REPORT

ON
PROJECT FINANCING
&
RELATED ISSUES
By
Abhishek Gupta
(A report submitted in partial fulfllment of the requirement of PGDBA program of
SCDL, Pune)
Table of Cotets
!" INTRODUCTION
1.1 The Essar Group
1.2 Essars Steel Business
1.3 The Project
1.4 Signifcance & ojecti!e o" the project
an# process "ollo$e# to pursue the
ojecti!es
#" DETAILED RE$IE% OF T&E PROJECT
2.1 TE%& & relate# 'atters
2.2 %inancial projections( &atios etc.
2.3 )ain sources o" #et an# typical ter's
& con#itions o" sanction o" fnancial
assistance
'" CONCLUSION
Page 2 of 28
!" INTRODUCTION
!"!" The Essa( )(oup
Essar Group is a high per"or'ance 'ultinational
organi*ation( pro!i#ing $orl# class ser!ices an# pro#ucts.
The usiness span o!er a $i#e !ariety o" in#ustries right
at the heart o" the econo'y li+e steel( energy( po$er(
co''unications( shipping an# logistics an# construction
etc. The Group is one o" the ,n#ias largest corporate
houses $ith an asset o" !alue o" &s. 41- illion ./S 0 1-
illion.1
Essar Steel 2t#. .EST21 is the 3agship co'pany o" Essar
Group in steel usiness. ,t is the largest pro#ucer o" 3at
steel pro#ucts in pri!ate sector in ,n#ia ha!ing 234 o"
total installe# 3at steel capacity.
!"#" Essa( steel busiess5
a1 Bailia#illa ore enefciation plant 5
1 6isha+hapatna' Pelleti*ation plant 5
c1 7a*ira Steel co'ple8
#1 9ol# &olling 9o'ple8( 7a*ira
%ully integrate# pro#uction "acilities o" EST2 ha!e the
"ollo$ing capacities:
Fa*ilit+ Capa*it+
Pellets ;.- 'tpa
7ot Bri<uette ,ron =.= 'tpa
7ot &olle# 9oils 3.> 'tpa
9ol# &olle# 9oils 1.4 'tpa
Gal!ani*e# -.= 'tpa5
EST2 has operations at 7a*ira in Gujarat an#
6isa+hapatana' in ?n#hra Pra#esh in ,n#ia an# in
,n#onesia.
Page 3 of 28
Gloal steel in#ustry has long ter' pro'ising outloo+ an#
steel #e'an# is e8pecte# to increase o!er ne8t 1- years.
Essar Group has #eci#e# to increase pro#uction capacities
in ,n#ia an# outsi#e to le!erage the a#!antages o" gro$th
in #e'an# an# its e8perience in steel 'anu"acturing.
%ollo$ing ne$ projects are alrea#y un#er construction:
P(o,e*t- Lo*atio Capa*it+
Essar Steel 7a*ira SE@ 4.- 'tpa
7a*ira Plate SE@ 1.= 'tpa
&olling )ills( 6ietna' 2.- 'tpa
,SP( 9ariean 2.= 'tpa
Pro#uction ases are eing e8pan#e# at strategic gloal
locations. Ahile a 2.= 't steel plant is eing set up at
Trini#a# & Toago( a 2.= 't integrate# steel "acility is
eing planne# at the recently ac<uire# co'pany(
)innesota Steel. 9o'pany is also i'ple'enting a 1 'tpa
&ear )ill at Barachi in Pa+istan.
,n ,n#ia( group has in+e# 3 )e'oran#u' o"
/n#erstan#ings .)C/1 "or setting up steel plant o" 4 'tpa
each at Dhar+han# an# Crissa an# 3 'tpa at 9hhattisgarh.
Cut o" these( project in Crissa is in the 'ost a#!ance#
stage. 9o'pany has planne# to start $ith ; 'tpa pellet
project $hich at a later #ate $ill e e8pan#e# to "ully
integrate# steel plant.
!"'" The p(o,e*t
Euring training perio#( it $as #eci#e# to pro!i#e 'e on
the jo training on the "ollo$ing project:
; 'tpa Pellet Plant( Para#eep( Crissa( ,n#ia
Essar group proposes to install an integrate# steel plant o"
> 'tpa capacity at Para#eep $hich $ill e i'ple'ente# in
phases. ,nitially the co'pany $ill i'ple'ent ; )TP? pellet
plant an# then ,SP $ill e i'ple'ente# in the secon#
phase. The pro#uct "ro' pellet project $ill e partially
e8porte# .4 'tpa1 an# alance $ill e consu'e# capti!ely
y Essar.
Page 4 of 28
The pellet project $oul# co'prises o"
2 8 4 )t pellet plant 'o#ules at para#eep
)atching capacity iron ore grin#ing &
enefciation plant at Bashia. Baril.
)atching capacity slurry transport pipeline o"
2F; B' "ro' Baril to Para#eep.
The project is in a#!ance# stage o" fnancial closure an#
all relate# $or+ings ha# een #one.
!"." Si)i/*a*e a0 Ob,e*ti1e of the P(o,e*t
a0 p(o*ess follo2e0 to pu(sue the ob,e*ti1es3
The ao!e:'entione# projects ha!e een co'e out
o" conceptuali*ation stage an# are no$ in the early
stages o" i'ple'entation. ,nitial project #e!elop'ent
acti!ities ha!e een starte# an# fnancial tie:ups are
eing arrange#. ,t $as "elt that this is an i#eal stage
to un#erstan# #iGerent aspects o" project fnancing.
Cjecti!e o" the assign'ent $as pri'arily to pro!i#e
asic un#erstan#ing o" #iGerent aspects o" project
fnancing an# relate# 'atters. The 'ain ojecti!e o"
training $as that at the en# o" the training , shoul#
e ale to #e!elop the un#erstan#ing o" eing ale
to orro$ "un#s "ro' the an+ "or a gi!en project.
To e ale to #e!elop the ao!e sai# s+ills( , "ollo$e#
the "ollo$ing steps5
&ea# TE%& an# un#erstan# $hat is project report(
$hat are the !arious issues that are a##resse#
an# $hyH
Stu#y the fnancial 'o#el( un#erstan# its
constructionI structure( the rational ehin# that
structure( the !arious co'putation( the rational
ehin# these co'putations an# the i'pact it has
on the #ecision o" the potential len#ers to
participate in the #et fnancing o" the project as
also the i'pact the fnancial results o" the fnancial
'o#els $oul# ha!e on the #ecision o" the
pro'oter o" the project regar#ing the ta+ing up o"
the project.
Page 5 of 28
,t $as un#erstoo# that though fnancial 'o#els
re3ects the proftaility an# return o" the project
ut there are !arious e8tre'ely i'portant issues
$hich cannot e "actore# in the fnancial 'o#el
ut ha!e a 'ajor i'pact on the successI"ailure o"
a gi!en project. e. g. a!ailaility o" ra$ 'aterial(
po$er( $ater( en!iron'ent appro!als( choice o"
right technology etc. ,t $as there"ore un#erstoo#
that e!en i" the fnancial 'o#el e8hiits attracti!e
proftaility the project $oul# not see the light o"
the #ay until an# unless all the resources
co'prising 'en( 'aterial( technology an#
statutory applicale appro!als etc. are not
e8pecte# to e a!ailale.


Page 6 of 28
#" DETAILED RE$IE% OF PROJECT
Essar Group ha# signe# a )C/ $ith Go!ern'ent o" Crissa
on 21st ?pril 2--= to i'ple'ent 4'tpa integrate# steel
plant .,SP1 in the state. ,n this process( initially the
co'pany is i'ple'enting an ; 'tpa pellet project $hich
$oul# e at a later #ate e8pan#e# to ,SP.
The stu#y o" the project $as #i!i#e# into three roa# areas:
2.1 TE%& & &elate# )atters
%inancial Projections( &atios etc.
)ain Sources o" Eet & Typical Ter's & 9on#itions o"
Sanction o" %inancial ?ssistance
#"! TEFR & Relate0 4atte(s
#"!"! Gee(al aspe*ts of TEFR5
Each TE%& is structure# to co!er all i'portant aspects o" a
gi!en project:
.a1 ,ntro#uction
.1 E8ecuti!e Su''ary $hich sho$s $hole o" the project
su''e# up in "e$ pages.
.c1)ar+et Ee'an#
.#1 Technology & Process
.e1 &a$ )aterial & Cther ,nputs
."1 %inancials co!ering project cost( proft & loss account(
cash 3o$( alance sheet( ratio analysis an# sensiti!ity
analysis
Jor'ally TE%& is either prepare# y the co'pany or a
9onsultant appointe# y the co'pany. The an+s on 'any
occasions otain an in#epen#ent !etting o" the TE%& "ro'
an in#epen#ent consultant $ho is appointe# y the re<uest
o" the an+er. This gi!es co'"ort to the an+er that project
is concei!e# on soun# usiness principle an# is ase# on
reasonale fnancial assu'ptions.
#"!"# P(o,e*t Co/)u(atio
Page 7 of 28
The project shoul# e opti'ally confgure# so as to opti'i*e
the capital cost an# operating cost an# therey 'a8i'i*e
the return on the capital.
%or the enefciation o" the pellet plant there $as !arious
a!ailale theoretical per'utation an# co'ination o"
confguration ranging "ro' 1 8 ; 'tpa up to ; 8 1 'tpa ut
+eeping in 'in# stan#ar# plant & 'achinery( 'o#ules
a!ailale( operating cost o" !arious confgurations( to ha!e a
re#un#ancy in a syste' etc.( it $as #eci#e# y the co'pany
to go "or 2 8 4 'tpa 'o#ules. Si'ilarly( it $as i'portant "or
the co'pany to ha!e its plant near iron ore 'ines as also it
$as e<ually i'portant to e on the port ecause 1--4 o"
the pro#uction $ill e e!acuate# through sea transport.
There $as no $ay that co'pany coul# achie!e oth these
ojecti!es. The only opti'al solution a!ailale $as that the
enefciation plant shoul# e at the 'ine hea#( the
enefciate# ore e co!ert into slurry an# a pipeline e use#
to transport the sa'e to the pellet plant $hich $as situate#
at the port so that the fnishe# goo#s shoul# e easily
e!acuate# ehin# the sea port.

#"!"' Lo*atio
Each "actor has a cost i'plication an# ase# on the relati!e
cost eneft analysis o" !arious options( the location is
#eci#e#. ,n the case o" the stu#ie# project( the location $as
#eci#e# in the state o" Crissa a"ter strategically consi#ering
the "ollo$ing aspect:
?!ailaility o" re<uire# <uality o" iron ore fnes in
#esire# <uantity
Soun# in"rastructure
Pro8i'ity to Port
?!ailaility o" re<uire# 'anpo$er
Eesire# support "ro' State Go!t.
?!ailaility o" utilities .$ater( po$er etc.1
#"!". 4a(ket De5a0
Page 8 of 28
/ntil an# unless the fnal pro#uct has a #e'an# an# can e
sol# in the 'ar+et at the assu'e# selling price there is no
project ecause the #et an# e<uity $ill e ser!ice# out o"
the proft o" the project . ,t is in this conte8t that #e'an# o"
the project is o" pri'e i'portance.
,n conte8t o" #e'an#( the other i'portant aspects are5:
i. Pro#uct 'i8 an# pro#uct specifcation.
ii. Cther 'anu"acturer an# the #e'an# supply
gap.
iii. Target )ar+et share. .incre'ental & o!erall1
i!. The project uni<ue selling proposition o" the
suject project. e. g. ran#( un#erstan#ing o"
'ar+et( technological e8cellence( relati!e cost
co'petiti!eness( <uality o" pro#uct( reliaility o"
supply( location a#!antage etc.
#"!"6 Te*holo)+ & P(o*ess
,t is i'portant to un#erstan# the technology to e a#opte#
"or each stage o" the project. 9hoice o" technology to e
use# #epen#s on !arious para'eters. The technology shoul#
e teste#( easily a!ailale an# cost eGecti!e. ,n TE%&(
technology to e use# inclu#ing plant confguration &
capacities( process route an# #esign criteria is e8plaine# an#
analy*e# in #etail.
%or the suject project( "ollo$ing teste# technologies are
propose# to e use#:
Aet grin#ing( Spirals an# 7G)S route "or enefciation.
Single stage pu'ping through pipeline "or slurry
transportation.
Straight Grate Technology "or pelleti*ation.
The technology o" con!erting the ore into slurry an#
transporting it through pipeline is cost eGecti!e in
co'parison o" transporting enefciate# ore through roa#I
railI sea.
Page 9 of 28
,t $as un#erstoo# that co'pany has alrea#y i'ple'ente#
an# operating a pellet plant o" si'ilar confguration an#
ase# on sa'e technology at 6isa+hapatana' in ?n#hra
Pra#esh.
#"!"7 Ra2 4ate(ial & Utilities
Success"ul i'ple'entation an# operation o" any project is
#epen#ant on 'any para'eters an# assure# a!ailaility o"
ra$ 'aterial an# !arious utilities li+e $ater( po$er(
'anpo$er etc. is one o" the'. ?ny project $hich pri'a "acie
loo+s !ery lucrati!e in ter's o" earnings 'ay not e ale to
run at stipulate# le!el o" capacity utili*ation ecause o"
una!ailaility o" operating po$er.
There"ore it is o" ut'ost i'portance to i#enti"y the lin+age o"
all ra$ 'aterials( utilities an# 'anpo$er etc.
%or the suject project( no prole' $as "oreseen in lin+age
o" ra$ 'aterial( utilities an# 'anpo$er.
Ra2 4ate(ial8 )ain ra$ 'aterial i.e. lo$ gra#e iron
ore fnes are a!ailale $ith the local 'ines in
aun#ance an# co'pany has otaine# in:principle oGer
letters "ro' the' "or supply o" re<uire# <uantity.
Po2e(8 9o'pany has otaine# sanctions "ro' State
Electricity Boar# "or construction po$er oth at
enefciation plant an# pellet plant site. %or operating
po$er( applications are in a#!ance# stage an# no 'ajor
prole's are "oreseen in the sanction.
%ate(8 9o'pany has otaine# sanctions "ro' local
o#ies "or $ith#ra$al o" $ater "ro' local ri!ers.
4apo2e(8 Total section $ise 'anpo$er re<uire'ent
at construction an# operating phase is esti'ate# an#
no prole' is "oreseen in that.
Page 10 of 28
#"# Fia*ial P(o,e*tios9 Ratios et*"
%inancial output "or any project is re3ecte# in the fnancial
'o#el o" the project. %inancial 'o#el is 'a#e using certain
assu'ptions aout capital cost( operating cost an# fnancing
& ta8ation. %inancial outco'e o" the project is esti'ate# in
the fnancial 'o#el y suitale use o" these assu'ptions in
!arious calculations li+e project cost( pro#uction cost(
proftaility etc.
Jor'ally( a fnancial 'o#el has the "ollo$ing contents:
.a1 Bey ?ssu'ptions
.1 Project 9ost & Aor+ing .,E9 & )argin )oney etc.1
.c19ost o" Pro#uction
.#1 Eepreciation Sche#ules .as per 9o'panies ?ct an#
,nco'e Ta8 ?ct1
.e1 2oan Sche#ules
."1 9alculation o" Ta8 2iaility
.g1 Proftaility State'ent
.h1 9ash %lo$ State'ent
.i1 Balance Sheet
.j1 &atio ?nalysis
Ahile 'a+ing the fnancial 'o#el "or the suject project(
!arious aspects associate# in the $or+ings $ere un#erstoo#
as un#er5:

:a; <e+ Assu5ptios
%inancial $or+ing o" any project $ill al$ays e
#epen#ant on certain assu'ptions aout !arious aspects
o" the project. These assu'ptions are su''ari*e# in
frst sheet un#er three roa# categories:
9apital 9ost &elate# ?ssu'ptions:
Page 11 of 28
%or esti'ating project cost( suitale assu'ptions are
re<uire# "or !arious ele'ents o" cost li+e lan#( ci!il $or+(
plant etc. Typical e8a'ple o" capital cost relate#
assu'ptions can e cost o" per acre lan# an#
consu'ption o" 'an hoursI construction 'aterial #uring
construction.
Cperating 9ost &elate# ?ssu'ptions:
%or projecting fnancial results o" the project( re!enue to
e generate# through the project an# !arious operating
costs are re<uire# to e esti'ate#. This $ill again
#epen# on certain assu'ptions li+e selling rate o" the
fnal pro#uct( cost o" ra$ 'aterial etc.
%inancial ?ssu'ptions:
?ssu'e# #et e<uity ratio( interest rate( 'oratoriu'
perio#( repay'ent perio# etc. "or the long ter' loan are
co!ere# un#er this hea#.
:b; P(o,e*t Cost & %o(ki) :IDC & 4a()i 4oe+
et*";
6arious ele'ents o" the project cost an# their esti'ation
$ere un#erstoo#. Jor'ally( cost o" the project is
esti'ate# un#er the "ollo$ing hea#s:
La0 & La0 De1elop5et8 ,t inclu#es the cost
pai# "or the ac<uisition o" lan# $here the project $ill
e un#erta+en along $ith "urther e8pen#iture 'a#e
"or the #e!elop'ent o" the lan# e.g. "encing(
rehailitation cost( #re#ging etc. ?s an accounting
principle( cost #eite# un#er this hea# is not
#epreciate# o!er the li"e o" the project.
Ci1il & St(u*tu(al Cost8 9ost o" construction all
ci!il $or+ an# uil#ings ."actoryI oKce1 is capitali*e#
un#er this hea#. This also inclu#es cost o" in#ustrial
constructions li+e pillars etc constructe# "or support
o" plants an# e<uip'ents.
Plat & 4a*hie(+8 /n#er this all cost relate# to
ac<uisition o" plant & 'achinery inclu#ing technical
consultancy an# engineering & super!ision is
Page 12 of 28
inclu#e#. The cost is #epreciate# o!er use"ul li"e o"
the plant.
Coti)e*ies8 There is a nee# to un#erstan# that
$hile 'a+ing fnancial 'o#els "or ne$ projects e!ery
$or+ing is ase# on esti'ates an# al$ays there $ill
e scope o" up$ar#I #o$n$ar# !ariation upon actual
i'ple'entation o" the project. There"ore it is al$ays
consi#ere# pru#ent to inclu#e contingent "uture
increase in project cost. Jor'ally contingencies are
calculate# at =4.
Ite(est 0u(i) Cost(u*tio8 ,nterest $hich is
accrue# on the loan #uring the construction perio# is
capitali*e# along $ith project cost. ,t is calculate# as
per esti'ate# #ra$#o$n sche#ule an# interest rates
en!isage#.
4a()i 4oe+8 /pon actual operation o" the
project( there $ill e so'e a'ount o" $or+ing capital
in!ol!e# $hich $ill e e'ploye# in the project on
perpetual asis. Practically( an+s #o not fnance the
co'plete a'ount o" $or+ing capital an# re'aining
a'ount a"ter an+ fnance is +no$n as )argin
)oney. This is also fnance# in #et e<uity ratio an#
eco'es a part o" the project cost in the frst year o"
operation.
:*; Cost of 4aufa*tu(i)
9ost o" 'anu"acturing consist the "ollo$ing ele'ents:
Ra2 4ate(ials8 9ost o" 'ain ra$ 'aterials is
assu'e# i#enti"ying 'ain ra$ 'aterials to e
re<uire# an# ta+ing a practical le!el o" consu'ption
an# pre!alent 'ar+et price.
Cosu5ables8 6arious types o" consu'ales li+e oil
& grease etc. are re<uire# in any pro#uction acti!ity.
These can e i#entife# $ith the help o" technical
people an# a suitale rate o" consu'ption can e
assu'e#.
Page 13 of 28
Spa(es8 ? suitale pro!ision o" consu'ption o"
spares shoul# e 'a#e ase# on the technical
inputs.
Labo( Cha()es8 2aor cost can e assu'e# ase#
on the laor hours re<uire# "or the pro#uction an#
pre!alent laor rates accor#ingly.
O1e(hea0s8 Proper assu'ptions aout !arious
ele'ents o" o!erhea#s li+e repairs & 'aintenance(
rent( oKce salaries( oKce 'aintenance an# other
o!erhea#s shoul# e 'a#e an# cost shoul# e
inclu#e# in the cost o" pro#uction.
%or'at use# "or calculation o" cost o" pro#uction in the
stu#ie# 'o#el is gi!en elo$:
COST OF 4ANUFACTURING
S"
No
"
Ite5s =ea( ! =ea( # =ea( ' =ea( . =ea( 6
A P(o0u*tio
9apacity /tili*ation .41
P(o0u*tio :5tpa;
Pellets
%ines
Total
> Ra2 4ate(ial &
Cosu5ables
&a$ )aterial
9onsu'ale
Total
C Utilities
Electrical Energy
%uel Cil
)a+eup Aater

Total
D Othe(s
2aour
&epairs & )aintenance
&ent( &ates & Ta8es
?#'inistrati!e E8penses
Selling E8penses
Total
COST OF
4ANUFACTURING
Page 14 of 28
:0; Dep(e*iatio S*he0ules :as pe( Co5paies A*t
a0 I*o5e Ta? A*t;
Eepreciation is pro!i#e# to$ar#s annual $ear an# tear
o" capital assets so that a suitale part o" project cost is
charge# to the proft & loss account e!ery year.
Jor'ally #epreciation is calculate# as per 9o'panies
?ct an# as per ta8ation la$s. Eepreciation as per
co'panies act is use# "or the calculation o" oo+ proft
an# ta8 #epreciation is re<uire# "or co'putation o" ta8
liaility.
EiGerent rates are 'entione# in oth acts "or #iGerent
group o" assets. Ahile 'a+ing a fnancial 'o#el $e
nee# to i#enti"y the rates applicale an# calculate#
#epreciation accor#ingly.
Preli'inary an# Pre:operati!e e8penses inclu#e# in the
project cost are a'orti*e# o!er a reasonale perio# say
3:= years.
Cal*ulatio of Dep(e*iatio
PARTICULARS =ea( ! =ea( # =ea( ' =ea( . =ea( 6
CI$IL & STRUCTURAL
%OR<
Cpening Gross Bloc+
?##itions #uring the year
Closi) G(oss >lo*k
Eepreciation "or the year
Cu5ulati1e
Dep(e*iatio
PLANT & E@UIP4ENT
Cpening Gross Bloc+
?##itions #uring the year
Closi) G(oss >lo*k
Eepreciation "or the year
Cu5ulati1e
Dep(e*iatio
PRELI4INAR=
EAPENSES
Cpening alance
Aritten oG #uring the year
9losing alance
Page 15 of 28
Page 16 of 28
:e; Loa S*he0ules
Sche#ule o" long ter' loans is re<uire# to e prepare# in
the "ollo$ing "or'at to esti'ate the interest pay'ent
e!ery year:
S*he0ule of Loa) Te(5 Loas :INR;
Total loa
&s.
)illion
Rate of
Ite(est 4 p.a.
Pa(ti*ula(s
Cost(u*tio
Pe(io0 Ope(atio Pe(io0
! # ! # ' . 6
Cpening Balance
?##itions #uring
the year

&epay'ent
#uring the year
Closi)
>ala*e

Ite(est fo(
the +ea(
:f; Cal*ulatio of Ta? Liabilit+
? suitale projection o" ta8 pay'ents o!er projection
perio# is re<uire# to e 'a#e as per applicale ta8
la$s. 7ere it is i'portant that "or ta8 purposes ta8
#epreciation shoul# e consi#ere#. ,n case o"
co'panies( pro!ision "or 'ini'u' alternate ta8 .)?T1
is also re<uire#.
:); P(o/tabilit+ State5et
%or 'a+ing the Proftaility state'ent $e nee# to
calculate the re!enue to e generate# through the
project an# incorporate !arious costs calculate# as
ao!e.
Re1eue8 %or projecting the re!enue o" any project(
"ollo$ing ingre#ients $ill e in!ol!e#:
Page 17 of 28
9apacity /tili*ation: ,t $ill start at a lo$er le!el an#
$ill +eep increasing year y year.
Pro#uction in ter's o" units: ,t can e calculate#
ase# on reasonale assu'ptions "or output o" the
plant.
Selling rate: &ates can e assu'e# analy*ing past
#ata "or the output pro#uct an# a#justing it "or "uture
changes.
Typically proftaility is calculate# at #iGerent le!els as
un#er:
Ea(i) befo(e Ite(est Dep(e*iatio Ta? a0
A5o(tiBatio :E>ITDA; C EB,TE? is an i'portant
'easure o" proftaility o" any year. This re3ects the
proft earne# y operating acti!ities suject to
#e#uction o" #epreciation $hich is a non cash
e8penses.
Ope(ati) P(o/t8 Cperating proft can e #eter'ine#
y #e#ucting #epreciation an# a'orti*ation "ro'
EB,TE?. This re3ects the proft generate# "ro'
operating acti!ities.
Ite(est8 %inance cost is calculate# in loan sche#ule
ase# on !arious assu'ptions #eci#e#.
P(o/t befo(e Ta? :P>T; C Proft e"ore ta8 is
Cperating proft minus fnance cost as calculate#.
P(o/t afte( Ta? :PAT;8 Proft a"ter ta8 is the net proft
a"ter ta8es. This re3ects the ulti'ate a'ount o" proft
to e generate# y project o!er projection perio#.
%or'at o" a typical proftaility state'ent is gi!en elo$:
P(o/t & Loss
A**out

Pa(ti*ula(s Uit
Ope(atio Pe(io0
=ea( ! =ea( # =ea( ' =ea( . =ea( 6
P(o0u*tio
9apacity /tili*ation 4
@uatitities
P(o0u*e0

Page 18 of 28
Pellets )TP?
%ines )TP?
Total
Net Sales
RealiBatio

Pellets &s.
)illion
%ines &s.
)illion
Total Re1eue &s.
)illion
9ost o" Pro#uction &s.
)illion
Eepreciation &
Preli'inary E8penses
&s.
)illion
Ope(ati) Cost &s.
)illion
Ope(ati) P(o/t &s.
)illion
,nterest &s.
)illion
E>T &s.
)illion
Ta8 &s.
)illion
P(o/t afte( Ta? &s.
)illion
:h; Cash Flo2 State5et
9ash 3o$ state'ent is prepare# to sho$ the 'o!e'ent o"
cash in an# out o" the project on a year to year asis.
%or'at o" a typical cash 3o$ state'ent is gi!en elo$:
Cash Flow Statement
S.
No.
Particulars Construction
Period
Operation Period
Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5
A SO!C"S OF FN#S
1 Equity
2 Local Long Term Loan- Fixed Capital
3 Foreign Currency Loan
4 Increase in Working Capital Loan
5 Profit before Interest !ep" #fter Tax
$ CE$%#T &e'ersal

%otal Cash &n 'low
( APP)&CA%&ONS OF FN#S
1 Capital Expenditure
2 !ecrease in Local Long Term Loan
3 !ecrease in Local(FE Long Term Loan
4 Increase in Working Capital
5 Interest on Loans
$ !i'idend
Page 19 of 28

%otal Cash Out 'low
Net Cash Accruals
Cumulati'e Cas) #ccruals
:i;>ala*e Sheet
Balance sheet is co'pile# "ro' !arious fgures calculate#
as ao!e. %or'at is gi!en elo$:
>ala*e Sheet
Pa(ti*ula(s
Cost(u*tio
Pe(io0
Ope(atio Pe(io0
=ea( ! =ea( # =ea( ! =ea( # =ea( ' =ea( . =ea( 6
Liabilities
Share 9apital
Proft & 2oss
2ong Ter' 2oan
Aor+ing 9apital
2oan


Assets
%i8e# ?ssets
Gross Bloc+
Eepreciation %un#
Jet Bloc+

9apital A,P

Aor+ing 9apital
9ash Balance

Preli'inary
E8penses


:,;Ratio Aal+sis
Jo$ a"ter co'pilation o" all fnancial state'ents an#
$or+ing( ne8t i'portant step $ill e to calculate !arious
ratios an# para'eters to 'easure the "easiility o" the
project. ,t $as un#erstoo# that "ollo$ing ratios are
consi#ere# i'portant "or e!aluating any ne$ project:
Page 20 of 28
Debt Se(1i*e Co1e(a)e Ratio :DSCR; 8 ES9&
re3ects the a!ailaility o" suKcient "un#s "or the
repay'ents o" loan an# interest a'ount. ?ny len#er
$oul# li+e to chec+ the cushion a!ailale "or its
pay'ents. ES9& is calculate# y #i!i#ing the cash
a!ailale "or ser!icing o" #et .EB,TE? less ta8
nor'ally1 y total #et ser!ice oligation .repay'ent
as $ell as interest1. Jor'ally an a!erage ES9& o" 'ore
than 1.= o!er repay'ent perio# is consi#ere# sa"e an#
co'"ortale.
>(eak8E1e Poit :>EP; 8 BEP #enotes the le!el o"
acti!ity re<uire# at 1--4I 'a8i'u' capacity utili*ation
to co!er the f8e# costs inclu#ing #epreciation etc. ?s
per 'ore 'o#ern approach to calculate BEP(
#epreciation an# other non cash ite's are not
consi#ere# as f8e# cost. Jor'ally( con!entional BEP o"
3-:4-4 an# cash BEP o" 2-:2=4 is consi#ere# healthy.
P(o,e*t Ite(al Rate of Retu( :IRR; 8 ,&& is the
rate o" return to e generate# y series o" cash 3o$s
in!ol!e# $ith the project. ,&& is the asic para'eter to
ju#ge the "easiility o" the project. %easiility o" the
project can e chec+e# y co'paring the ,&& $ith cost
o" capital. ," ,&& is higher then cost o" capital then only
project e8ecution 'a+es any sense an# !ice !ersa.
Net P(eset $alue :NP$; 8 JP6 is the present !alue
o" cash 3o$s generate# y projects using a suitale
#iscount rate. ," ,&& is higher than cost o" capital then
only project $ill ha!e a positi!e JP6 an# !ice !ersa.
Page 21 of 28
#"' 4ai Sou(*es of Debt & T+pi*al Te(5s &
Co0itios of Sa*tio of Fia*ial Assista*e
?"ter ha!ing un#erstoo# the !arious project report aspects
an# the i'pact they ha!e on the fnanciaility o" the
project. The last portion o" the training $as to pro!i#e a
asic un#erstan#ing o" the ter's an# con#itions on $hich
the project are pro!i#e# fnancial assistance y the len#ers
in the "or' o" long ter' loan. The sche#ule o" training $as
#i!i#e# into t$o parts.
1. Sources o" #et an# e<uity
2. Typical ter's an# con#itions o" fnancial assistance in
the "or' o" ter' loan.
i. Sources o" #et an# e<uty
To fnance any project one nee# a co'ination o" #et
an# e<uity.
Soures of debt
1. Ter' loan "ro' an+ an# fnancial
institutions
2. Bon# issue
3. Jon con!ertile #eentures
Soures of equit!
!" Pro'oter e<uity
#" Pulic issues in capital 'ar+et
'" Pri!ate e<uity "ro' "un#
." G.E.&I ?.E.&I %99B
6" 9on!ertile an# other 'ore co'ple8
instru'ents
Eespite so 'any options( ne$ project typically rely on5
11 Pro'oter e<uity an# pulic issues.
21 Ter' loan "ro' an+ an# fnancial
institutions
Page 22 of 28
ii. Typical ter's an# con#itions o" fnancial
assistance
,n any ter' loan transaction( the typical ter's an#
con#itions are as "ollo$s5
!" Ite(est (ate
The interest rate coul# e either f8e# or 3oating. The f8e#
interest rate is single interest rate $hich is applicale
through out the ter' o" the loan. This interest rate is
applicale on re#ucing alance o" the principle a'ount.
Jor'ally the interest rate is pai# on 'onthly or <uarterly
asis.
The 3oating interest rate is !ariale rate o" interest. ,n such
case ( the interest rate coul# either go up or co'e #o$n
#uring the ter' o" the loan. Each an+ has a pri'e len#ing
rate .P2&1. This P2& !aries $ith in3ation( statutory li<ui#ity
ratio .S2&1( cash reser!e ratio .9&&1( etc. Generally in perio#
o" rising in3ation( the P2& increase. Ahen P2& increases the
3oating rate increases ecause the 3oating rate is e8presse#
in the "or' o" sprea# sheet o!er the P2&. The sprea# sheet is
in the "or' o" a 4 an# 'ay as lo$ as elo$ 14 an# as high
as =4 or 'ore.
#" Se*u(it+
The ter' loans are secure# y $ay o" a frst parri:passu
charge on f8e# assets o" the co'pany. The an+s also ta+e
secon# parri:passu charge on the current asset o" the
co'pany. The frst parri:passu charge on the current assets
in $ith the $or+ing capital pro!i#ing an+s. ?t ti'es the
charge on the asset o" the co'pany is not "oun# a#e<uate
security y the an+s.,n such cases an+s also as+ "or either
the personal guarantee o" the pro'oter or i" the pro'oter is
alrea#y ha!ing another e8isting proft 'a+ing co'pany. The
an+s can as+ "or corporate guarantee an# personal
guarantee. ,t is also possile that an+s also as+ "or oth
personnel & corporate guarantees.
,n so'e cases apart "ro' the guarantee( an+s also as+ "or
ple#ge o" shares hel# y the pro'oter in the project eing
fnance.
Page 23 of 28
Basically the security pac+age $hich is as+e# y the an+ is
sustantially in3uence# y three "actors5:
a1 &is+ relate# to the project
1 Trac+ recor# o" the pro'oter
c1 %inancial strength o" the pro'oter
'" Repa+5et s*he0ule
The ter' o" loan is #epen#ent upon t$o "actors5
a1 ,'ple'entation
perio# o" the project
1 9ash 3o$ e8pecte#
to e generate# "ro' the project
Euring the i'ple'entation perio# o" the project( the project
#oes not ha!e any cash 3o$s. There"ore( no principle
a'ount o" loan is to e e8pecte# to e pai# ac+ to the
an+. ?"ter the i'ple'entation perio# o" the project is
co'plete( then #epen#ing on the cash 3o$s the an+ f8es
the repay'ent perio#. The annual a'ount o" principle to e
repai# coul# e either f8e# a'ount per year or the a'ount
coul# ha!e so'e allooning( i.e. s'aller install'ents in early
years an# then the annual repay'ent install'ent $oul#
increase.
," #uring the initial years o" cash 3o$s are $ea+ then the
an+ also pro!i#es so'e grace perio# $hich is also calle#
'oratoriu' perio#.
The project i'ple'entation perio# an# the grace perio# an#
the repay'ent perio# together #enote the total ter' o" the
loan $hich is also re"erre# to as the #oor:to:#oor perio# o"
the loan.
." Fu0e0 ite(est
The interest payale on the loans #uring the construction
perio# is inclu#e# n the project cost itsel" ecause an+s
are e8tre'ely reluctant to sanction a loan on $hich the
interest is not payale "or a certain perio#.
Page 24 of 28
7o$e!er in e8tre'ely e8ceptional cases( #ue to the typical
nature o" a gi!en project the an+s coul# also pro!i#e a
'oratoriu' o" the pay'ent o" interest. ,n such cases( the
accrue# interest on the loans is a##e# in the install'ent o"
the principle payale in the "uture year ut this is !ery rare.
6" Upf(ot fees
The an+s ha!e a practice o" charging an up"ront "ee at the
ti'e o" the sanction o" the loan. This is a co''on practice
ecause it a##s to the non "un# ase# inco'e o" the an+
an# at the sa'e ti'e it loc+s the potential orro$er to the
sanctione# "acility. This up"ront "ee !aries et$een -.2=4
to 1.--4 o" the sanction loan.
7" App(aisal fees
The an+ nor'ally spen#s 2:3 'an:'onths "or appraisal o"
a project. 9onse<uent to the appraisal( i" the appraisal is
"oun# satis"actory( an+s sanction the loan to the project. ,t
is co''on practice a'ong the an+s to charge a "ee "or
the appraisal. This "ee is nor'ally a lu'p:su' a'ount
$hich is payale at the ti'es o" the sanction. This a'ount
generally !aries et$een -.14 to -.2=4 o" the loan
sanction #epen#ing upon the si*e o" the sanction.
D" Co55it5et fees
Ahen the an+ sanctions the loan( it assu'es that this loan
$ill e a!aile# y the co'pany #uring the project
i'ple'entation perio#. The an+ lines up the a!ailaility o"
"un#s "or len#ing accor#ingly. ," "or any reason( the
orro$er #oes not ta+e the loan "ro' the an+( the an+
losses on its potential interest inco'e an# there"ore in such
cases the an+ charges a co''it'ent "ee. Such a "ee is
nor'ally e<ual to 14 o" the #ra$ #o$n in !ariance o" the
propose# loan #ra$ #o$n sche#ule.
E" A00itioal ite(est
The an+ sanctions the loan on the asis o" a security
pac+age. The asic security is the frst charge on f8e#
asset. This frst charge is create# in t$o "or's5:
a1 7ypothecation o" 'o!ale f8e# assets.
Page 25 of 28
1 )ortgage o" i''o!ale f8e# assets:$hich is generally
the lan#. This is 'ortgage o" lan# has to e #one
$ithin a specife# perio#. ," the 'ortgages is not #one
in that perio#( then an+ charge 14 a##itional interest
on the outstan#ing loan.
F" Peal ite(est
," any o" the interest install'ents is not pai# on ti'e( then
#uring the #elaye# perio# the an+ charges a penal
interest o" 2:34 on such interest #ues.
!G" LiHuate0 0a5a)es
," there is a #elay in repay'ent o" any o" the principle
a'ount then the an+ charges li<ui#ate# #a'ages L 2 4
p.a. o!er an# ao!e the interest rate on #elaye#
repay'ents o" the principle a'ounts.
!!" P(epa+5et pe(io0
Jor'ally( the an+s go $ith the assu'ptions that
orro$er $ill a!ail o" the loan "acility "or the ter' o" the
loan an# raise their resources accor#ingly ut i" orro$er
prepays the loan then the an+s nor'ally stipulate a
notice perio# o" 3 'onths an# a prepay'ent penalty o"
14 or so.
!#" Othe( *o1eats
To 'aintain the #iscipline in the orro$er( the an+s
stipulate a lot o" co!enants.
These co!enants coul# e classife# in three categories5:
a1 Pre co''it'ent con#ition
1 Pre #isurse'ent con#ition
c1 Cther
a. So'e o" the typical pre co''it'ent con#itions are5
i. Tie up entirely #et an# e<uity
Page 26 of 28
ii. Satis"actory #ue #iligence y the len#ers
in#epen#ent engineer an# len#ers in#epen#ent
legal council.
. So'e o" the typical pre #isurse'ent con#itions are 5:
i. Jecessary appro!als o" the go!ern'ent
ii. /n#erta+ing y the pro'oters to 'aintain 'ajority
share hol#ing
iii. ,n#uction o" agree# up"ront e<uity( tie# up o" all
inputs( otaining o" en!iron'ental clearance(
a#e<uate o" insurance co!er( roa# asing o" the
Boar# o" Eirectors an# strengthening o" the
'anage'ent( i" nee#e#( etc.
c. So'e other con#itions can also e stipulate#. These are
loan specifc an# nee# ase#.
Page 27 of 28
'" CONCLUSION
Thus #uring the course o" training( , un#erstoo# asics
o" all aspects relate# to preparation o" TE%& an# the
fnancial 'o#el as also its e!aluation an# i'portance in
the eyes o" the potential len#ers. The training also
pro!i#e# a rie" prospecti!e o" the !arious sources o"
#et an# the ter's at $hich such #et fnancing is
grante# to a project y an+sI fnancial institution.
This $as 'y frst e8perience o" un#ergoing training at a
corporate house. ,t has helpe# 'e a lot not only on
account o" training 'atterI suject ut also in ter's o"
un#erstan#ing the $or+ing an# relate# aspects in an
oKce.
, e8press 'y #eep than+s to the contriutions o" the
"ollo$ing:
i. )r. &. B. )an#irutta: TrainingI Project 2ea#er
ii. )r. Gaura! ?gra$al: TrainingI Project ?ssociate
Page 28 of 28