Project Report

Lanka Veeduru PLC

EXECUTIVE SUMMARY

Lanka Veeduru PLC is a well reputed company in the industry in Sri Lanka as well
as in the global market. While glass manufacturing industry offer a considerable
participation in GDP and employment rate of the country, the company decide to
increase their production capacity. The company suggest a 6th production line with
technological improvements and facilities. Increasing daily production capacity , local
(12% - 15%) and export revenue up to 25% are the main focus areas of this project.
Company reporting 4% growth in gross profit margin and net profit margin in the year
of 2018 to 2019. In continuation of company policy of distributing of operating
distributable profits, the Board of Directors has proposed a final dividend of 18% for
the year 2018.

Hence, company has growth in profit margins, company shows a profit loss for 2019.
The company operates with lower performance in liquidity and profitability. Also
unfavourable leverage values indicate the financial instability of company operations.
Activity ratios also prove that company is in unfavourable state in regular operations.

As the analysis of projected profit and loss company will gain net profit in 2022 after
the project investment. Sales will increase as it is. Working capital cover loan will pay
back after 4 and ½ years. NPV calculation for the project, under the discount rate
(Loan Interest rate) 13% is a negative value.

It says the cost of the project exceeds the cash inflow of the project. Investors may
need to consider the situation as they gain loss from the project investment. Since the
instability of company financial status bank is decide not to approve the finance for
the working capital requirement of Lanka Veeduru PLC.

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Lanka Veeduru PLC

INTRODUCTION

The production of glass bottles is an important part of the glass manufacturing

industry in the manufacture of glass containers. Glass is used more widely today than
ever before and it has been quite satisfactory and well managed in Sri Lanka.

Lanka Veeduru PLC is a sole manufacture in glass bottles industry for 60 years in Sri
Lanka. The company has a clear but stubborn aim of serving the Sri Lankan market
entirely while growing its business on the international markets. The business was
serving foods and beverage, pharmaceuticals, liquor and cosmetics and perfume
industries. We are the premier sole supplier of glass bottles with satisfying quality
standards of glass packing materials to the local and international market.

As the sole manufacture in glass bottle industry in Sri Lanka we are looking for
upgrade a new manufacturing plant with state of art technology. Lanka Veeduru PLC
is look forward to supporting business strategy in the new financial year, hoping to
gain the benefit from the company's new investment on its 6th bottle production line.
This Lkr 1 Billion investment will be made with the goal of increasing its export
support capabilities. The investment on 300 TPD furnace and dual chamber furnaces
is made to increase its production capacity from 150-200 million bottles per day to
300. Online inspection machines will install to increase the efficiency of productivity
and quality of automatic packaging process.

Finally Lanka Veeduru PLC will be calculating on increase exports from 18% to 25%
in the coming financial year to meet the demand from export market. The anticipated
revenue increase will be 12% in 2020 and 15% thereafter.

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Lanka Veeduru PLC

GLOBAL GLASS MANUFACTURING INDUSTRY

Increasing demand for alcoholic and non-alcoholic beverages, most likely aerated soft
drinks, is driving the global glass packaging market. It shows that glass is very
environmentally friendly, reducing landfills and saving energy.

Figure 1: Global glass packaging market segmentation

(Source: Reuters analysis, 2018)

According to Reuters analysis (2018), the global market for glass packaging is
segmented by product, application and area. The market is divided into bottles, jars,
and vials depending on the production. Due to the extensive use of bottles in all major
end-use industries, the bottles segment is expected to dominate the glass packaging
market over the forecast period. Bottles are the best way to keep the consumables
clean, new and stable for a longer period of time as they are easy to carry.

Figure 2: Global bottle glass revenue by application of glass packaging

(Source: www.grandviewresearch.com,2014)

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Increasing use of glass packaging in pharmaceutical products together with the food
& beverage sector is expected to drive demand due to its non-corrosive nature.
However, various properties including recyclability, non-permeability, and zero level
of chemical interaction make it suitable as a packaging material for various
applications including food, soft drinks, foods, and medical applications.

Figure 3: World glass export market share

(Source: www.grandviewresearch.com,2014)

Main glass bottle supplier of the market is China and USA. There is a chance to
increase Lanka Veedury PLC’ s exports as it already engage in exports and have 18%
from current businesses.

Lanka Veeduru PLC’s main importers

The integrated design, manufacturing, inspection, and decoration capabilities yield

high quality, sustainable performance and consistency of the company. Company
have world offices and warehouse facilities in India, France, Germany, Turkey, Spain,
USA, Brazil, India, UAE, UK, China, and Sri Lanka. Sri Lanka has a high demand in
bottle glass as many new beverage companies came up. The industry has an annual
turnover of over Rs.50 billion at present, out of which 30% is exports to over 20
countries. The main buyers of bottle glass are USA and the West-European markets.

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GLASS MANUFACTURING INDUSTRY IN SRI LANKA

The industry has generated over 22,000 direct employment jobs, while also creating
50,000 indirect employment jobs. There were 20 large-scale manufacturing facilities
and over 300 small-scale factories.

Table 1: Principal indicators of industrial activity - 2016

Type of Employees Salaries output Intermediate Value Gross
industry and wages consumption added additions to
fixed assets
Manufacture of 414 197149214 5395356134 2934401904 2460954230 836688962
glass and glass
products
(Source:Annual Survey of Industries, 2016)

Table 2: Value of output & output components - 2015

Type of industry Output Shipped Changed in Industrial

stock services & other
revenue
Manufacture of glass and 5395356134 5365000000 26000000 4356134
glass products
(Source:Annual Survey of Industries, 2016)

Table 3: Value of Intermediate & raw material consumptions 2015

Type of industry Intermediate Raw materials consumed

consumption
Manufacture of glass and 2934401904 1083000000
glass products
(Source:Annual Survey of Industries, 2016)

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Lanka Veeduru PLC

RAW MATERIAL MARKET IN GLASS INDUSTRY

The primary raw materials are used in manufacturing glass bottles are Silica sand,
Soda ash, Limestone And Cullet. Sri Lanka is a main trade partner of silica sand in
both imports and exports. Silica sand of 80% to 99% (SiO2) occurs as economic
deposits at Marawila, Nattandiya, Madampe, Sinnapadu and Vallipuram in Jaffna
peninsula. In addition, some low quality quartz deposits too are found in areas along
Giritale to Trincomalee. Sri Lanka imports with high cost of soda ash and lime stone
specially from China, Japan and Vietnam.

Figure 4: Silica sand market in Sri Lanka

(Source: Silica Sand, 2019)

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Lanka Veeduru PLC

ENVIRONMENTAL ANALYSIS OF LANKA VEEDURU PLC

Porters five forces model

Threats of new entrants Since glass manufacturing is high investment sector

in start-up cost, furnaces cost, technological intensive
and skilled labour, there is low threat of new entrants.
Bargaining power of The company face low bargaining power of suppliers,
suppliers while plants are located around the geographic area of
silica sand mining.
Threats of substitutes Main substitute of glass bottles is cheap and imported
plastic bottles.
Bargaining power of buyers Since the monopoly of bottle glass industry there is
low bargaining power in the buyers.
Competitive revelry There is very low chance to new market entrants and
have low competition in local market but high in
international market.

Competitors in local market

Table 4: Local market competitors

Primary competitors Secondary competitors Possible competitors

Piramal glass Ceylon PLC SG industries Asoka glass
Globe glass pvt ltd KPP group Nishantha glass
Ant glass Bruni glass S.P.A
Orient gold plus Civaro Lanka Ltd

Competitors in international market

 GlassPak, Daggett
 California Glass Studio
 Tumbler depot
 Jac's Wholesale
 Pangea Designs
 C&h Glassworks
 Invite Cottage Personalized Gifts & Papers

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PESTEL analysis

Political factors  The replacement of 14% Corporate Income Tax rate on

profits from exports to 28%.
 Haven’t formula-based pricing for furnace oil linked to
world crude oil prices.
 Haven’t anti-dumping regulation to prevent dumping from
China and India
 Government through Export Development Board (EDB) is
encouraging companies to push for more exports.
 No approval for mining silica deposits.
Economic factors  The concept of value migration effects.
 The GSP Plus encourages value addition in Sri Lankan
products.
 Limitation in promote the industry.
 Lack in LPG supply chain and silica sand management.
 Listed on the Colombo Stock Exchange.
 Increasing the duty structure to avoid cheap imports.
 BOI given first preference with the objective of developing
local companies and increasing scale.
Sociocultural  Employment opportunities
factors  Health hazards prevention in imports.
 CSR
Technological  Online presence and getting in line with technology.
factors  Digital transformation in manufacturing.
 Apply new business models.
 Smart manufacturing and supply chain.
Environmental  Gas emission issues control
factors  Recycling and clutter usage.
 Energy efficiency is resulting Solar panel energy project
under “Suryabala sangramaya”.
 Restrictions to export the country’s natural resources.
 Water recycling projects
Legal factors  Factories Ordinance
 Workmen’s Compensation Ordinance
 Mines and Machinery Protection Ordinance, 1896

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SWOT analysis

Strengths
 Sole bottle glass manufacture in
Sri Lanka
 High technology adoption
 Solar power consumption
 Warehouse facilities in globe.
 Produce glass at lower costs than
competitors
Opportunities
 New buyers in the food &
beverage, cosmetics industry.
 Expanded export market.
 Skilled manpower is cost-
effective and lower than in
developed markets.
 Investing in relevant technologies.
Weaknesses
 insufficient supply of bottle glass
 High energy cost (40% of total
cost)
Threats
 Competition for raw material
 Importing cheap products.
 No SLS standards in glass
imports.
 Silica sand mining restrictions

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Lanka Veeduru PLC

RISK ASSESSMENT

Financial Risk

Finance Division under policies approved by the Board which set out the principles
and procedures with respect to risk tolerance, delegated authority levels, internal
controls, management of foreign currency, interest rate and counterparty credit
exposures and the reporting of exposures.

Commodity price risk

The main impact for company is through energy & Imported Raw Material. The
imported Raw material price risk is mitigated through long term agreements & central
purchasing done by Veeduru PLC Procurement division. The energy cost consists of
LPG, Furnace oil & Electricity.

Interest rate risk

Interest rate risk is minimized by maintaining an appropriate mix between Rupee

borrowings & Dollar borrowing.

Export rate risk

The company has a natural hedging by way of its operational transactions as the
inflow of foreign currency through export sale off sets the import cost and interest.

Liquidity risk

company finance aims to maintain flexibility within the funding structure through the
use of bank overdrafts, Short Term loans, Letter of Credit & Guarantees.

Credit risk

The Company is exposed to credit risk from its operating activities.

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Promoter detail

Brief Bio-Data

Name :your name

Address : Your address.

Phone :number

e-mail ID (if any) :your email

Qualification : Business project developer and instructor

Experience details : Project Manager in Maga, Sri Lanka.

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Lanka veeduru PLC’ financial position for the years of 2018 and 2019

Ratio analysis for the years 2018 and 2019

2019
Liquidity ratio
Current ratio(times) 1.59
Quick ratio(times) 0.81
Cash ratio (times) 0.09
Net working capital to sales ratio 1.66
Profitability Ratio
ROA -4.967%
ROE -3.54%
Gross profit margin 48%
Net profit margin 22%
Leverage ratio
Total debt ratio 0.39
Debt to assets ratio 0.13
Debt to capital ratio 0.18
Debt to equity ratio 0.21
Activity Ratio
Inventory T/O (times) 0.24
Debtors T/O(times) 0.54
Creditors T/O (times) 0.57
Debtors collection period (days) 676
Creditors payment period (days) 639
Fixed assets turnover(times) 0.88
Total assets turnover(times) 0.098

Firm can meet its short term debt in 1.6 times over. Company have to sell its
inventory for cover the short term debt as quick ratio is 0.81. Cash ratio is below 1.0,
and company is unable to pay its current liabilities with cash and cash equalant.

The GPM and NPM has increased by 4% form F18 to F19. This may occurred due to
low cost volume and high sales volume of these years.

Both ROE and ROA state negative value. Negative ROE, due to the company having
a net loss for the year. Investors may overlook a single tough year's negative return if
they believe the company is well-positioned for long-term growth.

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Company has willingness to pay debt (0.39). The business owners have provide
sufficient equity fund to the business (0.21). Debt levels are manageable (0.18) and
the firm is considered risky to invest or finance in loan.

Company has weak sales and possibly excess inventory (0.24). while company
having lower payment and receivable management there is high volume in collection
period.

Profit or loss for the year 2019 of Lanka Veeduru PLC

Rs. (000)
Sales 653318.00
Cost of Goods Sold 339725.00
Gross profit 313593.00
Expenditure 457323.00
Net profit (143730.00)

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ANALYSIS OF PROJECT

Working capital requirement

Current assets
Inventories 1444064
Trade and other receivables 1319355
Pre payments 6296
Cash and short term deposits 161304
Total current assets 2931019
Current liabilities
Trade and other payables 1354755
Income tax payables 59288
Dividend payable 36258
Interest bearing loans and borrowings 396417
Total current liabilities 1846718
Working capital 1084301

Working capital loan repayment schedule

Year Opening EMI Principle Interest Closing

balance rate(13%) balance
1 1084301 223958.23 212212.19 11746.59 872088.81
2 872088.81 223958.23 214,511.15 9,447.63 657,577.66
3 657,577.66 223958.23 216,835.02 7,123.76 440,742.64
4 440,742.64 223958.23 219,184.07 4,774.71 221,558.56
5 221,558.56 223958.23 221,558.56 2,400.22 0
(Peoples’ bank,2019)

Projected profit and loss for 2020-2022

2020 2021 2022

Sales 731716.16 841473.58 967694.62
COGS 351223.7568 403907.32 464493.42
Gross profit 380492.4032 437566.26 503201.2
Expenses 503055.3 480189.15 480189.15
EBIT (122562.8968) (42622.886) 23012.053
TAX (24512.57936) (8524.5773) 4602.4106
EAT (98050.31744) (34098.309) 18409.643

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Depreciation 563000.04 495440.04 435987.23

Cash flow 883547.7032 917755.41 983390.35

According to the projected profit and loss account, F20 and F21 shows a net loss for
the year. It is due to increase in expenses of new project. The company assume the
expenses will increase in 10% in 2020 and 5% onwards. But sales will increase 12%
from 2019 to 2020 and 15% thereafter. It is assumed COGS will be 52% of total
sales/ revenue each year. The export revenue will be also increase in this period. In
2022, company starts to gain net profit in 2022. Expenses will decrease and sales will
increase by 15%. Depreciation is at 12% and tax rate is 20% (Piramal glass, 2018)

Analysis of capital investment techniques

NPV for the project

2019 2020 2021 2022 2023 2024

0 1 2 3 4 5
Initial (1,000,000) _ _ _ _ _
Working
(1084301) _ _ _ _ _
capital
Cash flow (2,084,301) 464949.7226 461341.73 454396.87 462462.6 485864.1
Discount
1 0.884955752 0.7831467 0.6930502 0.613319 0.54276
factor 13%
Discounted
(2,084,301) 411,460 361,298 314,920 283,637 263,708
cash flow
NPV (449,279)

The discount factor is 13% as bank business loan rate (Peoples’ bank,2019), NPV for
the investment of project is a negative value. Project is a failure investment. Hence
negative NPV company unable to get the bank loan.

Pay back method

0 (2019) 2020 2021 2022 2023 2024

Initial (1,000,000 ) _ _ _ _ _
investment
Working (1084301) 464949.72 461341.73 454396.9 462462.6 485864.1
capital
Pay back (2,084,301) (1,619,351) (1,158,010) (703,613) (241,150) 244,714

(241,150)
Payback period= 4 + 462462.6

=4 year and 5 months

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CONCLUSION

The Lanka Veeduru PLC is a fast growing company in both local and export market.
Company have high skilled employees in production process and use modern
developed technological equipment and machinery for the production process. The
main advantage of company is located around main raw material, silica sand
supplies. They employed low cost labour in production than other countries and it
support them in low cost of production. Customer base specific production line crafts,
designing, coloring are unique for the company.

Company is well established in the market for 60 years means the company have
stability in market for long. Company is the sole provider of bottle glass in Sri Lanka.
They have strengths in having low production cost, energy savings by using solar
power and have 50 locations of distributing and warehouse facilities over the globe.
Currently they engage in 18% of export and this huge investment will help company
to increase their exports and the total revenue. As liquidity of company is at
considerably modarate level.

The company is having a net loss for the F19 and it may due to high volume expenses
occurs in the year. Company have negative ROE means it may have large investment.
Debt ratio help investors to determine the company risk level. In order to stay solvent,
the company should have current ratio less than 1.0. Company have to sell its
inventory for cover the short term debt and company is unable to pay its current
liabilities with cash and cash equaling they have. The business investing many
accounts receivables and inventory to support its sales. It create excessive amount of
bad debts or obsolete inventory.

A negative ROA does not necessarily prove that business is better or worst. The
business with a negative net income could lose money or buy up assets that will
generate profits in the future. Lower debt levels are manageable and the firm is
considered less risky to invest or loan. A low turnover implies weak sales and
possibly excess inventory. It may indicate a problem with the goods being offered for
sale or be a result of too little marketing.

A low receivables turnover ratio might be due to a company having a poor collection
process or bad credit policies. Since, company has a lower debtors turnover ratio, it
may prove to be a risk investment. Lower creditors turnover ratio may imply a
financial distress for a company.

The working capital requirement is Rs.1084301000.00 and the initial investment for
the project will be Rs.2,084,301000.00 for the project of establishment of 6th
production line. In F22 company starts to gain profit from the investment. They will
pay the required working capital loan within 4 years and 5 months from 2020. But
NPV at discounted cash flow is a negative value.

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Recommendation

Negative ROE means may be the company engage in this huge investment of one
billion. Lower liquidity will cover after the this investment of 300 TPD furnace. A
negative NPV means that the present cost value exceeds the present revenue value at
the given discount rate. The investor couldn’t make a profit from the investment. The
project is expected to result in a net loss for the company. The company should not
pursue the project.

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References

1. Annual Survey of Industries, final report – 2016

2. Glass Packaging Market 2018 Future Trends, Competitive Analysis and
Segments Poised for Strong Growth in Future 2023.
https://www.reuters.com/brandfeatures/venture-capital/article?id=35625
3. Glass Packaging Market Size & Trend Analysis By Application (Alcoholic
Beverages, Beer, Food & Beverages, Pharmaceuticals), By Region, And
Segment Forecasts To 2022.https://www.grandviewresearch.com/industry-
analysis/glass-packaging-market-analysis
4. Maheswaran P. Glass Bottle Manufacturing Process – Step by Step. Process
https://ceramicninja.com/glass-bottle-manufacturing-process/
5. Piramalglass's Competitors, Revenue, Number of Employees, Funding and
Acquisitions. https://www.owler.com/company/piramalglass
6. Silica Sand. https://www.tridge.com/intelligences/silica-sand/LK,
7. Sri Lanka Ceramics and Glass Council calls for Govt. support to bolster
industry. http://www.ft.lk/business/Sri-Lanka-Ceramics-and-Glass-Council-
calls-for-Govt--support-to-bolster-industry/34-650656

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