Corporation Bank

Industry Profile

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:

Early phase from 1786 to 1969 of Indian Banks

Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

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.

Indian Banking system

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

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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.

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Co-operative BanksRegional Rural BanksCommercial Banks

State Bank Group

Private Sector Banks

Indian Banks Foreign Banks

Public Sector Banks

Nationalized Banks

State Bank of India Associate Banks

State Co-operative Banks

Central Co-operative Banks

Primary Credit

Reserve Bank of India

Commercial banks

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

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

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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Regional Rural Banks

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.

Scheduled banks and non-scheduled banks

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.

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Company Profile

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’.

A handful of people representing the various interests decided to promote the

‘Canara Banking Corporation of Udupi Limited’. Eleven persons who included 4 pleaders, 2

educationist, 1 insurance agent and 1 retired sub magistrate where the first signatories of the

Articles of Association and Memorandum of Association of the bank who had in all 111 shares.

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.

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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.

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 become a provider of World-Class financial services.

To meet customer expectations trough innovation and technological initiatives.

To emerge as a role model with distinct culture identity, ethical values and good

corporate governance.

To enhance share holder’s wealth by sustained, profitable and financially sound

growth with prudent risk management systems.

To fulfill national and social obligation as responsible corporate citizen.

To create environment, intellectually satisfying and professionally rewarding to

the employees.

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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:

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.

iv. Kshemanidhi Cash Certificates: KCC is a money multiplier deposit. It is a reinvestment

Term Deposit scheme that can be opened for a period ranging from 6 months to 10 years.

The rate of interest depends on the period of deposit.

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.

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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.

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.

b. Personal Loans Products

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.

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c. Corporate Products

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.

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e. Internet Banking

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.

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Financial Results of the Bank

Table No 1: Financial Results of the Bank

(Rs in crores)

Particulars 31st March

2006

31st March

2007

31st March

2008

Interest Earned

Other income

Total Income

Interest Expended

Operating Expenses

Total Expenditure

Operating Profit before provision and

contingencies

Provisions (other than tax)

PBT

Tax

PAT

Capital

Reserves

Deposits

Advances

Investment

2659.69

461.34

3121.03

1413.88

751.05

2164.93

956.10

283.88

672.22

229.22

443.00

143.44

3231.45

32876.53

23962.43

10651.99

3367.53

635.57

4003.10

2054.46

804.47

2858.93

1144.17

323.46

820.71

304.57

516.19

143.44

3622.01

42356.89

29949.65

14417.49

4516.58

702.08

5218.16

3063.09

892.26

3955.35

1263.31

185.74

1077.57

327.16

750.41

143.44

4139.78

55424.42

39185.57

16512.38

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Key Ratios

Table No 2: Ratio analysis of Bank

Particulars 31st March

2006

31st march

2007

31st March

2008

Capital Adequate Ratio (%) 13.92 12.26 12.09

Return on Avg Asset (%) 1.28 1.16 1.34

Return on Equity (%) 13.12 13.71 17.51

Earnings per Share (Rs) 30.89 35.98 52.31

Book Value per Share (Rs) 235.29 262.51 294.79

Yield Spread 3.56 3.08 2.71

Non-interest income to total income 14.78 15.87 13.45

Gross NPA to Gross Advances 2.56 2.05 1.49

Ratio Analysis

1. Capital Adequacy Ratio

Capital adequacy ratio is the ratio that signifies the amount of capital on Risk Weigted

Asset of the Bank.

Chart No 1: Capital Adequacy Ratio

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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2. Return on Average Asset

Return on average asset signifies that the ratio between net profit after interest and tax to

the average asset utilised by the bank to earn the returns.

Profit after Tax Return on Average Asset = 100

Average Asset

Chart No 2: Return on Average Asset

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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Profit after Tax Return on Equity = 100

Equity + Reserves

Return on equity is increasing every year. The ratio is 13.12, 13.71 and 17.51 in the year

of 2006, 2007 and 2008 respectively. There is increase of 45% in returns against only 13%

increase in the equity.

4. Earnings per Share

Earnings per share signify that the earnings available for the each share held by the

shareholder.

Profit after Tax Return on Equity = 100

No of shares

Chart No 4: Earnings per Share

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.

5. Book value per Share

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.

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Equity Share Capital + Reserves Book Value Per Share =

No of shares

Chart No 5: Book Value per Share

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.

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7. Non Interest income to Total Income

This ratio indicates the relationship between non interest income and total income. Non-

interest income arises out of the activities other than the lending.

Chart No 7: Non Interest Income to Total Income

The ratio was 14.78 in the year 2006, but there was slight increase in it in the year 2007.

It shows the bank earnings are increased out of lending business. But in the year 2008 the ratio

has decreased.

8. Gross NPA to Gross Advances

This ratio shows the relationship between Gross NPA to Gross Advances of the bank. It

states that the percentage of Non Performing Assets out of total advances granted by the bank.

Chart No 8: Gross NPA to Gross Advance

The ratio is decreasing from 2006 – 2008. It means the NPAs are decreasing from year to

year. It is good indication for the bank. 19

Research Design

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.

Statement of the Problem

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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Objective of the study

To understand the analytical framework of project financing and to analyze the

existing project appraisal mechanism at bank.

To study the project financing of Corporation Bank

To familiarize with the interrelationship among various aspects of project finance.

To understand the importance of project appraisal in sharpening the ability of the

bank to identify investment opportunities of the project undertaken.

To study the assessment of the various aspects of investment proposition to arrive

at a financing decision

Need for the study

To have practical knowledge and experience towards project financing.

To sharpen the ability of identification of various attractive investment

opportunities.

To value the options embedded in the project

To familiarize with the inter relationship among the various aspects of project

appraisal.

To evaluate the project in order to give suggestions to the bank

Scope of the study

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. 21

Methodology of Data Collection

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.

Interacting with executives, functional in charge of various areas and departments

discussing informally.

Referring to the secondary that is, various project reports prepared by the bank

and desk guides available with the bank.

Visiting official website of the bank and other related websites.

Referring to news papers and various business magazines.

Limitation of the study

The study is limited to the Project appraisal department of Corporation Bank. The

investigator could not cover all the banks, who are providing similar services.

The data recorded was presumed to be authentic

This study curtails comparison, as it is within the purview of only one

organization.

The study is conducted on the data that are made available to the bank by the

concern.

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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.

It is a process where by a lending financial institution makes an independent and

objective assessment of the various aspects of investment proposition for arriving at a financial

decision. Appraisal exercises are aimed at determining the viability of a project and some times

helps in reshaping the project to upgrade its viability. It is most crucial stage of project cycle at

which the bank makes a critical evaluation of all the parameter to determine the feasibility of the

project and to make a decision whether to finance or not.

Need for Appraisal

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.

23

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.

Functions of Project Appraisal Group

Undertake detailed techno-economic appraisal of large projects seeking financial

assistance from bank and preparation of appraisal report by evaluating technical,

managerial, financial and commercial aspects of the project.

Undertake regular evaluation of progress of implementation of large projects

assisted by the Bank.

Peruse and furnish views/observations on project appraised by other

banks/reputed consultants, submitted by Cos/other groups of the wing.

To undertake monitoring agency activity of companies going for IPO as per SEBI

guidelines.

Upgrade project evaluation skills.

Undertake unit visits and hold discussions with the official of the company.

Guiding User Sections of the wing on project appraisal skills.

Undertake detailed techno-economic merchant appraisal of projects going for IPO

as per SEBI guidelines.

24

Project Appraisal – An Overview

Table No 3: An Overview of Project Appraisal

Technical

Appraisal

Marketing

Appraisal

Financial

Appraisal

Economic

Appraisal

Management

Appraisal

Manufacturing

Process/Technology

Demand

techniques for

forecasting

Capital cost of

project

Ratio of

economic

appraisal

Qualities of an

entrepreneur

Technical

Arrangements

Supply depth of

competition

Sources of

finance

Economic rate

of return

Various forms

of organization

Size of plant Pricing policy Financial

projections

Exchange rates

of the project or

resource cost

Organizational

setup

Product Mix Life cycle of the

product

Ratio analysis Comparative

study of

financial and

economic rate

of return

Management

problems

Selection of P/M Brand name for

the product

Break Even

Point

Plant Layout Distribution

channels

Location of the

Project

Sales promotion

Schedule of Project

Implementation

Sources of

market

information

Publication to

study various

aspects of mktg

25

Bank’s way of Appraisal:

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.

b. Estimate of costs of the project detailing assets acquired, to be acquired inclusive

preliminary expenses and working capital.

c. Details of the proposed means of financing, indicating the extent of promoter’s

contribution, the share capital is to be raised from public and borrowings.

d. Working capital requirement at the initial year

e. Project implementation schedule

f. Organization setup with list of Board of Directors, Qualification, Experience and

Competencies.

g. Demand projection based on the overall market prospectus together with copy of

market survey report if any.

h. Estimate of sales, cost of production, profitability.

i. Projected profit and loss a/c, balance sheet for the operating years during banks

assistance.

j. Proposed amortization schedule (repayment program)

k. Projected fund flow statement

l. Details of the nature and value of securities of fund.

Due deligence report shall be submitted in the prescribed format. Consent from the

authorities of the Pollution Control Board and any other information.

26

Brief History

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

A summery of company’s past performance in terms of operating capacity, sales,

operating profit and net profit for the past 3 year will be analyzed by the bank. The bank will

analyze the sales and profitability for last 3 years. If the trend is in ascending order the

performance can be consider satisfactory.

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.

Present financial position

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.

27

The bank also collects the information regarding the following,

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.

i. The suitability of the Technology

The bank will examine whether the proposed technology can be successfully

employed in local condition with regard to the availability of resources, men and

materials.

ii. The size of the Plant

The bank will examine the size of the plant in relation to the optimum size

warranted be technical factors, economies of scale and production cost factor.

iii. The location of the plant

The bank will examine that whether it has ready accessibility to critical inputs and

utilities like raw materials, supplies, fuel, water etc.

iv. Technical arrangements

The arrangement made for obtaining the technical know how, design and detailed

engineering of plant and selection of suppliers of machinery/equipment will be examined

by the bank.

v. The bank will also examine the manufacturing process of the product.

28

Financial feasibility

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.

b. Total cost of the project

The various components of the total cost of given below will be studied by the bank.

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.

iii. Plant and Machinery

The bank will examine the stated plant and machinery is required or not according

to the recommendations made in the technical feasibility report in the project report and

will see they will be suitable and adequate for the production programme. The cost of the

plant and machinery will be examined by bank to ensure that the price paid is reasonable.

iv. Technical know-how

The bank will examine the basis of selection of technical consultants. It should

ensure that the promoters will not get any benefit out of it by selecting subsidiary concern

of the promoter as technical consultants. The bank will ensure that the fees paid are

reasonable to the service.

29

v. Preliminary Expenses

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.

vi. Working Capital

The bank has to estimate the working capital requirement of the company during

the 1st year operations and the provision has to be made to meet the requirements.

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.

ii. Internal cash accruals

The bank will examine whether the company will be able to meet its expenses and

working capital requirements. It will ensure that the remaining part of the profit(cash

accrual) will be possible to use it as part of financing for project.

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.

iv. Term Loans

The power of public company to borrow by way of term loans is restricted to the

amount of its paid-up capital and free reserves. The bank has to ensure that the loan taken

by the company under those limits only. If the loan is provided by many lenders the

information regarding that to be collected.

30

v. Deferred payment facilities

The bank has to get the details of the deferred payment guarantee.

vi. Any other(Central/state sales tax loans, development loans)

Bank has to specify whether it is central/state sales tax loan and will examine the

term and conditions of granting the loan.

Project Implementation Schedule

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.

ii. Raw Material

The bank will list out the major raw materials required for the company

production programme. The bank will examine the continuity of supply of the raw

materials. The bank also examines the prices of the raw material to ascertain whether the

fluctuations in the past years have taken into account while projecting the cost of

production and profitability.

iii. Utilities and Essentials

The bank will examine the requirements of power, fuel, water, transport and the

arrangement made by the company.

31

Market and Demand Analysis

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.

ii. Selling price

The bank will examine the industry’s general price trend to see that the prices

were stable in the past and will continue to be same in the future.

iii. Prospectus for export

The bank has to comment on the prospectus for export. The bank should state

how the company would meet the export commitments. The bank should state whether

any subsidy/cash incentives will be available to company.

iv. Marketing organization

The appraiser has to give brief description of the company’s marketing

organization. If the company selling its products through distributors and selling agents

bank has to examine the term of arrangement.

Commercial Viability and Profitability

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.

32

Inter firm comparison

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.

Debt Service Coverage Ratio

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.

Break Even Analysis

Fixed + Semi Fixed Expenses Production valueBreak Even Sales =

Contribution

Fixed + Semi Fixed Expenses Capacity Utilisation 100Break Even Installed Capacity = Contribution

33

Fund Flow and Cash Flow Statement

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.

i. Change in Working Capital concept

It is derived from the need for availability of liquidity and need for the liquid

funds. That is current assets and current liability.

ii. Change in Financial Position

A promoter/banker concerned with funds not only for the working capital but for

the entire funding needs. Their concern is to adding fixed asset/repayment of long term loans

as per their pre-fixed repayment schedule. Movement of all the funds in the business has to

be considered.

The fund flow statement should be carefully examined and reasonableness of the

various assumptions underlying the project should be ascertained. On the long term side, it

should be ensure that fund outflow for essential expenditure on fixed asset, repayment

obligation, taxes and dividends are fully provided for that the cash generation will be adequate.

On the short term side, the projected increase in current liabilities/bank borrowings should be

matched by projected increase in the inventories/receivables.

Cash flow estimates

It is prepared to ensure that the unit will have necessary cash with it and it will not face

liquidity problem. It is necessary for the construction period also to ensure availability of cash

according to the requirement of the project.

Projected Balance Sheet

In the case of cost of production and profitability estimates and fund flow projection, the

projected balance sheet should be furnished by the company for the entire period. While

appraising the following points will be checked by the bank. The cost of the project, means of

financing, the profitability estimates and the fund flow projection.

34

Others (Brief Comment)

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.

ii. Credit Rating

The bank will do the overall assessment of the company and rate the company

according to the assessment.

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.

Supervision and Follow-up

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.

Scrutiny of progress chart

Analysis of annual financial results

Visit/Inspection, regulatory control

Discussion with management

35

Murali Industries Limited

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).

36

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.

Present proposal

The credit sanctioned by the bank as under:

Sl No Nature of FacilityLimit Sanctioned Rate of Interest

Existing Proposed Existing Proposed

1 Fund Based 150 13%

Banking Arrangements

The following Banks financed for the project.

Table No 4: Banks arrangements for Financing

Name of Banks Loan Amt Interest Rate %

Corporation Bank

State Bank of India

State Bank of Mysore

State Bank of Patiala

State Bank of Bikaner and Jaipur

Punjab National Bank

Dena Bank

Bank of Baroda

Allahabad Bank

State Bank of Travancare

150

300

90

150

90

300

50.84

300

150

130

8.76

17.54

5.26

8.76

5.26

17.54

2.92

17.54

8.76

7.66

37

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,

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

Audited

31/3/2008

Provisional

31/3/2009

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

38

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

Compliance with Group Credit Policy Guidelines

Table No 7: Compliance with Group Credit Policy

Parameters Banks Norms Actual Position

Entry Level per Borrower Exposure for FB and NFB

Facilities

200 cr 150 cr

Maximum per Borrower Exposure (corporate)547 cr 151.80

Exposure to Industry/Sector10% of NBC 2.6% of NBC

Current Ratio1.25 2.79

Current Ratio for Export Orient Units1.1 --

Debt/Equity Ratio2 2.81

DSCR1.5 1.66

TOL/TNW4 3.28

Promoters Contribution to Project cost25% 19.66%

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.

39

Summary of Financials

a. Financials

Table No 8: Financial Results of the company

Particulars 2007 2008 2009 2010

Net Sales 523.93 646.47 931.25 1688.69

% growth in net sales -- 23.39 44.04 81.36

Raw Material 371.22 457.59 555.72 764.17

RM consumed as % of COP 85.10 85.35 81.71 72.12

Cost of Sales 441.51 527.77 673.12 1059.03

Cost of Sales as % of Net Sales 84.27 81.56 72.29 62.71

Operating Profit 46.13 70.82 156.02 355.28

Operating Profit % 8.80 10.95 16.76 21.04

Other Income 1.13 0.61 0.82 --

PBT 47.26 71.43 156.84 355.28

PAT 41.1 55.63 138.61 312.57

Net Profit Margin % 7.84 8.61 14.89 18.51

Cash Profit 59.50 77.17 169.47 372.17

Retained Profit 41.1 55.63 138.61 312.57

Paid-up Equity capital 9.61 10.24 21.40 21.40

Tangible Net Worth 129.53 221.63 911.90 1228.38

TOL/TNW 2.42 3.28 2.04 2.14

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.

40

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

Name of the Product Production

2007

% Utilisation Production

2008

% Utilisation

Solvent Extraction Units 1253 98.66 1480 116.54

Duplex Paper Unit 26530 100.49 24757 93.78

News Print Unit 32647 123.66 32153 121.79

Writing and Printing Units 54475 110.05 42080 85.01

Power Generation 82970 58.2 88786 62.28

Pulp -- -- 18444 37.26

The capacity utilised by the company is satisfactory except in the pulp production unit.

41

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.

iv. Net Owned Funds

Table No 11: Net Owned Fund

Particulars 2007 2008

Net Worth 133.07 224.46

(-) Intangible asset 3.54 2.83

Tangible Net Worth 129.53 221.63

(-) Used for unrelated to Business (3.08)

Net Owned Funds 129.53 224.71

Total Funds Deployed 442.50 951.94

NOF/TFD % 29.27 23.61

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

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.

42

vi. Fund Flow Statement

The position of movement of funds is furnished as under.

Table No 12: Fund Flow Statement of the company

Particulars 2007 2008

Long Term Sources 301.77 548.21

Long Term Uses 188.62 472.52

Long Term Surplus/Deficit 133.15 75.69

Short Term Borrowings Excluding bank Borrowings 76.70 --

Short Term Uses 257.42 67.01

Short Term Surplus/Deficit -180.72 -67.01

Net Surplus/Deficit -67.57 8.68

Increase/Decrease in Bank Borrowings 67.57 -8.68

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.

vii. Liquidity Position

The position of current asset, adequacy of Net Working Capital and Current Ratio

discussed as under.

Table No 13: Liquidity position of the Existing Company

Particulars 2007 2008

Total Current Asset 247.94 287.53

Min required NWC 49.59 57.51

Actual NWC 113.15 188.87

Surplus/Deficit in WC 63.56 131.33

CR 1.78 2.79

Liquidity position of the company is controllable and satisfactory throughout with the

ratio showing above the Bank’s bench mark ratio of 1.25.43

viii. Debt Servicing Obligation

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.

Details of the Project

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.

44

ii. Power

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

45

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

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)

Project LocationUnsecured

Loan

Internal

Accruals

Private

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

46

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.

Project implementation schedule

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

of Gujarath in October 2010. The company is confident of finishing the project according to the

schedule.

Business Projections and DSCR

Project (On standalone basis)

Table No 18: Projected DSCR for the Project

Particulars 2011 2012 2013 2014 2015 2016 2017 2018

Net Sales 1634.63 2452.66 2458.35 2458.35 2458.35 2458.35 2458.35 2458.35

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

Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Total (a) 394.84 567.50 551.81 539.02 525.18 512.39 499.92 495.76

Installment Due -- 214.54 285.14 285.14 285.14 285.14 285.14 70.60

Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --

Total (b) 160.07 401.66 436.62 400.98 365.34 329.69 295.16 70.60

DSCR 2.47 1.41 1.26 1.34 1.44 1.55 1.69 7.02

Avg DSCR 1.66

47

Company as whole

Table No 19: Projected DSCR for the whole company

Particulars 2011 2012 2013 2014 2015 2016 2017 2018

Net Sales 3398.57 4267.28 4323.57 4344.25 4377.34 4392.88 4392.88 4392.88

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 1010.00 1011.82 1014.82 1006.75 993.37 993.37

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

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.

Sensitivity Analysis of DSCR

If the project’s sale decreased by 10% in that the average DSCR will be 0.89 which is

risky for the banks to lend. If there is increase in the expenditure by 10% then the DSCR will be

1.12. Even though the standard ratio is 1.5 the company is able to pay its debt with the ratio 1.

If the company sale decreased by 10% the average DSCR will go to 1.55 from the

existing 2.75 but it is more than the bank norms. And if there is increase in the operating

expenses by 10% the average will be 1.99 so it is good for the bank to lend. Even adverse

situation also the company can pay its debts.

48

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 2990.06 2997.00 2997.00 2997.00 2997.00 2997.00 2997.00

(-) Excise duty 358.17 537.40 538.65 538.65 538.65 538.65 538.65 538.65

Operating Income 1634.63 2452.66 2458.35 2458.35 2458.35 2458.35 2458.35 2458.35

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 1374.95 1384.89 1385.89 1386.87 1387.89 1388.99 1390.12

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.

49

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 5101.87 5175.44 5201.33 5244.57 5262.38 5262.38 5262.38

(-) Excise duty 639.39 834.59 851.87 857.08 866.93 869.50 869.50 869.50

Operating Income 3398.57 4267.28 4323.57 4344.25 4377.64 4392.88 4392.88 4392.88

Raw Material 1245.32 1464.23 1476.75 1483.92 1492.23 1499.67 1499.67 1499.67

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 2321.48 2347.44 2356.08 2365.17 2374.76 2374.76 2376.25

Selling & Admin 642.72 873.44 886.32 890.02 897.19 898.59 898.59 898.59

Op profit before Int 835.72 1072.36 1089.81 1098.15 1115.28 1119.53 1119.53 1118.04

Interest on WC 68.91 71.60 63.27 54.95 49.24 48.27 48.27 48.13

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 1026.71 1026.71 1069.91

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.

50

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

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.

51

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.

i. Demand Supply Gap

The cement industry witnessing high growth, in the last 2 years (2005-06 & 2006-07)

demand for cement has grown at a compounded annual growth rate of over 10%. CRISIL

research expects demand to grow at CAGR of 9% over the next 4 years, due to growth in the

end user segment. Going forward, CRISIL research expects a major thrust to cement demand

to come from Higher Infrastructure Investment.

ii. Cement and Cement Products

In the last 4 years the cement industry’s demand supply gap narrowed, leading to

higher operating rates of over 90%. In the next 2 - 3 years, CRISIL research expects nearly

70 – 80 million tonnes of cement capacities to come on stream and majority of them are

expected to bunch up in 2008-09 and 2009-10. Going forward this is likely to result in the

lowering of operating rates and easing of demand-supply gap. CRISIL research expects

prices to decrease from the fourth quarter of 2008-09 onwords, due to incremental capacity

addition that are expected.

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.

52

Input related risks

Lime stone, fuel (coal and lignite) and power are the main inputs in the manufactures of

cement. The industry is dependent on the Govt for the pricing and availability of these inputs,

which accounts for a significant portion of the total production cost.

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)

Name of the StateInstalled Capacity Production Demand

Karnataka 12.41 10.80 11.80

Gujarath 17.76 15.40 11.68

Rajastan 24.82 25.70 10.33

Demand-Supply position in India during 2007-08

(in million tonnes)

Particulars Demand Supply

North India 49.79 43.61

West India 40.21 48.29

East India 25.33 26.55

South India 48.67 55.80

Total 164.00 174.25

53

However the average per capita consumption of cement in India has increased from the

level of 97 Kgs during 2001-02 to 148 Kgs during 2007-08.

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.

ii. Infrastructure Sector

In recent years the investment in infrastructure increasing, this sector accounts for 20-

22% of the cement consumption, is expected to double from the level of Rs 4.7 trillion during

the period from 2002-07 to Rs 9.2 trillion during the period from 2007-12, this is expected to

push up cement consumption.

iii. Industrial Projects

Due to capacity expansions undertaken by industrial such as steel, cement, paper and

petrochemicals, investment in industrial projects in India are expected to surge nearly three

fold form Rs 2867 billion during the period from 2002-07 to Rs 7841 billion between 2007-

12. This is also expected to increase the demand for cement.

iv. Commercial construction

It is estimated that the commercial construction (Retail, Office space, Hotels,

Hospitals, Multiplexes, Schools etc) is estimated to take place at slower pace in the forth

coming year when compare to previous years.

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.

54

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.

ii. Selling and Marketing arrangements

With the Government of India giving thrust in the infrastructure development in the

country, the demand for the cement is ever increasing; quality cement at affordable prices as

proposed by the company can be easily sold in the market with a suitable brand name.

The promoter/company has already earned good name for their brand for their soya

meal and soya refined oil in central India. The company may encash this strength for

developing good brand for cement also. Thus the market position of the company may be

considered favorable for the company.

55

Marketing Position and Competitiveness

Table No 23: Company Market Position

(Rs in Crores)

Name of the Company ROCEOperating profit

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.

56

Risk Analysis

Risk Factor Mitigation

Marketing RiskCompany proposes to use its existing as well as

Brand recognition to sell its products.

Employee Risk

The states where the cement plants are being set

up has adequate skilled and unskilled human

resources.

Off take risk/ Market Risk

According to CRISIL research the industry is

expected to add capacities equivalent to 50 MTPA

in the next 2-3 years. The company is confident of

leveraging on present brand recognition as well as

contacts to secure firm clients for the product.

Power availability risk

Company plans to set up captive power plant of

50 MW at each of the 3 locations, which will

supplement the power requirement.

Availability and Transportation of

Lime stone

The plants are being located adjacent to the Lime

Stone mines (major Raw Material), hence there

will be logistic advantage.

Cost Over run

Adequate contingency provision of around 10%

has been provided in the project cost. This will be

useful for to pay extra cost

57

Construction Risk/ Time over run

risk

Company has proposed to hire reputed engineering

consultants and contractors for the execution of the

project. More over it is also proposed to have a

well chosen team of experienced persons and in

house task force to co-ordinate the implementation

of the project

Operating Risk

Company is already into cement business by

setting up 2.14 MTPA cement plant along with a

30 MW CPP at Chandrapur, which is likely to be

commenced in this year, in the schedule time.

Management Risk

The promoters are well experienced businessmen,

who have shown commitment to the company and

have successfully implemented many projects in

the past. It is also expected that they will show the

same commitments and zeal to this projects as

well. Suitable stipulation in the sanction term not

to sell stake of promoter share mitigate this risk.

Funding Risk

Lenders are stipulating for 19.66% upfront equity

from the promoters. Considering the past record of

the promoters, no difficulty is involved in the tie

up of debt funds for the project. Also the internal

accruals of the company are considered adequate

to part finance the project.

Environmental RiskCompany does not face any problem in obtaining

the clearance.

Ratio Analysis58

a. Net Profit Ratio

This ratio shows the relationship between net profit and net sales which indicates

efficiency of management.

Table No 24: Net Profit Ratio

Chart No 9: Net Profit Ratio

59

Year PAT Sales NP Ratio %

2011 141.18 1634.63 8.63

2012 255.95 2452.66 10.43

2013 275.90 2458.35 11.22

2014 298.75 2458.35 12.15

2015 320.55 2458.35 13.03

2016 343.41 2458.35 13.96

2017 365.47 2458.35 14.66

2018 371.33 2458.35 15.10

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

Chart No 10: Debt/Equity Ratio

60

Year Debt Equity DE Ratio

2011 1781.12 855.42 2.08

2012 1654.44 855.42 1.93

2013 1464.01 855.42 1.71

2014 1254.12 855.42 1.46

2015 970.01 855.42 1.13

2016 679.85 855.42 0.79

2017 384.60 855.42 0.44

2018 299.53 855.42 0.35

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

Chart No 11: Current Ratio

61

Year Current Assets Current Liabilities Current Ratio

2011 753.24 575.32 1.68

2012 1255.21 609.05 2.06

2013 1465.61 609.55 2.4

2014 1678.95 609.59 2.75

2015 1839.87 609.62 3.01

2016 1946.29 538.37 3.61

2017 1927.13 324.56 5.93

2018 2337.88 324.60 7.2

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.

d. Debt Service Coverage Ratio

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.

Table No 27: Debt Service Coverage Ratio

62

Year Cash Accruals Debt DSCR

2011 234.77 160.07 2.47

2012 380.38 401.66 1.41

2013 400.33 436.62 1.26

2014 423.18 400.98 1.34

2015 444.98 365.34 1.44

2016 467.84 329.69 1.55

2017 489.90 295.16 1.69

2018 495.76 70.60 7.02

Chart No 12: Debt Service Coverage Ratio

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.

e. Interest Coverage Ratio:

Table No 28: Interest Coverage Ratio

63

Year PBIT Interest ICR

2011 396.03 183.52 2.15

2012 609.72 221.98 2.74

2013 604.37 186.40 3.24

2014 603.37 150.77 4.00

2015 602.39 115.13 5.23

2016 601.37 79.49 7.56

2017 600.27 44.96 13.35

2018 599.14 34.95 17.14

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.

64

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.

An analysis of a region economy provides a general framework within which the

assessment of any project is made. This analysis indicates whether the project is in a potential

environment, which enjoys priority for economic development of the region/state concerned.

This exercise itself usually involves the investigation of six different aspects; Economic,

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.

65

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

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.

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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

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.

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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.

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.

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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

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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