Professional Documents
Culture Documents
Introduction
Without a sound and effective banking system in India it cannot have a healthy economy.
The banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors. Banking in India
has its origin as early as Vedic Period. It is believed that the transition from money lending to
banking must have occurred even before Manu, the great Hindu Jurist who has devoted a section
of his work to deposits and advances and laid down the rules relating to rates of interest. During
the days of East India Company it was the turn of the agency houses to carry on the banking
business.
History
The banking system of India should not only be hassle free but it should be able to meet
new challenges posed by the technology and any other external and internal factors. For the past
three decades India's banking system has several outstanding achievements to its credit. The
most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct phases. They
are as mentioned below:
New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.
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Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad
Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set
up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of
India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve
Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To
streamline the functioning and activities of commercial banks, the Government of India came up
with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act
1949 as per amending Act of 1965.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence.
In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale
specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent
of RBI and to handle banking transactions of the Union and State Governments all over the
country.
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the GOI in the annual conference of the
All India Congress Meeting. Seven banks forming subsidiary of State Bank of India was
nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out.
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A second dose of nationalization of 6 more commercial banks followed in 1980. The
stated reason for the nationalization was to give the government more control of credit delivery.
With the second dose of nationalization, the GOI controlled around 91% of the banking business
of India. Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalized banks and resulted in the reduction
of the number of nationalised banks from 20 to 19.
Phase III
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by
his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put
to give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macroeconomics shock as other East Asian Countries suffered.
This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital
account is not yet fully convertible, and banks and their customers have limited foreign exchange
exposure.
Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalisation, licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks and included Global Trust Bank. This move, along with the rapid
growth in the economy of India, revitalized the banking sector in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.
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The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting
rights which could exceed the present cap of 10%,at present it has gone up to 49% with some
restrictions. Currently, banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private sector
and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. With the growth in the Indian economy expected to be
strong for quite some time-especially in its services sector-the demand for banking services,
especially retail banking, mortgages and investment services are expected to be strong. One may
also expect M&A, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed
Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%.
This is the first time an investor has been allowed to hold more than 5% in a private sector bank
since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.
The Indian Banking Industry can be categorized into non-scheduled banks and scheduled
banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about
67,000 branches of Scheduled banks spread across India. As far as the present scenario is
concerned the banking industry in India is in a transition phase. The Public Sector Banks (Pubs),
which are the foundation of the Indian Banking system account for more than 78 per cent of total
banking industry assets. Unfortunately they are burdened with excessive Non Performing assets
(NPAs), massive manpower and lack of modern technology.
On the other hand the Private Sector Banks are witnessing immense progress. They are
leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public
Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20
percent in the employee strength of the private sector in the wake of the Voluntary Retirement
Schemes (VRS). As far as foreign banks are concerned they are likely to succeed in India
Central Co-operative
Nationalized Banks
State Bank Banks
Group
Indusland Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank,
SBI Commercial and International Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd,
Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include
Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank
etc.
ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd; Citibank etc are
some foreign banks operating in India.
Commercial banks
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Commercial banks have been in existence for many decades. Commercial Banks
mobilize savings in urban areas and make them available to large and small individual and
trading units mainly for Working Capital requirements. After1969, Commercial Banks are
broadly classified into nationalized public sector banks and private sector banks. The State Bank
of India and its associate Banks along with another 20 banks are the public sector banks. The
private sector banks include a small number of Indian Scheduled banks which have not been
nationalized.
Public sector banks are those which are owned by the Central Government either directly
or through the Reserve Bank of India. They are also known as Nationalised Banks. Eg: State
Bank of India and its subsidiaries, Allahabad Bank, Corporation Bank, Vijaya Bank, Canara
Bank, Bank of Baroda, Punjab National Bank, Syndicate Bank, the Oriental Bank of
Commerce.
Private Sector banks are those which are owned and controlled by private entrepreneurs.
Private sector banks are classified as Private sector Indian Banks and Private Sector Foriegn
banks.
Private Sector India Banks are those which are owned and controlled by Indian
Entrepreneurs. Indusland Bank was the first private bank to be set up in Inda. IDBI, ING Vyasa
Bank, HDFC Bank, ICICI Bank, UTI Bank (Now Axis Bank), Centurion Bank.
Private sector Forign Banks are those which are owned and controlled by foreign
entrepreneurs. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd; Citibank
etc are some foreign banks operating in India
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The Regional Rural Banks (RRB) came into existence since the middle of 1970’s with
the specific objective of providing credit and deposit facilities particularly to the small and
marginal farmers, agricultural laborers and artisans and small entrepreneurs.
Co-operative banks
In India, co-operative Banks has assigned an important role in the development of vital
areas such as agriculture, rural and small-scale industry, retail distribution; housing etc. the co-
operative banking sector has been developed in the country to replace the village moneylenders.
They also promote savings of the farmers and meet their credit needs for cultivation. The co-
operative banking sectors are not only in rural areas but now they have spread to urban areas
also.
Under the RBI Act, 1934, banks were classified as Scheduled banks and non-scheduled
banks. the scheduled banks are those which have are included in the schedule(second)of RBI
Act,1934.these banks have a paid up capital and reserves of an aggregate value of not less than
Rs.5 lakhs and which satisfy RBI that their affairs are carried out in the interest of their
depositors. Scheduled Banks comprise commercial banks and the cooperative banks, In terms of
ownership, Commercial banks can be further grouped into nationalized banks, the State Bank of
India and its group banks, Regional Rural Banks and Private sector Banks (old, new, domestic
and foreign).These banks have over 67,000 branches spread across the country. Non-scheduled
banks are those which have not been included in the second schedule of RBI Act, 1934.at
present, there are three non-scheduled banks in India.
Company Profile
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Corporation Bank is one of the oldest Banking Institutions in the Dakshina Kannada
district of Karnataka and one of the oldest banks in India. As the saying goes on “A thousand
mile journey starts with small step”. A step was taken by Shri Khan Bahadur Haji Abdullha Haji
Kasim Saheb Bahadur, a businessman of Udupi way back on the 12th of March 1906 with a
group of philanthropist founded the ‘Canara Banking Corporation of Udupi Limited’.
The need to start this bank was felt because there was no such facility at Udupi, an
important trading centre next to Manglore in Dakshin Kannada district. The indigenous banking
was largely in the hands of few rich private individuals and some thing had to be done to provide
relief to the common man from the clutches of the money lenders who held fully swey. What
inspired the founding fathers was the fervor of swadeshism, for promoting the bank, the founder
president made an appeal saying, the primary object in forming the ‘Corporation Bank’ is not
only to cultivate habit of thrifts amongst all classes of people, without distinction of the cast or
creed, but also habit of co-operation amongst all classes. This is swadeshism, pure and simple
and every lover of the country is expected to come forward and co-operate in achieving the end
in view. It was called through co-operation of all, shorn of distinction of caste and creed “ The
Canara Banking Corporation Limited” as the institution was called then, started functioning as a
“Nidhi” with a humble beginning. The initial capital was Rs 5000.
Corporation Bank which was founded in 1906 and today it is a “100 year young bank”.
The bank had its origin in the temple town, Udupi which was then a part of Dakshin Kannada
district. The credit of introducing the bank goes to the Canara Banking Corporation of Udupi
Limeted. Corporation Bank is a public sector bank which has been silently creating waves
among the domestic banks in India. It is one of the Nationalised Banks in India.
The bank withstood the challenges of the financial sector reforms and has emerged as the
one of the financially and fundamentally strong, well capitalised, technological sophisticated,
efficient, effective and one of the most profitable bank in India.
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In the year 1952, Corporation Bank became the third bank in the country to receive
license from the Reserve Bank of India as ‘Scheduled Bank’. In the year 1961, the bank of
citizens was merged with the Corporation Bank. It was nationalised in April 1980, which
triggered the growth of the bank in terms of geographical reach and business volumes. The name
of the bank was changed from Canara Banking Corporation of Udupi Limited to Corporation
Bank in the year 1973 and the corporate office of the bank was shifted to Manglore.
Corporate Vision
“To evolve into a strong, sound and globally competitive financial system, providing
integrated services to customers from all segments, leveraging on technology and human
resources, adopting the best accounting and ethical practices and fulfilling corporate and social
responsibilities towards all stake holders.”
Corporate Mission
To emerge as a role model with distinct culture identity, ethical values and good
corporate governance.
Service Profile
The Corporation Bank will provide the different services with CARE approach to the
customer’s. The service profile of the Corporation Bank is as follows:
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Personal Products
a. Deposit Products
i. Corp Pragathi Account: The account can be opened with an initial deposit of Rs 10/- and
will provide the account holder the basic banking facilities. No penalty will be levied even if
the balance in the account drops below Rs 10.
ii. Centenary Year Gold coin: It is 8gm Centenary Year Gold coin of 999.9 purity, 24 carat.
This gold coin is available at Corp Bank branches in select cities across India to individuals
or retailers at a competitive price.
iii. Saving Bank: Corp Bank SB account holder will get the facilities like any Branch banking.
Corp power cheque, Corp convenience card, Corp junior account, Corp senior account.
v. Money Flex: The flexible term deposit- it allows the customer to withdraw money whenever
he/she wants. The deposit can be made for a period ranging from 6 to 120 months. The
minimum deposit is Rs 5000.
vi. Fixed Deposit: The deposit can be made for period ranging from 15 days to 10 years. The
rate interest depends on the period of deposit.
vii. Corp classic: It is an innovative technology-based account that combines the hi-liquidity
of a savings bank account and the high-returns of a Terms deposit. The account works simply
by fixing by fixing your savings from a savings bank account to a term deposit and vice
versa.
viii. Recurring Deposit: Best suite to the salaried class, the customer can save a fixed sum
every month for a period ranging from 12 months to 120 months.
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ix. Janatha Deposit: This deposit is for a period from 1 to 5. Our collection agent will call at
customers place to collect your savings at regular intervals even daily.
i. Corp Plus: It is a loan facility to meet the short term financial requirement. This loan can be
availed by professionals having gross income of Rs 80000 p.a. The loan amount will be
limited to the extent of 25% of borrower’s net annual income.
ii. Corp Rental: The loan may be availed for any productive purpose such as taking up new
projects, business or to meet domestic/personal/any other commitments. The minimum loan
amount is Rs 5 lakh.
iii. Education Loan: Under this scheme the bank finances the financial requirements of the
student for higher studies.
iv. Consumer Loan: This is a financial arrangement to finance the purchase of consumer
durables. This loan can be availed to any person having an income of Rs 50000 p.a.
v. Home Loan + Insurance: Corp bank in association with the life insurance corporation of
India gives life insurance cover to the housing loan taken by the customers. Maximum term
assure under the scheme will be 3 years.
vi. Vehicle Loan: Corp Mobile offers the customer easiest motor cycle/car loans with absolutely
no hassles.
vii. Corp Mortgage: Under this scheme an individual can avail a loan minimum of Rs 1 lakh
and maximum of Rs 25 lakh by mortgaging an asset as security.
viii. Other Personal loan Products: Corporation bank also offers few more personal loan
products such as Corp Mitra, Loan against shares and Corp Home etc.
c. Corporate Products
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Corporation Bank offers several corporate banking services. The bank offers unique
services tailor- made for the requirement of Corporate and large business houses as well as small
and medium enterprises.
i. Corp Fast: Corp fast is an innovative solution which facilities speedy realization of
outstation cheques and instruments using latest communication technology.
ii. Project Finance: Corp Bank also finances the financial requirements for certain projects on
the basis of economic a technical feasibility of the project.
iii. Corp Rental: This facility helps the customer to encash the rent receivable from the
commercial properties.
iv. Forex: Corp Bank also offers Forex services to its customers.
v. Working capital: Corp Bank also provides the short term financial facility to finance the
working capital requirements.
vi. Term Finance: The bank extends term loans for capital investment being made by the
clients on account of expansion of existing enterprises for establishment of a new enterprise.
d. NRI Schemes
i. Corp Express Money: The bank has entered into a tie up with UAE Exchange Center LLC
for facilitating global money transfers into India from Gulf region. With a view to facilitating
the NRIs in the Gulf and Middle East to transfer their earnings back home swiftly.
ii. NRI Loans: Corp bank is granting loans in rupees to NRIs against security of shares,
immovable property in India corp. It also provides housing loans to NRIs.
iii. Forex Facility for Residents: Indian residents can get foreign exchange assistance from
Corporation bank for study in abroad, foreign travel, purchase of air tickets and investments.
e. Internet Banking
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i. Corp-E-cheque: It is an innovative product developed by Corp bank by combining the
power of Corp net the bank’s Internet Banking Services with EFT scheme.
ii. Corp Net: In the niche area of collection and payment services Corp bank has a leadership
presence in the country and caters exclusively to the cash management requirements of the
corporate.
f. Other Services
i. Online Railway Reservation: The Bank has entered into a tie up with the Indian railway
catering and tourism corporation for online booking of railway tickets.
ii. Corp Mediclaim: This is a group medical claim insurance offered by the Corp Bank to its
account holders. This product has been devised to meet the medical insurance needs of banks
customer.
iii. Corp Junior: It enables parents whose children are studying away from them to remit
money at periodic intervals in a hassle free manner.
iv. Corp Mobile Recharge: Electronic Recharge of pre-pad mobile phones is a facility which
customers having prepaid mobile phones to electronically recharge their mobile phones cards
by debiting their account through Corp bank ATMs or through SMS from their mobile
phones.
v. Corp Bullet RTGS Facility: It is a remittance facility, which enables customer to transfer
funds to anybody anywhere within India. The facility works on the Real Time Gross
Settlement (RTGS) platform developed by the RBI.
vi. Corp Power cheque Multi city cheque Facility: Multi city cheque is a facility wherein the
customer can issue cheques drawn at the base branch and payable at selected remote centers.
This cheques will thus, be treated as local cheques in the remote center selected by the
customer.
Ratio Analysis
The banks should have 9% capital adequacy ratio, the corporation bank has much more
than the standerd rate. Even the ratio is decreasing it is above the standerd.
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In the year 2006 the ratio was 1.28, but in the year 20 07 there was decrease in the ratio.
But in the year 2008 it goes to 1.34. It clearly shows that there is increase in the returns. In the
year 2008 there is only 25.5% increase in the asset but there is a 45% increase in the returns.
3. Return on Equity
Return on equity shows the relationship between profit earned and equity.
Chart No 3: Return on Equity
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4. Earnings per Share
Earnings per share signify that the earnings available for the each share held by the
shareholder.
The ratio is increasing year by year. That shows the bank is earning sufficient funds to its
shareholders. From 2006 – 2008 the ratio has almost increased by 70%, this is good indicator for
its shareholders of the Bank.
Book value per share signifies the value of the book of each equity share of the bank.
Book value consists of equity share capital and reserves of the bank.
Equity Share Capital + Reserves
Book Value Per Share =
No of shares
Chart No 5: Book Value per Share
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There is increasing trend in the ratio, it because of the increase in the reserves of the
bank. It is good indication from the investor’s point of view.
6. Yield Spread
It is the difference between yields on advances over cost of deposits. It is useful to know
the spread of yields over cost of deposit; more the spread bank is more efficient in lending and
accepting deposit.
Yield Spread = Yield on Advances- Cost of Deposits
Chart No 6: Yield Spread
The yield spread is decreasing year on year basis. This is because the percentage increase
in yield on advance is less than percentage increase in cost of deposits of the bank. The bank is
inefficient in earning high yield on the advances granted by them.
The ratio is decreasing from 2006 – 2008. It means the NPAs are decreasing from year to
year. It is good indication for the bank.
Research Design
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It is the conceptual structure within which the research is conducted. It constitutes the
blue print for the collection, measurement and analysis of data. The design includes an outline of
what the researcher will do from writing the hypothesis and its operational implication to the
final analysis of data. It constitutes the steps taken beginning with the collection of data,
classifying, analyzing and interpretation, processing and finally putting in textual form. This is
one important chapter of project and can be considered as skeletal of project.
Progressive deregulation and liberalization of the Indian financial sector have offered
banks tremendous business opportunities and brought in competition. As there is growth in the
economy many industry sectors like, Manufacturing and Infrastructure etc are growing up. This
provides a good business opportunity of financing them. The long term or short term loan
providing to the project is known as Project Financing.
The banks should see the various risk related to the project before sanctioning the loan
for the project. The bank should see uncertainty involved in the project. These risk and
uncertainty may have an adverse impact on the Bank’s capital and earnings.
The project financing involves detailed and indepth analysis of the results of the project.
In this process the technical, the marketing, the organizational, the financial, the economic and
the social aspects of the Projects are examined to ensure technical feasibility, market necessity,
financial viability, economic strength and social desirability. The project financing is to identify
measures, monitor and control various risk arising for its lending.
When fierce competition is the rule, the banking sector is no exception. Banks compete
with each other to attract quality borrowers. In this scenario, a hasty or adequate project appraisal
will result in growth of NPA. There fore the banks should have proper appraisal methods.
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To study the project financing of Corporation Bank
The scope of the study is limited to Project Finance Department of Corporation Bank
Head Office, to the area of project financing. It will give an indepth theoretical and practical
knowledge about the project financing. This study also covers ratio analysis, cash flow from
proposed project, risk involved in the project, analysis of the financial statement and the data
found in the appraisal statement.
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As regarded to methodology, normally both quantitative and qualitative approaches are
adopted. In order to collect the data, this study brings a live analysis based on the live data
collected from secondary type of data. The techniques of ratio analysis have been made use for
the analysis of the financial statement of the bank.
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Project Appraisal
Introduction
Project appraisal involves detailed and in-depth analysis of the results of the project. In
this process the technical, the marketing the organizational, the financial, the economic and the
social aspects of the projects are examined one by one to ensure technical feasibility, market
necessity, financial viability, economic strength and social desirability.
During recent times, not only have the number of projects increased, but the size of
projects have gone up substantially. The lenders are also concerned about debt equity ratio and
insist on promoters bringing in equity so that they have a stake in the project. Now the ratio
hovers at 4:1 for the infrastructure sector and 1:1 in other projects. This is opposed to the
situation in the 1990’s when the ratio used to go even as high as 15.
Mega projects like Power Projects, Infrastructure are very common these days. When the
project is of such size, it is easy desirable that the project Technical, Feasibility and Commercial
possibility are assessed by the committee member of lending institution to ensure to lend funds
for the projects. Corporation Bank is one such institution and has a vibrant and efficient team of
professionals, which are most capable in appraising projects.
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Steps in Project Appraisal
The steps which are followed by the bank in appraisal of a project are as follows.
The borrower (promoter) approaches the bank with his project report and
gives a written request to bank to appraise the project.
Bank quotes a fee for the appraisal (usually 0.25% of the total cost of the
project). Along with it bank also gives a questionnaire to borrower. Questionnaire
will cover all financial, economical and technical factors of the project.
If the borrower agreed over fee charges, term and condition of the
payment of fees as it is indicated by bank along with the reply of questionnaire,
then the bank has to study the report that is submitted by the borrower.
The appraising staff should visit the project site to make physical
verification.
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Undertake detailed techno-economic merchant appraisal of projects going
for IPO as per SEBI guidelines.
Project Appraisal – An Overview
Table No 3: An Overview of Project Appraisal
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The Branch should call for from the applicant an ‘Application’ in the prescribed format
covering full particulars. The application should contain the following essential data/information.
a. Particulars of the project along with the copy of project report furnishing
details of the Technology, Manufacturing Process, Availability of Raw Material,
Construction, Production facilities etc.
i. Projected profit and loss a/c, balance sheet for the operating years during
banks assistance.
Due deligence report shall be submitted in the prescribed format. Consent from the
authorities of the Pollution Control Board and any other information.
Brief History
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In case of already existing company the bank will collect following information,
Essential particulars about its promoters and background
Its incorporation
Its subsequent corporate growth to the date
Major developments/changes in its management
If the borrowing unit is new to the bank a credit report will be obtained by bank to
ascertain the credit worthiness of the company. The banks will carefully scrutiny the MOA and
AOA to ensure there is no limitations have been placed on the companies borrowing power and
operations.
Past Performance
Capacity Utilisation
If the actual production is less than the rated capacity, the reason for the under-
utilisation of the capacity should be examined. The bank will examine the steps taken by the
company to improve the capacity utilization. The bank will examine the special important
aspects relates to company’s management labour relation. Whether there was any strike, lock-
outs or shut down during the past 3 years and how the labour disputes were settled.
The bank will analyze the company’s Audited Balance Sheet and Profit and Loss a/c for
the last 3 years. A careful analyze and interpretation of the financial statement would provide a
reasonable clear picture of the company’s financial history, present position and future trend.
The bank will look into Debt/Equity ratio and Current Ratio.
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The method of Depreciation
Record of major defaults by the company
The position regarding the company’s tax assessment
Pending suits by or against the company and their financial implication
Qualification/adverse remarks if any, made by the statutory auditors on the
company’s accounts.
Technical Feasibility
If the project involve a new process or new technology, a technical feasibility report by a
competent agent will experienced in the line will be essential. The bank will examine the
technical feasibility of new project from the following angle.
v. The bank will also examine the manufacturing process of the product.
Financial feasibility
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a. Cost of the Project
Correct estimation of the total cost of the project is an important fact of appraisal as it has
bearing on the means of financing and profitability. The bank will scrutinize the estimated
cost with a view to ensuring that they have been arrived at realistically after taking into
account all relevant cost factors.
i. Land
The bank has to examine the suitability of the site. Topographical features,
Availability of Transport and the sources like water, power, labour, raw materials and
market for finished goods. Bank will examine that the land will be sufficient to take care
of present needs. The bank has to satisfy itself that the price paid/payable for the land is
comparable.
ii. Building
The bank will examine whether the building will be sufficient having regard to
the layout and it will permit and it will permit further addition if needed.
v. Preliminary Expenses
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These are the expenses incurred before the incorporation of the company.
Expenditure incurred on project report, market survey in the initial stage. The bank will
examine the cost estimated are reasonable to the organization.
Means of Financing
The bank will examine the mean proportion of debt and equity components of means of
financing of the project. The bank will comment on the project debt/equity ratio is satisfactory
and acceptable. As per group credit policy the debt/equity ratio shall not exceed 2:1.
i. Share Capital
The bank will ensure that the promoter’s of the company have invested atleast
25% of the total cost. The investment should be made in share capital.
iii. Debenture
The bank will examine the terms of proposed issue of debentures such as the
nature of debenture, rate of interest, date of redemption and security offered.
The bank will examine the project implementation schedule with reference to Bar chart
or PERT/CPM chart by referring to actual implementation of similar projects. The bank has to
ensure that the t5ime schedule for construction of building, installation of plant and machinery
and commencement of commercial production is reasonable and acceptable.
Production Factors
i. Manufacturing Process
The bank has to examine the basis of selection of the process in relation to the
other alternative process. If the technology is new to the country, the appraiser has to
ensure about the suitability of the manufacturing process.
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This constitutes a crucial aspect of project appraisal as the basic viability of the project
and consequently the repayment of the Bank’s loan depends on the marketability of its product.
The bank will study this aspect under following heads.
i. Sales Prospectus
The bank will examine the company sales projections and the underlying
assumption with reference to the demand forecast made in the publications and through
market survey. It will examine also through past consumption from imported sources and
likely future trend. The bank will examine the nature and extent of competition likely to
be faced by the project from the principal competitors. Bank also examines the
competitive ability of the company to penetrate the market and earn market share based
on price, quality etc.
Appraising profitability is the most crucial exercise in project appraisal. The bank will
examine estimated sales, cost of production and net profit furnished for the project.
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The reasonableness of the financial projection may be cross checked by the comparing
the key financial parameters of the project with those of a similar project or with the industry
average.
The Debt Service Coverage Ratio is the ‘core test’ ratio in project financing. This ratio
indicates the degree of viability of project and influence in fixing the repayment period and the
quantum of annual installments. Here ‘Debt’ means installments payable during the year and
‘Service’ means cash accruals comparing net profit plus depreciation and non cash write-off. It
measures the extent of cash accruals(service) available to cover the maturing term
obligation(debt) during each year.
Interest due and chargeable can be fully paid even in a year where the project undergoes
in loss. The bank will ensure that the profitability the project does not fall to that extent where
the interest can not be paid by the company. The bank will ensure because of any genuine or
valid reason the installment can be post-phoned, but the project should be able to pay the interest
as and when falls due. The Bank Group Credit Policy is that the project shall give an average
debt service coverage ratio of 1.5:1.
33
The statement which shows various sources of funds and their uses is called fund flow
statement and it’s different from revenue statement of balance sheet. The FFS can be based on
two concepts, those are as follows.
34
i. Quality of Management
Appraiser will briefly comment on the company’s management setup, the
composition of the board and the chief executive in-charge of the day-to-day operations.
Disbursement:
Execution of loan agreement and other necessary legal documents is not sufficient for
disbursing the amount. Branch will ensure that the amount disbursed is utilised for the purpose
for which it has been sanctioned.
Projected supervision and follow-up of assisted project during and after implementation
is indeed a important exercise to performed periodically by bank. It not only safeguard the
interest of the bank but also to ensure optimum returns on the total investment in project. Even a
project well accepted at the appraisal stage may go bad due to lack of adequate care. There fore
supervision and control during implementation is necessary during and after project
implementation it will be done by the bank by following methods.
35
The Murali Industries Limited, a Nagpur based company was initially established on 2 nd
December 1991, in the name of Murali Agro Products Pvt Ltd to process soyabean in a Solvent
Extraction Plant to produce vegetable Oil and De-oiled cakes with an installed capacity of 150
tonnes per day. On 5th January 1993 the company was renamed as Murali Industries Limited
when it raised funds from capital market through its public offer.
The company entered capital market in the year 1993 through IPO and expand the
capacity of Solvent Extraction Plant to 250 tonnes per day. In the same year the company
acquired another soya plant to strengthen its stake in the industry.
In the year 1997 MIL diversified into paper manufacturing by setting up 40 tonnes per
day. Kraft paper manufacturing plant, which was sold in the year 2004 to SBM industries pvt ltd.
In the year 2000 the company established Duplex paper manufacturing unit with an established
capacity of 60 tonnes per day.
In the year 2002 the company also set up a 70 tonne per day new print paper
manufacturing unit, along captive power plant with 3 MW capacity to meet the power
requirements of its paper units. In the year 2004-05 the company set up 150 tonne per day
writing and printing paper unit along with 15 MW co-generation units.
The company is also setting up a 2.14 million tonnes per annum cement manufacturing
plant together with 30 MW captive power plant at Chandapur in Maharastra with capital outlay
of Rs 578 cr, this plant is reportedly in the advanced stage of implementation and the commercial
production is expected in the current financial year (2008-09).
MIL is has already into cement industry by setting up a 2.14 million tonnes per annum
cement manufacturing plant together with 30 MW captive power plant at Candapur in
Maharastra. In addition to this, company is also going in for setting up of three more cement
plants of 3 million tonnes per annum capacity each, along with these 50 MW captive power plant
in the state of Rajastan (village Barana), Karnataka (Aloora) and Gujarath (Jujarpur).
The Rajastan plant shal have out lay of Rs 862.55 cr, Karnataka Rs 837.98 cr and
Gujarath 865.73 cr. The project will be financed by banks at these plants shall be 575.04 cr,
558.65 cr and 577.15 cr respectively.
36
Present proposal
Banking Arrangements
The following Banks financed for the project.
Security Coverage
Bank will change on the project specific factory Land & Building and Plant &
Machinery. The Corporation Bank share is 183.36 cr out of the total cost 2139.51 cr. The finance
made by bank, interest there on and all amounts in respect there of shall be secured inter alia by,
37
A first mortgage/hypothecation and charge on all the project immovable
and movable properties both present and future infavour of Bank
Security interest by way of first mortgage/hypothecation, performance
bonds and any letter of credit in relation to the project that may be provided by
any party.
A first mortgage/hypothecation of all insurance policies taken in respect of
the project asset.
A first mortgage/hypothecation and charge in favour of the bank on all the
bank account in relation to the project.
Key Indicators
Table No 5: Key indicators
(Rs in Crores)
Particular 31/3/2007 31/3/2008 31/3/2009
Audited Provisional Projected
Net Sales 523.93 646.47 931.15
% of Growth -- 23.39 44.04
Operating Profit 46.13 70.82 156.02
Operating Profit to Net Sales % 7.84 8.61 14.89
Cash Accruals 59.5 77.17 169.47
Share Capital 9.61 10.24 21.40
Tangible Net Worth 129.53 221.63 911.90
Net Owned Funds 129.53 224.71 821.74
Debt/Equity Ratio 1.3 2.81 1.81
Current Ratio 1.78 2.79 1.79
NOF/ TFD % 29.27 23.61 30.39
Share Holding Pattern: The company has Paid-up Capital of Rs10.24 crores.
Table No 6: Share Holding Pattern of the company
Share Holder Category % Holdings
Promoters 51.77
Bodies, Corporate and Public 33.58
Individuals 9.82
Others 4.83
38
Parameters Banks Norms Actual Position
200 cr 150 cr
Entry Level per Borrower Exposure for FB and NFB
Facilities
547 cr 151.80
Maximum per Borrower Exposure (corporate)
10% of NBC 2.6% of NBC
Exposure to Industry/Sector
1.25 2.79
Current Ratio
1.1 --
Current Ratio for Export Orient Units
2 2.81
Debt/Equity Ratio
1.5 1.66
DSCR
4 3.28
TOL/TNW
25% 19.66%
Promoters Contribution to Project cost
In this the company current position of Debt/Equity ratio is 2.81, where as the banks
norms are 2. It is less than the standard, which is not acceptable. But for the project taken up by
the company the Debt/Equity ratio will be below the norms. So the project can be acceptable.
Summary of Financials
a. Financials
Table No 8: Financial Results of the company
The company has achieved a sales growth of 23.39% during the year ended 31/3/2008,
operating profit margin has improved from 8.80% to 10.95%, and net profit margin has also
improved from 7.84% to 8.61% as on 31/3/2008. Cash accruals has improved substantially from
Rs 59.50 cr to 77.17 cr. Total Net worth of the company improved substantially from Rs 129.53
cr to 221.63 cr. Liquidity position of the company is comfortable with net working capital
showing Rs 188.84 cr and liquidity parameters may be considered satisfactory for financing the
project.
b. Financial Observation
i. Sales
Table No 9: Sales of products of the company
(Rs in crores)
Name of the Product 2006 2007 2008
Duplex Paper Unit 39.59 45.52 41.86
News Print Unit 54.76 69.37 70.27
Power 30.36 33.09 36.12
Pulp Mill Unit -- -- 25.5
Solvent Extraction Units 266.04 277.34 349.70
Writing and Printing Units 119.70 148.52 123.00
The company achieving a growth in the sales (except Duplex Paper Unit and Writing &
Printing Unit). The performance of the company in Solvent Extraction Unit has been satisfactory
with 53% growth. Even though there is negative growth in the units. However overall growth in
the turnover of the company with 23% will be considered satisfactory.
ii. Production
Table No 10: Production and Capacity utilisation
The capacity utilised by the company is satisfactory except in the pulp production unit.
iii. Profitability
During the year ended 31/3/2008 the company has earned operating profit of 70.82 cr at
margin of 10.95% compare to Rs 46.13 cr at margin 8.8% for the previous year. Net profit for
the year ended 2008 is Rs 55.63 (8.61%) compared to earlier year 2007 of Rs 41.1 cr (7.84%).
Cash accrual for the year ended 31.3.2008 was Rs 77.17 cr compared to previous year 2007 of
Rs 59.5 cr. The profitability of the company during the year 2008 has increased and it is
satisfactory.
The ratio of the NOF as a percentage of total funds deployed has come down from
29.27% in 2007 to 23.61% in 2008. This is below the Banks norms which is not acceptable for
financing for the project. However the position is expected to improve to 29% in the coming
years.
v. Debt/Equity position
41
The debt/equity ratio as on 31.3.2007 stood at satisfactory level at 1.3. However the same
has increased to 2.81 on 31.3.2008 is below the less than the banks norms. It is not good to
provide finance to the company. However by considering the projected balance sheet the ratio
will be within the desired level for the project in future years.
vi. Fund Flow Statement
The overall long term funds deployment in the company is considered satisfactory. It has
adequate sources of funds to deploy in the company as and when required.
Liquidity position of the company is controllable and satisfactory throughout with the
ratio showing above the Bank’s bench mark ratio of 1.25.
viii. Debt Servicing Obligation
42
Debt Service ability of the company as a whole, as well as project on standalone basis is
satisfactory with debt service coverage ratio showing the bench mark ratio of 1.5.
There is no adverse features reported on the notes forming part of audited accounts for
the year ended 31.3.2008.
The company has taken up setting up of 3 projects of 3 million tones per annum along
with 50 MW captive power plant each, in the state of Karnataka, Gujarath and Rajastan.
Company intends to manufacture Portland Cement at these location along with co-generation
plans of 50 MW capacity at each of these location.
Technical Feasibility
i. Raw Materials
The major raw material for cement manufacturing is Lime Stones mines. These three
plants are being located near to the Lime Stone mines. Thus this will be logistic advantage
for the company. The mining will be done by conventional method. The company has
installed 1050 tph capacity crusher in mines.
Material Transportation
The company to deliver the crushed Limestone and Marl to the Raw Material yard at
cement plant, the transportation conveyor has been chosen amongst the several methods and
possibilities. The distance between Quarries to plant yard is 1000 meters and plan of using of
two 1000mm wide rubber belt conveyers.
ii. Power
43
The company plans to set up captive thermal power plant of 50 MW at each of the 3
locations. The required coal for power generation will be supplied by the Indian coal. This
will supplement the power requirement of the plants.
iii. Building
The necessary buildings for main Factory Shed include Godown, Stores, Electric
room, Blower Room and Work shop. The building also required for management offices,
official departments, laboratories, services and welfare facilities have been estimated up to
12000 square meters.
Financial Viability
a. Project Cost
Table No 14: Cost of the Project
(Rs in Crores)
Name of each Cash Component Estimated Cost Cost to be
incurred in future
Land and Site Development 31.59 31.59
Building 328.12 328.12
Plant and Machinery 1024.51 1024.51
Captive Power Plant 58.33 58.33
Miscellaneous FA 171.99 171.99
Preliminary Exp 53.35 53.35
Upfront fees 4.32 4.32
Working Capital Margin 83.38 83.38
Misce and Contingencies 285.5 285.5
b. Means of Finance
Table No 15: Means of Finance
(Rs in Crores)
Sources Amount % of Total
Equity 450.00 17.54
Internal Accrual 351.00 13.68
44
Term Loan From Banks 1710.84 66.67
Unsecured Loan 54.42 2.11
The company proposes to bring on its margin for the 3 projects as detailed below.
Table No 16: Margin brought by the Promoters
(Rs in Crores)
Unsecured Internal Private
Project Location
Loan Accruals Equity
Karnataka 21.58 117 150
Gujarath 12.33 117 150
Rajastan 20.52 117 150
Total 50.43 351 450
The company has projected to generate sufficient internal accruals as detailed below.
Table No 17: Internal accruals of the company
Particulars 2009 2010
Net Profit 238.20 313.33
Add: Depreciation 61.00 59.69
Gross Cash Accruals 299.20 373.02
Decrease in term loan 134.21 118.08
Dividend 2.74 --
Others 13.33 51.29
Surplus 148.93 203.65
The balance margin would be bought in through equity investment by private equity
investor (450 cr) as well as in the form of unsecured loans by the promoters.
The company states that the negotiations are at advanced stage for private equity. The
loan provider has stipulated a condition that the private equity. The bank has stipulated condition
that the private equity amount has to be tied up before disbursement of loan.
As for the information furnished by the company, the Rajastan project shall commence
commercial production during the month of April 2010, that of Karnataka in July 2010, and that
45
of Gujarath in October 2010. The company is confident of finishing the project according to the
schedule.
Company as whole
Table No 19: Projected DSCR for the whole company
Particulars 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 3398.5 4267.2 4323.5 4344.2 4377.3 4392.8 4392.8 4392.88
7 8 7 5 4 8 8
PAT 487.92 630.47 677.76 716.13 759.20 787.55 809.41 819.43
Cash Accrual 639.92 812.23 858.82 895.98 934.62 962.20 983.39 993.37
Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --
Total (a) 799.99 999.35 1010.0 1011.8 1014.8 1006.7 993.37 993.37
0 2 2 5
Installment Due 86.18 300.72 369.08 363.87 336.46 285.14 285.14 70.60
Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --
Total (b) 246.25 487.84 520.56 479.71 416.66 329.69 295.16 70.60
DSCR 3.25 2.05 1.94 2.11 2.44 3.05 3.36 14.70
Avg DSCR 2.75
46
Detailed Balance Sheet and Cash Flow Statement for the projects on standalone basis and
company as whole is furnished by way of Annexure.
The business projection and profitability working furnished by the company may be
considered reasonable and achievable, as the same is based on the market study, capacity being
created and the demand-supply gap.
The projects are individually and severally viable as revealed by the DSCR which is
above the bench mark ratio of 1.5.
Profitability Analysis
Project
Table No 20: Project Profitability Analysis (Rs in crore)
Particulars 2011 2012 2013 2014 2015 2016 2017 2018
Gross sales 1992.80 2990.0 2997.0 2997.0 2997.0 2997.0 2997.0 2997.00
6 0 0 0 0 0
(-) Excise duty 358.17 537.40 538.65 538.65 538.65 538.65 538.65 538.65
Operating Income 1634.63 2452.6 2458.3 2458.3 2458.3 2458.3 2458.3 2458.35
6 5 5 5 5 5
Raw Material 454.62 667.08 667.08 667.08 667.08 667.08 667.08 667.08
Stores consumed 16.20 24.30 24.30 24.30 24.30 24.30 24.30 24.30
Power and Fuel 134.51 201.76 201.76 201.76 201.76 201.76 201.76 201.76
Direct Labour 12.76 17.86 18.75 19.69 20.68 21.71 22.80 23.93
Other Mfg Exp 234.56 348.67 348.67 348.67 348.67 348.67 348.67 348.67
Depreciation 93.59 124.43 124.43 124.43 124.43 124.43 124.43 124.43
(Inc)/Dec in WIP -6.04 -5.23 -0.06 -0.02 -0.03 -0.03 -0.03 -0.03
(Inc)/Dec in FG -4.53 -3.92 -0.04 -0.02 -0.02 -0.03 -0.02 -0.02
Total Cost of Sale 935.67 1374.9 1384.8 1385.8 1386.8 1387.8 1388.9 1390.12
47
5 9 9 7 9 9
Selling & Admin 302.93 467.99 469.09 469.09 469.09 469.09 469.09 469.09
Op profit before Int 396.03 609.72 604.37 603.37 602.39 601.37 600.27 599.14
Interest on WC 23.45 34.86 34.92 34.93 34.93 34.94 34.94 34.95
Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --
Profit Before Tax 212.51 387.74 417.97 452.60 487.26 521.88 555.31 564.19
Tax (Current) 23.78 43.93 47.36 78.60 165.68 183.49 199.95 207.31
Tax (deferred) 47.55 87.86 94.71 75.25 1.03 -5.02 -10.11 -14.45
PAT 141.18 255.95 275.90 298.75 320.55 343.41 365.47 371.33
Cash Profit 234.77 380.38 400.33 423.18 444.98 467.84 489.90 495.76
The profit after tax to net sales of the project is projected at rate of 8.63% in the first year
and it is increasing every year. The average profit after tax to net sale for the project is 12.46%,
which are satisfactory returns. From the above table it shows that the company has got cash
accruals to pay its loan obligation every year.
Whole Company
Table No 21: Whole Company Profitability Analysis
(Rs in crore)
Particulars 2011 2012 2013 2014 2015 2016 2017 2018
Gross sales 4037.96 5101.8 5175.4 5201.3 5244.5 5262.3 5262.3 5262.38
7 4 3 7 8 8
(-) Excise duty 639.39 834.59 851.87 857.08 866.93 869.50 869.50 869.50
Operating Income 3398.57 4267.2 4323.5 4344.2 4377.6 4392.8 4392.8 4392.88
8 7 5 4 8 8
Raw Material 1245.32 1464.2 1476.7 1483.9 1492.2 1499.6 1499.6 1499.67
3 5 2 3 7 7
Stores consumed 38.51 47.17 47.75 47.85 48.97 48.97 48.97 48.97
Power and Fuel 321.48 394.40 399.39 398.95 400.13 400.55 400.55 400.55
Direct Labour 32.43 38.72 40.91 43.25 45.76 47.96 47.96 50.17
Other Mfg Exp 141.53 201.89 202.19 202.55 202.93 203.01 203.01 203.01
Depreciation 152.00 181.76 180.76 179.85 175.82 174.65 174.65 173.94
(Inc)/Dec in WIP -6.39 -5.56 -0.08 -0.06 -0.05 -0.03 -0.03 -0.03
(Inc)/Dec in FG -4.53 -3.92 -0.04 -0.02 -0.02 -0.03 -0.02 -0.02
Total Cost of Sale 1920.13 2321.4 2347.4 2356.0 2365.1 2374.7 2374.7 2376.25
8 4 8 7 6 6
Selling & Admin 642.72 873.44 886.32 890.02 897.19 898.59 898.59 898.59
Op profit before Int 835.72 1072.3 1089.8 1098.1 1115.2 1119.5 1119.5 1118.04
6 1 5 8 3 3
Interest on WC 68.91 71.60 63.27 54.95 49.24 48.27 48.27 48.13
48
Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 44.55 --
Profit Before Tax 606.74 813.64 875.06 927.36 985.84 1026.7 1026.7 1069.91
1 1
Tax (Current) 118.82 183.17 197.30 211.23 226.64 239.16 239.16 250.48
PAT 487.92 630.47 677.76 716.13 759.20 787.55 787.55 819.43
Cash Accrual 639.92 812.23 858.82 895.98 934.62 962.20 983.39 993.37
The profit after tax to net sales for the company as whole is projected 14.35% at the first
year and it is increasing every year. The average profit after tax to net sale for company is
16.64%. The returns are satisfactory to provide the loan.
Management
The management of the company is having a full fledged Board comprising of Promoters,
Directors, Executive and Non-Executive Director and Professional Director, who have required
qualification and adequate experience in different areas. Mr Shobhagmal B Maloo is the chief
promoter and chairman of the company. Other promoter directors are Mr N B Maloo, Mr L B
Maloo and Mr S K Maloo. Executive director Mr Yashpal Dhiman and independent directors Mr
B P Ganu, Mr R P Gupta and Advocate M Mani are on the board.
The Board of Directors are supported by team of experienced and well qualified
executives from different area of functioning, like production, marketing, finance and accounts
etc. The company being a listed one in Bombay stock exchange, National stock exchange and
Culcutta stock exchange, they are governed by the directive of SEBI for the implementation of
corporate governance, which they have implemented in their spirit. The relations with
employees/labourers have been maintained very well by the company.
Industry Analysis
The cement industry has continued its growth over the past seven years. Domestic cement
demand growth has surpassed the economic growth rate of the country for the past couple of
years. The growth rate of the cement demand over the past five years at 8.37% was higher than
49
the rate of growth of supply at 4.84% as also the rate of growth of capacity addition during the
same period.
Cement Industry in India is on a roll at the movement. With the boost given by the
government to various infrastructure projects, road network, housing facilities, a booming real
estate sector and global demand, growth in the cement consumption is anticipated in the coming
years. Due to the enormous population of India, there has been a perpetual focus on the
development of civic infrastructure as well as housing facilities. The high demand for cement is
coupled with favourable Governmental policies has been favourable factors driving the growth
of the cement industry in India.
Production capacity has gone up and top cement companies of the world are vying to
enter the Indian market, there by sparking off a spate of mergers and acquisitions. India is the
world’s second largest producer of cement after China with industry capacity of over 200 million
tonnes. The present scenario of cement industry is very good in terms of demand and with the
prices going above Rs 160 to Rs 180 everywhere.
50
iii. Government Policies
Till mid 2007, the cement industry shows a lot of struggle between cement players
and the Govt. The Govt took various steps to control cement prices. It announced a
differential excise duty and removal of all duties on import of Portland cement. All these
steps have not resulted in any price reduction, on the contrary, they have increased during
this period. The cement industry will continue to enjoy the pricing flexibility in the short to
medium term, due to a tight demand-supply situation. However, price increase will not be as
significant as seen in the last 12 – 15 months.
In the last 10 years, Lime Stone cost has not increased significantly. But as more
capacities come on stream, it is expected to exert pressure on the country’s limited mineable
Lime stone resolves. Going forward, prices of lime stones are not expected to rise significantly.
However, increased level of blinding is likely to help cement players lower their consumption
norms of Limestone, there by mitigating the risk of a price hike.
Energy cost, which account for nearly 26-30 % of net sales have been rising steadily. In
2006-07, energy cost decreased to 21% from 26% in 2005-06. This has been primarily on
account of the increasing focus of companies on captive power plant. Currently 52% of the total
production of cement is through captive power plant.
Demand-Supply position of cement during 2007-08
Table No 22: Demand Supply Position (in million tonnes)
Installed
Name of the State Capacity Production Demand
Karnataka 12.41 10.80 11.80
Gujarath 17.76 15.40 11.68
Rajastan 24.82 25.70 10.33
CRISIL research expects the domestic cement consumption to register a CAGR rate of
8% in the next 5 years as against the 8.2% CAGR recorded in the preceding 5 years owing to the
following factors.
i. Housing Sector
This sector accounts for 60-65% of the total cement consumption, is likely to be the
key demand drivers. CRISIL estimates the total housing stock to increase by 3% (CAGR)
from the level of 146.3 million units during 2008 to 164.7 million units during 2012.
52
In order to meet the demand, capacity addition to the 115 million is expected to take
place during the period from 2008-09 to 2012-13. As against 37 million tonnes added during the
preceding 5 years. Due to the lower capacity addition, cement prices have been on an upword
trend (CAGR of 11%) over last 5 years. However due to the large capacity expansion that are
taking place.
CRISIL research expects cement prices to fall by as much as Rs 15-20/bag over the next
two years, once these units becomes operational.
The company is implementing the most modern state of the art technology in setting up
of the cement plants at the strategic location in Karnataka, Rajastan and Gujarath. Further, the
cement industry being power intensive in nature, they are going in for setting up in parallel
captive power plant of 50 MW each, which will support the power requirements of these units.
The captive power plant also helps in reducing pollution and reducing the production cost. Thus
the company shall have advantage to face stiff competition from the market. The company also
has the advantage of utilizing the existing selling and marketing set up for marketing cement and
cement products. There is also possibilities that the company may be eligible for Carbon Credit
in future.
Business Analysis
i. Production and Infrastructure Facilities
Company is setting up the production and infrastructural facilities with the able
guidance of National Council for Cement and Building Materials (NCB), who have prepared
Techno-Economic feasibility reports. Company has made arrangements to get mining lease
for quarrying Limestone, which is the main raw material for the cement manufacturing. They
have well planned for housing production infrastructure with all the required amenities like,
Mining, Cement plant and Labour colony. They have obtained/ in the process of getting
clearance from the statutory agencies including pollution clearance.
(Rs in Crores)
Operating profit
Name of the Company ROCE
Margin %
Industry Average 12 17.2
Other Companies
Sri Vishnu Cement Limited 82.68 22.57
Zuari Cement Limited 27.49 30.61
Murali Industries Limited 10.31 10.95
ACC 11.00 5.5
Birla White 10.40 6.25
Anjani Portland Cement Limited 24.56 18.63
Cement Manufacturing Company Limited 44.23 39.90
Dalmia Cement Bharath Limited 18.62 14.53
Deccan Cement Limited 33.68 25.91
J K white Cement works 18.57 15.21
Jaiprakash Associates Limited 13.83 14.05
Madras Cement Limited 26.30 31.06
Penna Cement Industries Limited 11.05 7.68
Ramco Industries Limited 10.29 8.22
Sagar Cement Limited 15.53 21.99
In this analysis the company operating profit margin(10.95%) is below the industry
average (17.2%), which is not acceptable by the banks appraiser. But company yet to enter into
cement production. Hence industry average of cement industry may not be comparable with the
company’s financial/profitability parameters.
Risk Analysis
54
Risk Factor Mitigation
55
of the project
56
Year PAT Sales NP Ratio %
2011 141.18 1634.63 8.63
2012 255.95 2452.66 10.43
57
As per the projected Profit and Loss A/c it is estimated that the profit will be Rs 141.18 cr
in the year 2011. This ratio increasing every year, it shows the operational efficiency of the
company. It shows that the company is earning enough money to meet its obligations.
b. Debt/Equity Ratio
The debt equity ratio is determined to ascertain the soundness of the long-term financial
policies of the company.
Table No 25: Debt/Equity Ratio
58
Chart No 10: Debt/Equity Ratio
The bank norm for the ratio is 2, the current position of the ratio is 2.81. But the
company’s promoters in the projected balance sheet ensured that the ratio will be below the bank
norms. Only in the first year it was above the norm, after that the ratio decreasing. It is because
of the decrease of the term loan. The average of the ratio is 1.25 which is below the norms.
c. Current Ratio
It measures the relationship between current asset and current liability. The ratio is an
indicator of the firm’s commitment to meet it’s short – term liabilities.
Table No 26: Current Ratio
59
Year Current Assets Current Liabilities Current Ratio
2011 753.24 575.32 1.68
2012 1255.21 609.05 2.06
60
The standard for the ratio is 2, but the ratio is less in the first year. But still the company
has sufficient funds to pay its creditors and current liabilities. The ratio is increasing year by
year, it shows that the company has high capable of paying its creditors. the ratio is more in the
later years it shows that less efficient use of funds.
The Debt Service Coverage Ratio is the ‘core test’ ratio in project financing. This ratio
indicates the degree of viability of project. Here ‘Debt’ means installments payable during the
year and ‘Service’ means cash accruals comparing net profit plus depreciation and non cash
write-off. It measures the extent of cash accruals (service) available to cover the maturing term
obligation (debt) during each year.
61
Year Cash Accruals Debt DSCR
2011 234.77 160.07 2.47
2012 380.38 401.66 1.41
62
It is projected that the cash accrual will be 2.47 more than the debt obligation, which is
more than the bank’s norm 1.5. But from 2012 the projected ratio came down to below the
bank’s norm. Any way the ratio is more than 1, it shows that the company will be able to repay
its term loan and the interest arise on the loan. The average DSCR is 1.66 which is more than the
Bank’s norm.
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Chart No 13: Interest Coverage Ratio
The ratio is very important from the lender’s point of view. It indicates whether the
business would earn sufficient profits to pay periodically the interest charges. The project’s
projected profit before interest and tax to interest is only 2.15, it has increasing trend in the future
period. It shows that the company is earning sufficient funds to pay the interest arising for the
loan taken to put up project. In the year the PBIT is will be 17 times to its interest payment, it is
because of the decrease in the interest and increase in the profits.
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FINDINGS
Project appraisal methods try to reduce the subjectivity involved in assessing the capacity
of the borrowers with respect to repayment capacity. The availability of computerised software
makes the technicalities of the assessment much simpler as compared to earlier. The project can
be appraised by using some of the methods like healthy discussion can be held with the members
of management of borrowings firms to get better idea about the business, its viability and the
capacity of management to take decision in exceptional situation.
The study revealed that the different aspects of a project are not independent entities but
are highly inter-related and a meaningful project appraisal depends upon the appreciation of
these fundamental facts. The appraisal of a project is undertaken by the bank with the objective
of determining the market potential of a project, to determine repayment capacity of sanctioning
unit and selecting an optimal strategy. The methods of analysis vary from project to project, but
there are certain common aspects of study from the angle of technology and engineering.
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Technical, Organizational, Managerial, Operational and Financial. The relative importance of
these different aspects can vary considerably according to circumstances and type of project.
The study also revealed that in a large majority of cases, it is possible to quantify project
costs and benefits. Future costs and benefits are calculated, using either market are shadow prices
and on the basis of past performance in case of expansion projects. Further both costs and
benefits are put under subsidence to initiate the projects estimated rate of return. The latter is
then compared with the minimum earning power. While the rate of return is an important test
that all projects with quantifiable costs and benefits must pass, importance and significance is
usually overestimated.
The rate of return is a necessary confirming test of projects that have to be justified
within a much wider frame of reference, in which basic project objectives and the nature of
project benefits increased employment and improved income distribution play major roles.
It was found that technical feasibility study is mainly done to consider the adequacy and
suitability of the plant, the equipments and their significations, plant layout, balancing of
different sections of the plant, proposed arrangements for procurement of the plant and
equipments, reputation of the machinery suppliers etc. The feasibility study also considers the
technology required for a particular project, evaluate technological alternatives and select the
most appropriate technology in terms of optimum combination of project components.
The study revealed that the market analysis gives a comprehensive account of the market
opportunity, as well as of the marketing strategy appropriate for converting the opportunity into a
reality. An intensive scanning and analysis of the proposed environment in which the industrial
unit has to function should from the basis for analyzing market opportunities as well as for
specifying the marketing strategy. This is because the ever changing environment, in which the
industry sector functions, restricts or expands the opportunities available to and the threats to be
faced by an industrial unit.
The purpose of the appraisal of financial aspects of a project is generally to ensure its
initiation of financial conditions for the sound implementation and efficient operation. The scope
of this aspect of appraisal varies, of course, considerable with the nature of the project and
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whether it is revenue producing or not. For projects, which involve the marketing of a product or
services by an entity, the appraisal includes in investigation of the availability and cost of raw
material, power, labour and services needed for production and the prospects for marketing the
product or services profitability.
In every case, it is necessary to ensure that satisfactory accounts are maintained for
effective control over expenditure and revenue and to disclose the project and entity carrying it
out also. Since the banks finance only a part of the investment cost of a project, it is necessary to
ensure that funds from other sources are available on acceptable terms to meet the balance of the
cost.
This may be relatively simple where the government is able to provide the rest of the
necessary funds from budgetary sources or it may be complicated, as in a project to expand or
modernize a revenue earning concern where all the financial requirements of the concern during
the construction of the project must be considered.
Financial appraisal also evaluates capacity of revenue producing investments from the
stand point of the entity. Industrial sponsor or other investors, who would make them in order to
ascertain whether it is sufficiently attractive to warrant their participation establishing that the
entity carrying out the project is in a position to manage its business in a cost-effective fashion is
another important aspects.
The efforts made by the Corporation Bank to constantly update its evaluation procedures
indicate its high level professionalism and explains why it is in a leading position amongst all
nationalised banks and incase of Murali Industries Limited cement project bank has done
efficient appraisal. The project is to set up 3 cement plants at Karnataka, Rajastan and Gujarath
with a capacity of 3 million tonne per annum.
The current DER is 2.81 where the banks norm is 2, it is less than the bank norm. But in
coming year the ratio will be improved. For the project the average DER is 1.25. Sensitivity
analysis shows that the debt servicing capacity if the Murali Industries Limited would be
adequate in the adverse scenario assumed. The promoter/management risk, project
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implementation risk, operational risk, market risk and finance risk are considered to be normal.
The overall DSCR of the company and project are 2.75 and 1.66 respectively, which indicates
viability and its above the Bank norms.
SUGGESTIONS
i. Net Present Value of the project should be calculated. NPV is considered as one of the best
method for evaluating the capital investment projects. It is the difference between the total
present value of future cash inflows and the total present value of future cash outflows. The
project should be accepted if the NPV is positive. If the bank would have calculated the NPV
it would have made better appraisal. Because present value methods always provides for
correct ranking of investment projects.
ii. All critical assumption could be valued in the light of actual parameters for similar
understanding in the same industry and sensitivity analysis can be undertaken by varying
these factors accordingly. Relative comparison with other players in the industry would
provide a better estimation and analysis of the project. It also helps to assess the impact of
adverse changes in the operating conditions of the project on its viability.
iii. In recent years, environmental concerns have assumed a greater deal of significance. The
bank has to do Ecological analysis as the new project like drug and chemical industry impact
the Environment.
iv. The Bank should also consider the capability of management and its analytical skills of the
top management in the company.
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v. The Costs, Profits are predicted only on the basis of the past trends. But same trend may not
continue in the future. They may vary depending upon the Economic conditions, Business
cycles, Government policies etc. So there should be a provision for all these contingencies.
This exercise is critical as it calls for a multi-dimensional analysis of the project that is, a
complete scanning of the project.
CONCLUSION
Project Appraisal is a science as well as an art. While the basic principles of appraisal
could be mastered in a short time span, the successful practice of the art of carrying out of
appraisal requires keen observation, objectivity and decision making. It is also necessary to took
ahead of the project. Project appraisal is a key to broad based, balanced industrial growth of the
country. In a way, it calls for a judicious judgment and perspective outlook.
The lending institutions examine the project to study its soundness on Technical,
Economic, Commercial and Management grounds. If the appraisal report is found satisfactory,
the loan application will be favourable considered. The manager then communicates his decision
to the borrower and terms and conditions will be negotiated.
The most important areas for the borrower and lender to negotiate are timing in relation
to negotiation method of financing based on certificates of work done, repayment schedule, rate
of interest, commitment fees, security options and monitoring and control requirements.
Financial institutions also pay attention to political environment and labour conditions of the area
where the project is to be located. Strikes, Lockouts, Industrial Peace and Communal Harmony
in the area play a decisive role in examining success or failure of the project.
As a lender and a development institution, the bank places particular stress on the need
for an efficient organisation and responsible management for the execution of the project. It is,
therefore natural that financial institutions very carefully appraise the managerial aspects before
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sanctioning assistance for a project. If a proper appraise of the managerial aspects is made in the
beginning itself, future problems in these areas can be avoided to a very large extent. It is
therefore necessary that the overall background of the promoters, their academic qualification,
business and industrial experience and their past performance are looked into in greater detail to
assess their capabilities for implementing the projects for which financial assistance has been
sought.
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