Ayush Group of Industries Read the case carefully and answer the following questions:

(a) Estimate the cost of the project and highlight the financing structure.

(b) Prepare the projected cash flows relating to long-term funds of the RBL for five years. Assume the

terminal value of fixed assets, excepting land, to be 90% of the book value at the end of 5th year.

(c) As a project analyst, comment on the important aspects of the project.

Ayush Group of industries is planning to set up a manufacturing unit of ball bearings in Jiljil, Gujarat.

The capacity of the factory would be 5,000,000 units per annum. Mr. Ayush director of Ayush Group

has been entrusted the responsibility of bringing that factory into operation. The primary business area

of Ayush Group is construction. The construction company was incorporated as Ayush Housing and

Construction Ltd. (a public limited company) on October 1983. Real estate development continues to

be the main business of AHCL, with focus on high and medium range residential and commercial

property. It concentrates on the area in and around Delhi, Bangalore and Mumbai. The construction

business was always with a special focus on Noida, Ghaziabad, Thane etc.

In October 2002 the company has launched new project called Ganga Enclave (Dehradun) in Joint

Venture with Dehradun Development Authority. The residential project at Faridabad involving

construction of about 2 million Sq.Ft of area is likely to be launched in early of 2004. The expected

turnover is approximately Rs.45 crores in this project for the first six months. In 1996, the company

has been awarded three prestigious projects. The Razala Bridge in Karnataka at a contract value of Rs.

300 million, the Rock Fill Dam in Doyang, Nagaland at cost of Rs. 1469 million and site levelling work

at Mangalore, Karnataka awarded by Kudremukh Iron and Steel Company at a cost of Rs.120 million.

These projects were completed as per the scheduled time.

Apart from these the company executed many industrial civil construction projects for the textile,

pharmaceutical, heavy engineering, chemical industries, commercial complexes, multi-storied

buildings, effluent treatment systems, etc, which involve civil and structural work, sanitary and

plumbing work, etc. The company made its entry into the overseas construction market in 1985 by

constructing a fibre-board factory at Abu Suhair. It was one of the most prestigious civil construction

contracts awarded by the Iraqi government to an Indian company. AHCL was again the first Indian

company to have secured a turnkey project of Hockil Dam Construction in Sudan in 1987. The

company has been awarded a service contract for the construction of sewerage system of Abu Aisha in

Libya equivalent to Rs.1000 millions and for construction of Civil Works of Sugar Shafts & Power

House Complex in Haryana, amount equivalent to Rs.1984 million and the work has already been

commenced. It has received various awards from the Engineering Export Promotion Council. Currently,

it is one among the very few Indian companies to have secured sizeable construction contracts

overseas. The new company is promoted by Ayush Group in a joint venture with Eastern Asian Bearings

Ltd. It entered into a technical collaboration with VEB Kombinat Waelzlager Und Normteile (an

amalgamation of bearing companies in Germany which markets bearings under the brand name DKF).

Under the agreement, the collaborators were to supply all technical know-how and provide designs,

drawings, etc to manufacture ball bearings.

The company is expecting that the products find applications in motors, handpumps, idlers, machinery

and the automobile industry. The company's major customers would be HMT, Kirloskar Bros, Enfield,

Mahindra & Mahindra Tractors, Escorts, NLC, Bhilai Steel Plant, Crompton Greaves, Nalco, GAIL, Ashok

Leyland, Voltas, Tata Motors (Previously TELCO), TISCO, Hindustan Sheet Metals, etc. The new

company, Ayush Bearings Limited (ABL), was formed on May 14, 2003 as a joint venture company. The

Chairman cum Managing Director of the company is Mr. Ayush. The nominee from the Eastern Asia

Bearings is Mr. Ram Jajodia. Two more nominees are supposed to join from the Eastern Asia Bearings.

The project site has been finalized at Rahakana, Chhattishgarh. The site is 36 kilometers from

Bilaspur. Three more manufacturing units are coming up in that locality – These are production unit of

electric brakes from Kapoor group, Bulk Drug manufacturing company from Shameera

Pharmaceuticals and the largest potassium based Fertilizer factory of German outfit Duntensdamer.

The basic cost of the land is Rs. 24 lakhs. The cost of registration is 12.5%. The leveling and

development work in the site is already over. It has cost the company around Rs. 15 lakhs. More or

less 500 meters of approach road is constructed by the company at a cost of Rs. 5 lakhs. Internal

roads of the factory are not yet done. It is expected that by the end of October 2003 this work could be

completed with a cost of Rs. 8 lakhs. The boundary wall of 8 feet height is already constructed at a

cost of Rs. 50 thousands. The cost of buildings and civil works cover the following:

Building for main plant at a cost of Rs. 55 lakhs

Building for water treatment plant at a cost of Rs. 20 lakhs

Building for Hydraulic System at a cost of Rs. 5 lakhs

Building for Pneumatic System at a cost of Rs. 3 lakhs

Building for godowns at a cost of Rs. 8 lakhs.

Building for administrative office at a cost of Rs. 5 lakhs

Building for Time office at a cost of Rs. 1 lakh.

Building for canteen at a cost of Rs. 2 lakhs.

Garages at a cost of Rs. 1 lakh

The basic process equipments are being planned to be procured from Germany. The CNC machine

would be supplied by a Swedish company. The total FOB value of these equipments is expected to be

in the range of Rs.12 crores. The support equipments like water supplying system, material handling

system, process automation, plant illumination, compressed air system, plant electrics and hydraulic

system etc. are being supplied mostly by Indian vendors. Water supply system is supplied by Mather &

Platt India Ltd. The cost of total supply would be Rs.3.5 lakhs. The total system covers the supply of

four pump-motor sets along with separated control system. The material handling system proposed

would comprise of two EOT cranes and three mobile electric cars. Apart from these a couple of

wheelbarrows are also planned. EOT cranes are supplied from HEC, Ranchi at a cost of Rs.30 lakhs.

Electric cars are imported from Mitsubishi, Japan for an FOB cost of Rs.24 lakhs. Larsen and Toubro

have been roped in for the supply of process automation. The whole process is divided into four zones

and the controls of each of these zones are isolated. The supervisor level of control is done by a higher

level computer monitoring the interfaces of these zonal control systems. The cost of the whole system

would be Rs.25 lakhs. Plant lighting system is being procured from Philips India. The whole supply

includes: Bay lighting with 500/1000 watt HPSV lamps, Room lighting with 2x40 watt tube lights, stair

lights with 100 watt sodium lamps in flowering brackets etc. The whole package would cost the

company Rs.5 lakhs. The compressed air system would be supplied by Crompton Greaves India. The

system consists of two compressors with a common drying unit and a comprehensive cooling water

supply system. The supply also includes its own control unit in electrical panels. All of these put

together would charge the company around Rs.7 lakhs. The company is planning to get the plant

electrics requirements from Siemens India. The motor control centers and power control centers are

the primary elements in this package. The company has to commit an outlay of Rs.3 lakhs for this

system. The hydraulic system would cost the company around Rs.6 lakhs. The cost of pipe lines for

water supply, compressed air supply and hydraulic lines would be Rs.2 lakhs. The exhaustive electrical

system would demand a large usage of cables of different types. The company is planning to get the

cables from Hindustan Cables at a cost of Rs.3 lakhs.

The customs duty applicable on imported capital equipment is 35% of basic cost. The average rate of

excise for indigenous machines is 16%. The average cost of octroi, freight, transportation, loading,

unloading and forwarding charges is 4%. The erection charges on an average come to 10% of the basic

cost of the plant and machinery. Under miscellaneous fixed assets the office equipments, furniture

and vehicles worth Rs.50 lakhs have to be purchased.

Legal charges for drafting agreements for memorandum and articles of association would cost the

company Rs.50,000. The cost of market survey was Rs.200,000. Reily and Associates had prepared

the feasibility report of the project. Total expenditure for the preparation of feasibility report was

Rs.80,000. Other expenses expected to be incurred by the company till the date of commencement of

commercial production are as follows:

Travelling expenses to the of Rs.125,000

Postage, Telegrams and Telephone expenses to the tune of Rs.50,000

Printing and Stationery expenses to the tune of Rs.70,000

Advertisement expenses to the tune of Rs.10,00,000

Insurance premium during construction to the tune of Rs.3,00,000

The cost of electricity is Rs.5.90 per KWH. The slabs for power requirement are as follows:

Capacity Utilization Upto 60% 60% to 85% 85% to 95% Above 95%

Daily Power

Requirement (KWH)

1500 1323 1100 1000

The cost of consumables per unit of final product is Rs.4.

Project Execution Schedule

Activity Start Finish

Land Development July15, 2003 August 10, 2003

Civil Work August 1, 2003 September 10, 2003

Equipment Erection August 5, 2003 December 15, 2003

Equipment Testing December 2, 2003 December 30, 2003

Integrated Trial January 20, 2004 February 20, 2004

Trial Production March 1, 2004 March 20, 2004

Commercial Production April 1, 2004

Additional Information

1. The capacity utilization is expected to be 80%, 90% and 100% in the first, second and third year

respectively. Thereafter the capacity utilization of 100% is expected to be maintained.

2. In order to provide for escalation in cost, contingencies are to be provided at 10% on fixed assets

yet to be created, excluding land.

3. IDBI Bank has agreed to extend a term loan of Rs.10 crore to ABL. The implicit rate of interest is

14% per annum. The principal amount of the loan is to be repaid in 5 years beginning from the

end of first year in equal annual instalments.

4. The promoter’s contribution is Rs.8 crores.

5. Project cost excess of promoter’s contribution and term loan is to be raised through public issue of

equity capital. Cost related to issue would be 5% of the size of the public issue.

6. The average expected sales price per unit of ball bearings is Rs.85.

7. The cost of repairs and maintenance in the first year of commercial production is 2% of the cost of

plant and machineries. An increase of 5% is to be provided every year.

8. The depreciation rates applicable are as follows:

Buildings Machineries and Other Assets

Company Law Purposes 3.34% 10.00%

Income Tax Purposes 10.00% 10.00%

9. Salaries and Wages are estimated to be Rs.11.25 lakhs per month in the first year of commercial

production. An annual increase of 5% is expected in the coming years.

10. Administrative overheads are estimated to be Rs.60 lakhs in the first year of commercial

production with an increase of 4% every year.

11. Selling overhead is calculated at the rate of 3% on the sales value.

12. The cost of raw material is 50% of the sales.

13. The following periodicities have been estimated for the computation of working capital:

(Period in months)

Particulars Periodicity

Raw Materials 1.1

Consumables 2.5

Finished Goods 0.5

Debtors 1.2

Expenses 1.0

14. Axis Bank has agreed to finance 75% of the working capital requirement from 2nd year onwards.

Rate of interest on the bank borrowings for working capital is 12%

15. Working capital requirement during first year should be included as margin money in the project

cost.

16. Average asset beta of the companies engaged in the manufacturing of ball bearings is 0.80.

17. 364-day treasury bills return 5.2% in the market.

18. Premium on the market portfolio is 6%.

19. Tax rate applicable to the company is 35%.

20. The company has decided to distribute 20% of the profit after tax as dividend.