Project Financing, Appraisal and Control Report

On

Setting up a Ferro Alloy

Manufacturing plant at
Raigarh

Submitted by:
Varad Aggarwal(185)
Girish Agarwal(158)
Pulkit
Rahul
Riya Arora(179)

Lal Bahadur Shastri Institute of Management

Dwarka
Chapter 1. Idea Generation

Indias steel production capacity is going to increase manifold in the coming years. The per capita
consumption of steel is only 49kg in our country compared to world average of 182 kg. In addition
various steps have been taken to increase domestic steel consumption. India is the 5th largest crude
steel producer in the world and is expected to become the second largest by 2015-16. India
continues to maintain its lead position as the world's largest producer of direct reduced iron (DRI) or
sponge iron during January-December 2010. 222 MoUs have been signed with various States for
planned capacity of around 276 million tonne. In order to have product flexibility keeping in view the
demand supply scenario and contribution the company will use the same facility fully or partially to
manufacture Ferro Alloys like High Carbon Ferro Chrome, Ferro Manganese and Silico Manganese.
Chapter 2. Growth of Steel Industry

2.1 What is a Ferro Alloy ?

Ferro alloys are consumables required to manufacture steel. Ferro alloys are used to
manufacture various types of carbon and steel, essentially to impart certain physical and
chemical properties in a particular grade of steel viz change of tensile strength,
ductility, hardness, corrosion resistance, wear resisting or abrasion resistance properties
etc. Ferro alloys are also commonly used for de-oxidation and refining of quality steel.

2.2 Steel Demand in India

Steel demand in India has been forecast mainly on the basis of past trends, taking into
account the relationship between GDP and steel consumption and then projecting specific
assumed GDP growth rate for future years. The forecast of steel demand for 2025-26 made
by INSDAG as per standard methodology assuming 6 & 6.5 percent annual compounded
average growth rate of the GDP seems to be fairly realistic. As per this, demand for finish
steel is likely to rise to 165/171 million tones respectively. To meet this demand only, the
country will have to set up adequate facilities for production of 190 205 million tonne crude
steel. The total steel demand and required level of finished steel production (alloy & non-
alloy) for the 12th Five Year Plan, i.e. 2012-2017 had been estimated by the competent
authority and it was to the tune of 115.30 million tonne in the year 2016-2017. It is also
estimated that about 3.02 million tonne manganese alloys shall be required to meet the
demand of Ferro-manganese & silico-manganese alloys in the year 2016-2017.

2.3 Supply Available

At present, existing installed capacity for the plants manufacturing above alloys is 3.16
million tones and corresponding capacity utilization is remained at 54% for a production of
1.7 million tonne as noted for the year ending 2011. As on today, it is seen that there is a
positive growth for manganese alloys. Since it is linearly proportional with the growth of
steel industry, it is apprehended that growth of the consuming industry would be substantial
within a few years to come and therefore in order to meet the demand, manganese alloys
industry shall have to make the way for it. Now, if it is assumed that all the plants those who
are operating for manganese alloys now increased their operating efficiency level at 65% of
the installed capacity, i.e. 11% higher than the earlier level then the total production would
have been to the tune of 2.054 million tonne per annum whereas the demand for manganese
alloys has been projected as 3.02 million tonne leaving a gap of 1.106 million tonne as short
fall for the year 2016-17. However, the demand projection has been made after considering
domestic as well as export demand for a year and it concludes that even after operating at
appreciable level there would be enough scope for addition of new capacity plant in order to
meet the growing demand.

2.4 Supply-Demand Gap

From the foregoing discussion a conclusion may be drawn that a fairly constant demand for
the ferro-alloys shall be maintained and it will rise proportionately in accordance with the
growth of steel production. It is apprehended that the growth of steel production will reach to
an appreciable level within near future and therefore capacity additions for production of
manganese alloys would be a necessity.
As per the Indian Ferro Alloy Producers Association (IFAPA), the licensed capacity
of Ferro Alloys in India as of 2009-10 is about 3.64 MMTPA with about 156 units,
out of which 2.78 MMTPA is the actual operationa l capacity through 134 working units
High Carbon Ferro-Chrome, Ferro Manganese and Silico Manganese dominate the Ferro
Alloys market with an aggregate share of over 90%. Ferro Manganese enjoys a share of
around 16.5% of the overall Ferroalloys market, whereas Ferro Silicon accounts to about
3.54%.

SOURCE: All the figures mentioned in the above paragraphs have been obtained from the
Papers Long Term Perspectives for Indian Steel Industry submittd by Dr. A.S. Firoz, Chief
Economist, Economic Research Unit, and Manganese Ore and Ferro Alloys for Steel
Production submitted by G.P. Kundargi, Director (Production & Planning), MOIL Limited.
Chapter 3. Market Analysis & Major Competitors
Chapter 4. Cost Financing & Project Details

4.1 PROJECT SCHEDULE

Project implementation schedule is 2 years from the date on which the all
statutory clearance to start the project are received. The plant will be setup at
Jindal Industrial Park situated in Raigarh , Chattishgarh
4.2 COST ESTIMATE
The cost estimate for the project is Rs. 80 Crores. The breakup of the project cost
is presented below:

Total Plant Capacity (Tonnes/Annum) 41,500.00

Chapter 5. Assumptions

i. The set up period for the project will be 2 year.

ii. The Project will be setup at Jindal Industrial Park, Raigarh.
iii. The land will be acquired on lease basis with initial lease period of 30 years which can be
further increased at the multiple of 30 years.
iv. The projects land requirement will be 10 Acres.
v. The land will be acquired by paying a one-time lease fee of Rs 25 lakhs per acre.
vi. The installed capacity of the plant is 40,150 tonnes per annum.
vii. The capacity utilization will be 70% in the first year, 80% in the second year, and 90% for the
third year and beyond.
viii. The average sales realization per tonne of silicon manganese will be Rs. 64500/tonne
ix. The cost of raw materials and consumables will be 50% of sales, the cost of power will be
25% of sales.
x. Wages are expected to be Rs. 4.4 Crores for the first years and thereafter will increase at the
rate of 5% per annum.
xi. Salaries are expected to be Rs. 60,00,000 for the first years and thereafter will increase at
the rate of 10% per annum.

xii. Factory overheads will be Rs. 25 lakhs for the first year and will thereafter increase by 5%
per annum.
xiii. Administrative expenses will be Rs. 25 lakhs per year.
xiv. Selling expenses are expected to be 10% of sales per annum.
xv. The term loan will be repaid in 20 equal yearly instalments, with the first instalment falling
due at the end of the first operating year. The interest rate on the term loan will be 12% per
annum.

xvi. The current asset requirement are expected to be as follows :

a. Raw material and consumables 1 month
b. Stock in process 0.5 months
c. Finished goods 0.5 months
d. Book Debts 1 month
xvii. The suppliers of raw material and consumables will provide trade credit for half a month.
xviii. The bank finance for working capital will cost 12% per annum.

xix. The depreciation rates for company law purposes and for income tax purposes are as
xx. follows :
a. CLB (straight line method) CBDT (WDV method)
b. Building 3.34% 10%
c. Plant & Machinery 4.75% 13.91%
d. Miscellaneous fixed assets 9.50% 25.89%
xxi. The preliminary expenses may be written off in 10 equal annual installments.
xxii. The income tax rate applicable is 30%.
xxiii. The firm plans to pay directors remuneration of Rs 6,00,000 per annum/-
xxiv. The firm will pay dividend @ 12% from third year onwards.
Chapter 6. Projections
Chapter 7. Sensitivity analysis
Chapter 8. Conclusion