2013

FINANCIAL MODEL SWEET CANES LIMITED

BY RAHUL MENON & PUNYA TRIVEDI

PGDM - EXEC

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Acknowledgement We place on record and warmly acknowledge the continuous encouragement, invaluable supervision, timely suggestions and inspired guidance offered by our guide Prof. Deva Dubey , K J Somaiya Institute of Management Studies and Research , Mumbai, in bringing this report to a successful completion. We are grateful to Prof. Deva Dubey for permitting us to make use of the facilities available in the department to carry out the project successfully. Apart, he has been helping closely at a personal level and we acknowledge his contribution. Last but not the least we express our sincere thanks to all of our friends who have patiently extended all sorts of help for accomplishing this undertaking. Finally we extend our gratefulness to one and all who are directly or indirectly involved in the successful completion of this project work.

Rahul Menon Punya Trivedi

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Declaration

We hereby declare that the project work entitled “Financial Model-Sweet Canes Ltd” submitted to the K J Somaiya Institute of Management Studies and Research ,Mumbai, is a record of an original work done by us under the guidance of Prof. Deva Dubey This project work is submitted in the partial fulfillment of the requirements for the course Corporate Finance. The results embodied in this course have not been submitted to any other University or Institute for the award of any course. Date- 29-Apr-2013 Place-SIMSR,

Mumbai Rahul Menon Punya Trivedi

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Certificate This is to certify that the Project entitled, “ Financial Model-Sweet Canes Ltd” submitted by Rahul Menon & Punya Trivedi in partial fulfillments for the requirements for course of Corporate Finance at K J Somaiya Institute of Management Studies and Research, Mumbai An authentic work carried out by Rahul Menon & Punya Trivedi under my supervision and guidance. To the best of my knowledge, the matter embodied in the Project has not been submitted to any other University / Institute for any course. Date:

Prof.Deva Dubey K J Somaiya Institute of Management Studies and Research, Mumbai

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CD-ROM INCLUDED

The CD included in this project report consists of the detail financial model spread sheet which includes

details of the input sheets, calculations sheets and report sheets of the case.

The CD also contains the PDF version of this report

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Contents

Sweet Canes Limited ..................................................................................................................................... 6

Financial Model Guide .................................................................................................................................. 9

Assumption Sheet ....................................................................................................................................... 10

Calculation Sheets ....................................................................................................................................... 12

Reports ........................................................................................................................................................ 14

Conclusion ................................................................................................................................................... 16

Appendix 1 .................................................................................................................................................. 17

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Sweet Canes Limited1

Sweet Canes Limited is a newly set up private company promoted by J.S. Pabla, Rupinder Saini &

Gurpreet Saini. Mr J.S.Pabla is a renowned agriculturalist in India. Ms. Rupinder Saini is a fellow

Chartered Accountant and she is the CFO of the company and Mr. Gurpreet Saini is the marketing

director of the company.

They propose to set up a sugarcane juice plants in state of Gujarat and Maharashtra, in the era of Coke

& Pepsi, they plan to come up with a natural and organic drink for the youth of India. Currently there are

no other players which offer a bottled sugarcane juice, the sector is dominated by unorganized sector.

The initial market for their produce is Bombay, Ahmedabad, Pune & Vadodara.

Technical and Marketing Aspects

A technology has been developed for preserving the sugarcane juice in bottles for a period up to six

months. The process of preserving the sugarcane juice involves peeling, crushing, filtration,

pasteurization and bottling. Sodium Benzoate @ 125 ppm is added as preservative. The bottled juice

can be stored without any loss in the quality and flavor for six months at room temperature. The cost

involved for the production of one bottle (200 ml) of juice is Rs.1.50. Consumer acceptability of the

preserved juice was evaluated and found to be 98 per cent.

Marketing would be done across 4 cities through direct and indirect channels. The bottling machines

with a total capacity of 2,00,000 bottles per month would be purchased for Rs. 15 lacs, the cane

crushing machines will be bought for Rs. 40 lacs, which has a monthly capacity of 40,000 litres. The

vendor finalized is S.G.K Industries. Plant location is identified near Vidarbha in Maharashtra

Sweet Canes Ltd would require about 300 tons of sugarcanes to work on full capacity, which it would be

procuring from farmers in Maharashtra and would be made available to the plants.

The total cost of project is approximately Rs. 30 million.

Particulars Rs. In Millions

Land & Site Development 10

Building 8

Plant & Machinery 6

Preliminary expenses 0.2

Preoperative Expenses (Incl. Interest) 1.8

Contingency Margin 1.5

Working Capital Margin & Cash Balance 2.5

Total 30

1 This case is prepared for practice and submission purposes. The case has been created by considering Vegetron’s Case study as base.

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The proposed means of finance is as follows

Particulars Rs. In Millions

Share Capital 10

Term Loan @ 10% pa 20

Total 30

Following are the basic assumptions

1. Construction period will last for 12 months

2. Company’s production will function for about six months a year

3. Company will start its production from 1st January, 2014

4. The installed capacity comes to bottling capacity of 40,000 litres of sugarcane juice, and crushers

have a capacity of about 300 tons per month.

5. Sales proceeds would come from two sources,

a. Selling bottles at Rs. 10 for first 5 years and then increasing the rates to Rs. 12 once the

brand is established.

b. Bagasse a byproduct after crushing canes, would be sold to nearby paper mills for Rs.

1500 per ton, the by product is linked directly with the production capacity, if the

company operates at 100% capacity for 6 months, the maximum available by product

will be 900 tons (i.e. 150 tons per month)

6. The company will start capacity at 50% capacity and gradually reaching 100% capacity in 10th

year below are capacity details

1 2 3 4 5 6 7 8 9 10

50% 55% 65% 75% 75% 80% 83% 90% 100% 100%

7. The cost of raw materials and consumables per litre of sugarcane juice is Rs. 10 throughout the

life of plant

8. Wages and salaries are expected to be Rs. 1 million, 1.1 million and 1.21 million for 3 years and

then 1.31 for 4th&5th year and to remain constant at 1.5 thereafter.

9. Selling expenses will be 10% per sales

10. Term loan will be repaid in 10 equal half yearly installments. Moratorium period is one year

from commencement of operations.

11. Administration expenses is Rs. 0.4 million for first five years & Rs. 0.5 million thereafter.

12. Raw Material requirements 1 day, with no stock in process and finished product is for 30 days,

purchases are made on all cash basis from local farmers near factories.

13. Annual maintenance expenditure is expected to be about 0.5 million

14. Depreciation rate for building is 4%, Plant & Machinery is 10%

15. Effective income tax rate for company is 30%.

16. Income tax depreciation for building is 5%, P&M is 20%

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17. Preliminary expenditure is to be written off over next four years

18. The company plans to pay a dividend of 10% per year

Following are certain additional parameters to be considered:

A. Effect if increase in Tax Rate by 5%. B. Effect of changes in capital structure for (a) debt equity ratio of 2:1, (b) debt equity ratio of 1:1.

Compute following:

NPV and IRR arising for the additional parameters, create statement of changes in working capital, balance sheet, cash flow statement, statement of depreciation, interest on term loans schedule and profitability statement.

A. With 30% Tax Rate & Debt Equity Ratio of 2:1 a. IRR 5% b. NPV @ 10% -7.16 million (Negative)

B. With Tax Rate increasing by 5% a. IRR is 4% b. NPV @ 10% is -8.15 million (Negative)

C. With debt equity ratio of 1:1 a. IRR is 6% b. NPV @ 10% is -5.99 million (Negative)

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Financial Model Guide

This section serves as a user guide for using the financial model through case of Sweet Canes Limited

Following is the breakdown of the financial model (please note there are various sheet’s in financial model, which are interconnected, broadly following is the breakup of various sheets.

Input Sheets

• Assumptions

Calculation Sheets

• Term Loan

• Working Capital

• Depreciation Co.

• Depn Tax

• Tax Cal

Reports

• Balance Sheet

• P&L

• Cash Flows

• IRR & NPV

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Assumption Sheet

This sheet, accessed by clicking Input, contains all the main variables needed to compile consecutive sheets automatically. Readers simply modify the numbers in below colors in the assumption sheet:

Financial Numbers in Millions

Numbers in Percentage

Numbers in Tons

Days

Numbers in Actuals (As per Units)

The assumption sheet looks as below:

Production and Sales Related: This section consists of Installed capacity, capacity utilization and Sales

realization.

Assets Related: Consists of the value of the underlying assets, and the corresponding allocation of

preoperative expenses and contingency margins.

Other assets, consists of Preliminary Expenditure and WC margin/Cash balance

Legend

All those colored

boxes are, where

data is required to be

entered

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Working Capital Related: This section gives the details of working capital requirements.

Depreciation and Miscellaneous Rates: Consists of depreciation details as per Companies Act & Income

Tax Act, in addition it also consists of Dividend rates, Tax rate, Amortization rate etc.

Financing Related: This section consists of Details about Equity Capital, Debt Capital and Debt Equity

Ratio

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Calculation Sheets

1. Term Loans: This sheet consists of the repayment and interest payment schedule of the term

loan.

2. Working Capital: Sugarcane is such a product, which cannot be stored for more than 24 hours,

as the juice content of the Cane will fall rapidly due to getting dried, the suppliers are primarily

farmers hence one is required to pay them Cash directly for supplying their produce. This sheet

consists of the details about the same.

3. Depreciation Schedule: This sheet consists of Gross values & Depreciation and Net Block Values

as per company law.

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4. Depreciation Schedule as Per Taxation: This sheet consists of Gross values & Depreciation and

Net Block Values as per Income Tax Act.

5. Tax Computation: This sheet consists of details about the computation of tax by adding

depreciation as per the Company Law and Deducting the Depreciation as per IT act and then

computing the Tax.

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Reports

1. Balance Sheet: This sheet consists of what money is owned by the Sweet Canes and What Sweet

Canes Owes to outsiders or owners.

2. Profit & Loss: This sheet contains various Revenue and Expenditure heads of the Sweet Canes, to

know the profit numbers, one should refer this sheet.

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3. Cash Flow Statement: This statement show’s where the company is receiving Cash from and

Where the Cash is going:

4. IRR & NPV: This section consists of NPV and IRR computation

for the project. (Assuming 30% Tax rate & Debt Equity Ratio of 2:1)

Here the flaw in estimating

Working capital requirements is

reflected, negative Cash Balance

could either be an overdraft or

Owner would be required to

contribute. For our Financial

Model we assume owner would

be bringing in his contribution

to overcome this liquidity issue

With debt equity ratio of 1:1

1. IRR is 6% 2. NPV @ 10% is -5.99 million

(Negative)

With Tax Rate increasing by 5%

1. IRR is 4% 2. NPV @ 10% is -8.15 million

(Negative)

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Conclusion

The business of Sugarcane juice may sound like an attractive proposition, however since Sugarcane

being a seasonal product and inability to store Sugarcanes for more than 24 hours (to avoid major value

loss) makes this business model very difficult to implement. Margins are Razor Thin and Local

competition is very high, hence implementation of this business model would be extremely difficult

unless any new breakthrough innovation happens!

Our assumptions are the cost of procuring sugarcanes will not change for 10 years, looks like an

unrealistic, since the prices of Sugarcane’s for farmer’s hasn’t really changed much, but doesn’t mean it

would never change.

With Rainfall becoming more difficult to predict, the business plan is not without risks, any drought like

situation may hamper the profitability of the Plant badly.

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Appendix 1

-2

0

2

4

6

8

10

12

14

16

1 2 3 4 5 6 7 8 9 10

Rs

in M

illio

ns

Key Financial Indicators

Sales (Juice)

PAT

Cashflows After Taxes

Depreciation