,357) (5,357) (5,357)
Foreign AUS$ (254,909) (364,156) (364,156) (364,156)
Labor costs
Domestic THB (61,527) (75,553) (75,553) (75,553)
Foreign Ind.Rupee (28,800) (28,800) (28,800) (28,800)
Public Utilities THB (51,134) (73,049) (73,049) (73,049)
Depreciation THB (127,205) (127,205) (127,205) (132,205)
SG&A THB (74,016) (104,483) (104,483) (104,483)
Interest charges (60,130) (60,130) (56,856) (43,761)
Miscellaneous (fees, other manuf.) 16,186 (72,771) (72,771) (72,771)
Total cost (645,285) (911,504) (908,230) (900,135)
• STEP 3: The company compared IRR with its internal hurdle rate
- undifferentiated across projects or geographies
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Decision at Hand
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Case Outline
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Cost of Equity Calculation
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Valuation – WACC Approach
FCFU calculation Year 0 Year 1 Year 2
Profit before tax 12,669 155,287
Add back: interest 60,130 60,130
• STEP 1: Calculate FCFU
Profit before interest and tax (PBIT) 72,799 215,417 (free-cash flow to
Profit after tax (PIT) 72,799 215,417 unlevered firm) Based on
Add back: depreciation 127,205 127,205
Add back: preliminary expenses 4,473 4,473
provided pro forma
CFO - cash flow from operations 204,477 347,095 statements and CAPEX
forecasts
Capital Expenditure (1,571,982) - -
Increase in working capital (174,018) (113,283) (16,003)
CFI - cash flow from investment (1,746,000) (113,283) (16,003) • STEP 2: Calculate WACC
FCFU (1,746,000) 91,194 331,092
for every year based on
current capital structure –
WACC calculation Year 0 Year 1 Year 2 changing due to debt
Debt/(Debt+Equity) - assumes dividend repatriation 0.50 0.50
repayment !!!
Effective tax rate 0.0% 0.0%
Cost of Debt 5.50% 5.50%
Cost of Equity 11.71% 11.71%
WACC - real 8.61% 8.61%
• STEP 3: Discount FCFU
backward (right to left) to
NPV Summary obtain projects NPV of
NPV of FCFU at end of period 2,101,183 2,281,990 2,379,314
Year 0 investement outflow (1,746,000)
THB 350 million ($8 mil.)
Project's NPV 355,183
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Valuation – Sensitivity Analysis
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Real Options – Identification and Discussion
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Currency Risk Mitigation Measures
- 400,000 800,000 1,200,000
Inflows
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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THANK YOU !!!
Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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