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Pre-Feasibility Study

FABRIC WEAVING UNIT


(Auto Looms)

Small and Medium Enterprise Development Authority


Government of Pakistan
www.smeda.org.pk
HEAD OFFICE
Waheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA Lahore
Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756
helpdesk@smeda.org.pk

REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE


PUNJAB SINDH NWFP BALOCHISTAN
Waheed Trade Complex,
1st Floor, 36-Commercial Zone, 5TH Floor, Bahria Ground Floor Bungalow No. 15-A
Phase III, Sector XX, Complex II, M.T. Khan Road, State Life Building Chaman Housing Scheme
Khayaban-e-Iqbal, DHA Lahore. Karachi. The Mall, Peshawar. Airport Road, Quetta.
Tel: (042) 111-111-456 Tel: (021) 111-111-456 Tel: (091) 9213046-47 Tel: (081) 831623, 831702
Fax: (042) 5896619, 5899756 Fax: (021) 5610572 Fax: (091) 286908 Fax: (081) 831922
helpdesk@smeda.org.pk helpdesk-khi@smeda.org.pk helpdesk-pew@smeda.org.pk helpdesk-qta@smeda.org.pk

June, 2002
Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject
matter and provide a general idea and information on the said area. All the material
included in this document is based on data/information gathered from various
sources and is based on certain assumptions. Although, due care and diligence has
been taken to compile this document, the contained information may vary due to any
change in any of the concerned factors, and the actual results may differ substantially
from the presented information. SMEDA does not assume any liability for any
financial or other loss resulting from this memorandum in consequence of
undertaking this activity. Therefore, the content of this memorandum should not be
relied upon for making any decision, investment or otherwise. The prospective user
of this memorandum is encouraged to carry out his/her own due diligence and gather
any information he/she considers necessary for making an informed decision.
The content of the information memorandum does not bind SMEDA in any legal or
other form.

DOCUMENT CONTROL
Document No. PREF-39
Revision 1
Prepared by SMEDA-Punjab
Approved by GM Punjab
Issue Date June 15, 2002
Issued by Library Officer

PREF-39/June, 2002/1
Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

1 INTRODUCTION
1.1 Textile Sector of Pakistan
Pakistan is amongst the leading producers of cotton in the world. To make full use of
its abundant resources, the development of Textile Industry has been a priority area
towards industrialization and export growth. Textile industry is the bulwark of
Pakistan's economy that contributes more than 60% to the total export earnings, 40%
to employment, 33% to stock market capitalization and 8.5% to GDP of the country.
Weaving sector is one of the most important textile sub-sectors. The exports of
woven fabrics and other woven made ups comprise a major portion of textile exports
from Pakistan. Out of total world fabric trade of $18 billion, Pakistan's share was
about $1.10 billion in the year 1999-20001, which highlights the key position of
Pakistan in the world textile trade. Other than direct fabric exports, Pakistan has also
emerged as a leading exporter of woven made-ups with a value of more than $950
million in the year 1999-20002.

1.2 Project Brief


This is a project of fabric weaving and is based on Auto Loom technology. The
fabric quality produced on these looms is meant both for the local industry and for
export purpose. This export can either be in the form of fabric or in the form of
woven made-ups and hence will contribute in the earning of foreign exchange for the
country.
The unit size as of 36 looms proves to be the best possible economically viable unit
size as of this number of looms utilizes manpower most optimally. Therefore, a
generic feasibility study has been prepared while taking 36 number of looms as a
base figure. The complete project details of 36 wider width Auto Looms have been
covered in this section.

1.3 Opportunity Rationale


Weaving sector is comprised of two types of setups. One is the organized mill sector
and the other is the unorganized non-mill sector. The non-mill-weaving sector,
which is also called the Auto/Power Loom sector, supplies the majority of the fabric
in the country. In 1999, total fabric production in the country was 4.4 billion square
meters and about 65% of this production came from the Auto Loom sector,
amounting to 2.8 billion square meters.
Pakistan exported about 1.6 billion square meters of fabric in the year 1999-2000.
Estimated share of Power Looms in fabric exports is about 60%, with a value of
more than $500 million. Besides exporting, this sector also supplies fabric to
manufacturers and exporters of the garments/made-ups in the domestic market.

1
Source: Federal Bureau of Statistics (FBS)
2
Source: Federal Bureau of Statistics (FBS)
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The Power Loom sector employees low level of technology and hence has low
productivity and quality. The fabric manufactured on Power Looms is of inferior
quality and is unable to fetch high unit value in the international markets. Also, due
to technical limitations (i.e. shorter width), it does not produce the specifications,
which are required in the international market.
The diversification of the garments/made-ups sector is not possible without
modernization of the non-mill-weaving sector. Installation of the modern looms is
therefore, necessary to upgrade the product quality, reduce production cost,
strengthen the competitiveness and stabilize the operations so as to be more
profitable.

1.3.1 High Growth Rate in the Export of Made-Ups


Export of made-ups from Pakistan, basically comprises of bed sheets and pillow
covers. The basic material used in these bed sheets/pillow covers is printed fabric
and the primary source of supply of this fabric in raw form is the Auto Loom sector.

Table 1-1 Made-ups Exports from Pakistan (Value: Rupees in Thousands)

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

14,842,141 19,898,661 25,428,815 30,926,090 40,433,810 48,297,372


Source: Federal Bureau of Statistics
Above table shows the export value of made-ups over the period 1994-2000. A
tremendous growth rate can be seen in the export of made-ups. The average growth
rate during this period is approximately 27% per year.
As the exports of textile made-ups directly relate to the fabric production of Auto
Loom sector, we can forecast that high growth rate in the exports is a favorable
market factor for this sector.
Through technology up-gradation of this sector, the quality of fabric will improve
and it will allow for production of wider width fabric for made-ups in the export
markets.

1.3.2 Quotas & Import Tariffs


According to WTO agreement, quotas are being phased out and import tariffs are
being reduced in the major importing markets of textile items from Pakistan. By the
year 2005, all quota restrictions will be eliminated and tariffs will be reduced to
minimum limits.
The European Union has already increased the quota limits for Pakistan and reduced
the import duties on textile products from Pakistan. This has shown a very positive
impact on the textile exports of Pakistan, especially the textile fabrics and made-ups.
This changing scenario of world trade is going to have a very positive impact on the
exports of textile products from Pakistan, especially fabrics and made-ups.

PREF-39/June, 2002/1
Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

Keeping in view the export growth rates of made-ups from Pakistan during the last
few years, post quota years will be having a multiplier effect on the made-ups export
from Pakistan. The Auto Loom sector is the major source of raw material of grey
fabric to be converted into printed fabric and ultimately into bed sheets and pillow
covers. It is expected that demand will increase for this sector in the coming days. If
this sector is equipped with better technology and produce better quality products, it
will certainly fetch better unit values and more value and quantity of exports.

1.3.3 Raw Material Mechanics


From mid 1990's and onward, the spinning industry of Pakistan has been facing hard
times, mainly because of bad cotton crops during this time period. This raised the
yarn prices in the local market and adversely affected the performance of the main
consumer of that raw material i.e. Auto Loom sector.
However, since the year 2000 onward, the spinning industry in the country has got a
positive shift. Most of the closed spinning units are functional again and heavy
investment has been made for BMR of the spinning industry during the year 2000-
2001.
Because of this, it is forecasted that now the supply of yarn in the local market will
be stable and the variations in the yarn prices will be limited.

1.4 Proposed Capacity


The proposed project size is 36 new wider width Auto Looms

1.5 Total Project Cost


The total cost of the project is about Rs. 10 million

2 INDUSTRY STRUCTURE
2.1 Current Structure of industry
Weaving sector of Pakistan is comprised of both the organized and the unorganized
sectors. The organized sector3 has shuttle-less and Air-Jet looms. Shuttle-less looms
are either the Projectile or Rapier type. The un-organized sector called "Power
Loom" sector has about 225,000 looms. Major known Power Loom clusters are in
Faisalabad, Gujranwala, Gujrat, Multan, Karachi, Kasur and Jhang. However,
Faisalabad is the biggest cluster in Pakistan, having about 125,000 Power Looms.
Power Loom sector in Pakistan is highly fragmented and is based on cottage/small
scale and unorganized manufacturing clusters. Out of 225,000 total looms in this
sector, 90% consists of basic Power Looms units and 10% are equipped with an auto
cop changer, which are called Auto Looms.

3
According to an estimate by Textile Commissioner's Organization, there are 10,200 Projectile,
1,307 Rapier, 600 Water Jet and 4,033 Air Jet looms in the organized mill sector.
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There are a substantial number of units in this sector, which have 50 to 100 looms in
a single premise as one unit.
Historically, Power Looms industry started on a cottage scale in the country. Even in
present days, major chunk of the industry is based on small home-based units.
Mostly, the owners and their family members themselves are managing these units.
However, eventually with the increase in the number of looms, these families have
been multiplying the number of their units and looms. Under the existing set-up,
same family can own a multiple of units but they keep the size of one unit as low as
maximum of eight looms per unit. In this way, they try to get the benefit of tax and
avoid formal documentation that may be required by different Government agencies.
There are two representative Associations of this sector. "Pakistan Small Units
Power Looms Association" represents those units having up to eight looms and "All
Pakistan Cotton Power Looms Association" represents those units having more than
eight looms. Different clusters have their independent Associations as well.
Since the last 5 to 10 years, the numbers of independent loom units with 24 looms
(or above) have been increasing. These units are comparatively more structured and
have formal set-ups as compared to cottage units. It has been observed that a
substantial number of units with 100 looms or above do exist in the main clusters as
well.
It has also been observed that traditionally, there is no concept of formal bank
financing in this sector to establish new projects or to expand an existing one. Most
of the projects are based on 100% self-financing. Generally, most of the people own
the land and building themselves and there are very few units, which are on rental
premises.
There are two types of systems on which Auto Looms industry is operating. The
units, which are comparatively structured and have a high number of looms, have
good financial strength. These units procure their raw material with their own
investment, go for their own production and earn good margins on the sale of fabric
in the local market or by exporting it in the form of fabric or made-ups.
The other system operates on "conversion" basis. These units don't have the financial
strength to procure raw material for themselves. The customers provide the main raw
material that is yarn and these manufacturing units just take the conversion charges
for converting yarn into fabric. In this case, the profit margins are limited.

2.2 Existing Technology & Industry Trends


The technology of Power Loom dates back to late eighteenth century. Most of the
Power Looms installed are of shorter width (less than 76"), 10 to 15 years old (or
even more) in poor physical condition.
The quality of cloth woven on these looms carries many inherent fabric faults that
are normally not acceptable by quality conscious customers, especially in the export
markets. The present production of existing looms and quality of fabric is catering
mostly to the lower end of the export markets that is low quality, low price and
hence is unable to fetch good unit prices.
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Current split of the Power Looms industry is as follows:


a). 60% Power Looms are more than 10 years old with widths 44" - 72"
b). 20% Power Looms are 5 to 10 years old with widths 72" - 120"
c). 20% Power Looms are 1 to 5 years old with widths 72" - 120"
For the past decade or so, the trend is shifting from shorter/medium width Power
Looms (47" - 76") to wider width Auto and Shuttle-less looms (105" - 160"). The
fabric manufactured on the shorter width looms mostly caters to the local market
demand while the wider width looms take care of the quality conscious export
market of made-ups. Subsequently, the yarn requirement for these two looms also
differs owing to the difference in the expected quality of output. The quality of yarn
that is used for fabric production for export purposes is better so that the fabric has
fewer faults.
Derived by the demand for export markets, awareness is already increasing to
replace the existing shorter width power looms with wider width auto or shuttle-less
looms.

3 MACHINERY
3.1 Machinery Details
Following is the list of machinery and other equipment, required for a new unit of 36
wider width Auto Looms. It is recommended to install a humidifier plant in the
premises because it keeps the humidity level in the manufacturing area high, which
helps in reducing breakage of yarn. Folding machine helps in folding the cloth more
efficiently.

Table 3-1 Machinery & Equipment List


Machine Description No. Cost/Machine (Rs.) Total Cost
(Rs.)
Auto Loom (115" Width) 36 125,000 4,500,000
Humidifier Plant 1 150,000 150,000
Winder 2 15,000 30,000
Folding Machine 1 80,000 80,000
Transformer (28 KW) 1 165,000 165,000
Electric Wire 100 Meter 36,000
Total 4,961,000
*All prices are inclusive of installation costs.

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4 MANPOWER REQUIREMENTS
4.1 Human Resource Requirements
For an Auto Loom unit of 36 looms, following manpower is required:

Table 4-1 Human Resource Requirements


Title Requirement Salary/Month Salary/Annum
Chief Executive 1 30,000 360,000
Assistant Master 1 4,000 48,000
Weaver 18 3,500 756,000
Cloth inspector 3 3,000 108,000
Cloth folder 1 2,500 30,000
Foreman 1 8,000 96,000
Fitter / helper 3 5,500 198,000
Electrician 1 3,500 42,000
Accounts officer 1 5,000 60,000
Store In charge 1 3,000 36,000
Security guards 2 3,000 72,000
Miscellaneous staff 1 1,500 18,000
Total 34 1,824,000

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5 LAND & BUILDING


5.1 Land & Building
For a unit of 36 Auto Looms, the approximate land required would be 9,200 square
feet. The split of different sections and accordingly, covered area requirements are as
follows:

Table 5-1 Covered Area Requirement


Description Required Area (Sq. Ft)
Production Shed (183 sq. ft/Loom) 6,600
Inspection Room 350
Total Storage (yarn, fabric & spares) 250
Total Factory Area (sq. ft.) 7,200

Pavement/driveway 700
Grounds 700
Management Building 600
Total area required (sq. ft.) 9,200

Table 5-2 Cost of Land and Construction Cost


Description Cost (Rs./Sq. Ft.) Total Cost (Rs.)
Approx. Land price / kanal (in Faisalabad) @ Rs.
700,000/Kanal
Approx. Land Cost (@ Rs.130/Sq. Ft) 1,196,000
Construction Cost
Factory Area (6,600 Sq. Ft.) 250 1,650,000
Inspection Room (350 Sq. Ft.) 250 87,500
Store (250 Sq. Ft.) 250 62,500
Pavement/Driveway (700 Sq. Ft.) 100 70,000
Grounds (700 Sq. Ft.) 25 17,500
Management Building (600 Sq. Ft.) 500 300,000
Total Construction Cost 2,187,500
Total Estimated Cost of Land and Building 3,383,500

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Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

6 PROJECT ECONOMICS

Table 6-1 Project Cost/Capital Requirements


Fixed Capital Requirement Total Cost Rs.
Land 1,196,000
Building/Infrastructure 2,187,500
Machinery & Equipment 4,961,000
Furniture & Fixture 34,000
Office Vehicles 450,000
Pre-operating Costs 172,000
Total Fixed Capital Cost 9,000,500

Working Capital
Equipment Spare Part Inventory 69,000
Raw Material Inventory 793,000
Up front Insurance Payment 14,000
Cash 500,000
Total Working Capital 1,376,000

Total Investment in the Project (Rs.) 10,376,500

Table 6-2 Financing plan


Description
Equity 50%
Debt 50%
Interest Rate (per annum) 11%
Total Debt Tenure (years) 7
No. of installments (per annum) 12
The above mentioned financing plan is based on the assumption that LMM scheme
will be applicable on these projects with an interest rate of 11% per annum.

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Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

Table 6-3 Project Returns


Internal Rate of Return
Equity 32%
Project 23%
Pay back period (Years)
Equity 4.11 Years
Project 4.20 Years

Ratios Year 1 Year 2 Year 3


Gross profit margin 23.75% 21.10% 21.57%
Net profit margin 7.28% 5.81% 6.12%
ROI 17.07% 14.03% 15.43%
ROE 32.65% 25.28% 26.27%
Current ratio 4.01 4.52 4.82
Quick ratio 2.96 3.48 3.79
Times interest earned 7.46 6.78 7.98
Debt service coverage ratio 4.19 3.47 3.63

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Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

7 FINANCIAL ANALYSIS
7.1 Projected Income Statement
Statement Summaries SMEDA
Income Statement

Rs. in thousands
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Revenue 27,824 28,381 28,948 29,527 30,118 30,720 31,335 31,961 32,601 33,253
Cost of goods sold 21,424 21,716 22,017 22,326 22,646 22,976 23,317 23,670 24,036 24,416
Gross Profit 6,400 6,665 6,932 7,201 7,472 7,744 8,018 8,291 8,565 8,837

General administration & selling expenses


Administration expense 770 793 816 841 866 892 919 947 975 1,004
Utilities expense 949 1,015 1,086 1,162 1,243 1,330 1,423 1,523 1,630 1,744
Travelling & Comm. expense (phone 23 24 24 25 26 27 27 28 29 30
Office vehicles running expense 14 14 17 20 27 37 56 90 154 284
Office expenses (stationary, etc.) 8 8 8 8 9 9 9 9 10 10
Promotional expense 28 28 29 30 30 31 31 32 33 33
Insurance expense 14 12 11 9 8 7 5 4 3 1
Professional fees (legal, audit, etc.) 28 28 29 30 30 31 31 32 33 33
Depreciation expense 654 654 654 654 654 654 654 654 654 654
Amortization expense 17 17 17 17 17 17 17 17 17 17
Subtotal 2,503 2,594 2,691 2,796 2,910 3,035 3,174 3,336 3,537 3,811
Operating Income 3,897 4,071 4,240 4,405 4,562 4,710 4,843 4,955 5,028 5,026

Earnings Before Interest & Taxes 3,897 4,071 4,240 4,405 4,562 4,710 4,843 4,955 5,028 5,026

Interest expense 546 486 418 343 259 165 61 - - -


Earnings Before Tax 3,351 3,585 3,822 4,062 4,303 4,544 4,782 4,955 5,028 5,026

Tax 1,033 1,115 1,198 1,282 1,366 1,450 1,534 1,594 1,620 1,619
NET PROFIT/(LOSS) AFTER TAX 2,318 2,470 2,624 2,780 2,937 3,094 3,249 3,361 3,408 3,407

Balance brought forward 2,318 4,789 7,413 10,193 13,130 16,224 19,473 22,833 26,241
Total profit available for appropriation 2,318 4,789 7,413 10,193 13,130 16,224 19,473 22,833 26,241 29,648
Balance carried forward 2,318 4,789 7,413 10,193 13,130 16,224 19,473 22,833 26,241 29,648

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7.2 Projected Balance Sheet


Statement Summaries SMEDA
Balance Sheet
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Assets
Current assets
Cash & Bank 500 1,373 3,487 5,660 7,894 10,180 12,469 14,789 18,212 21,675 26,215
Accounts receivable - 1,143 1,155 1,178 1,202 1,226 1,250 1,275 1,301 1,327 1,353
Finished goods inventory - 931 944 957 971 985 999 1,014 1,029 1,045 1,062
Equipment spare part inventory 69 73 78 82 87 93 98 104 110 117 -
Raw material inventory 802 818 834 851 868 886 903 922 940 959 -
Pre-paid insurance 14 12 11 9 8 7 5 4 3 1 -
Total Current Assets 1,384 4,352 6,509 8,739 11,030 13,375 15,726 18,108 21,595 25,124 28,630

Fixed assets
Land 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200
Building/Infrastructure 2,194 2,084 1,974 1,865 1,755 1,645 1,536 1,426 1,316 1,207 1,097
Machinery & equipment 4,961 4,465 3,969 3,473 2,977 2,481 1,984 1,488 992 496 -
Furniture & fixtures 34 31 27 24 20 17 14 10 7 3 -
Office vehicles 450 405 360 315 270 225 180 135 90 45 -
Total Fixed Assets 8,839 8,185 7,531 6,877 6,222 5,568 4,914 4,260 3,605 2,951 2,297

Intangible assets
Pre-operation costs 172 154 137 120 103 86 69 51 34 17 0
Total Intangible Assets 172 154 137 120 103 86 69 51 34 17 0
TOTAL ASSETS 10,395 12,691 14,177 15,735 17,355 19,029 20,708 22,419 25,235 28,092 30,926

Liabilities & Shareholders' Equity


Current liabilities
Accounts payable - 888 893 904 914 925 935 946 957 969 957
Total Current Liabilities - 888 893 904 914 925 935 946 957 969 957

Other liabilities
Deferred tax - (389) (796) (1,223) (1,668) (2,133) (2,656) (3,198) (3,754) (4,315) (4,877)
Long term debt 5,198 4,676 4,093 3,443 2,718 1,909 1,007 - - - -
Total Long Term Liabilities 5,198 4,287 3,297 2,221 1,050 (224) (1,649) (3,198) (3,754) (4,315) (4,877)

Shareholders' equity
Paid-up capital 5,198 5,198 5,198 5,198 5,198 5,198 5,198 5,198 5,198 5,198 5,198
Retained earnings - 2,318 4,789 7,413 10,193 13,130 16,224 19,473 22,833 26,241 29,648
Total Equity 5,198 7,516 9,987 12,611 15,391 18,328 21,422 24,670 28,031 31,439 34,846
TOTAL CAPITAL AND LIABILITIE 10,395 12,691 14,177 15,735 17,355 19,029 20,708 22,419 25,235 28,092 30,926

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7.3 Projected Cash Flow Statement


Statement Summaries SMEDA
Cash Flow Statement
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Operating activities
Net profit - 2,318 2,470 2,624 2,780 2,937 3,094 3,249 3,361 3,408 3,407
Add: depreciation expense - 654 654 654 654 654 654 654 654 654 654
amortization expense - 17 17 17 17 17 17 17 17 17 17
Deferred income tax - (389) (407) (426) (446) (465) (523) (542) (556) (562) (561)
Accounts receivable - (1,143) (11) (23) (24) (24) (25) (25) (26) (26) (27)
Finished good inventory - (931) (13) (13) (13) (14) (14) (15) (15) (16) (17)
Equipment inventory (69) (4) (4) (5) (5) (5) (6) (6) (6) (7) 117
Raw material inventory (802) (16) (16) (17) (17) (17) (18) (18) (19) (19) 959
Advance insurance premium (14) 1 1 1 1 1 1 1 1 1 1
Accounts payable - 888 5 10 10 11 11 11 11 11 (11)
Cash provided by operations (884) 1,395 2,696 2,823 2,959 3,095 3,192 3,326 3,423 3,463 4,540

Financing activities
Change in long term debt 5,198 (522) (582) (650) (725) (809) (903) (1,007) - - -
Issuance of shares 5,198 - - - - - - - - - -
Cash provided by / (used for) financin 10,395 (522) (582) (650) (725) (809) (903) (1,007) - - -

Investing activities
Capital expenditure (9,011) - - - - - - - - - -
Cash (used for) / provided by investin (9,011) - - - - - - - - - -

NET CASH 500 873 2,114 2,174 2,234 2,286 2,290 2,319 3,423 3,463 4,540

Cash balance brought forward 500 1,373 3,487 5,660 7,894 10,180 12,469 14,789 18,212 21,675
Cash available for appropriation 500 1,373 3,487 5,660 7,894 10,180 12,469 14,789 18,212 21,675 26,215
Cash carried forward 500 1,373 3,487 5,660 7,894 10,180 12,469 14,789 18,212 21,675 26,215

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7.4 Ratio Analysis


Ratio Analysis SMEDA
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Profitability ratios
Gross profit margin on sales 23% 23% 24% 24% 25% 25% 26% 26% 26% 27%
Net profit margin on sales 8% 9% 9% 9% 10% 10% 10% 11% 10% 10%
ROI (same as ROA) 18% 17% 17% 16% 15% 15% 14% 13% 12% 11%
ROE 31% 25% 21% 18% 16% 14% 13% 12% 11% 10%

Liquidity ratios
Current ratio 5 7 10 12 14 17 19 23 26 30
Quick ratio 4 6 9 11 13 16 18 21 25 30

Asset management ratios


Inventory turnover ratio 31 31 31 31 31 31 31 30 30
Days sales outstanding 15 15 15 15 15 15 15 15 15 15
Fixed assets turnover ratio 3 4 4 5 5 6 7 9 11 14
Total assets turnover ratio 2 2 2 2 2 1 1 1 1 1

Debt management ratios


Debt ratio 50% 37% 29% 22% 16% 10% 5% 0% 0% 0% 0%
Times interest earned 7.14 8.38 10.14 12.84 17.61 28.47 79.40 - - -
Debt service coverage ratio 3.65 3.81 3.97 4.12 4.27 4.41 4.54 - - -

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8 KEY ASSUMPTIONS

Table 8-1 Financial Assumptions


Description Rate / Cost Rationale
Debt 50%
Equity 50%
Interest rate 11% LMM Rate
Debt tenure 7
Debt payments/year 12
Income Tax
Tax rate Sole Proprietor Tax Rate
Project Life (Assumed life of 10
Machinery & Equipment) (years)

Table 8-2 Cash Flow Assumptions


Description Rate / Cost Rationale
Accounts receivable cycle (in days) 15 Based on present and past
years' revenue
Accounts payable cycle (in days) 15 Based on present and past
years' average COGS, Op.
Costs (machinery
maintenance), raw material
inventory, & spare part
inventory

Table 8-3 Revenue Assumptions


Description Rate/Cost Amount / Rationale
Other
Production capacity (per year) 813,278 meters
Production (Meters)/Loom/Day 55
Sale price of fabric in year 1 Rs. 42/Mtr.
Sale price growth rate (Fabric 2% On the basis of 10
Price/Year) years historical data
Production capacity utilization 85%

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Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

Table 8-4 Inventory Assumptions


Description Months
Equipment spare part inventory 2
Raw material inventory 0.5
Finished goods inventory 0.5

Table 8-5 Expense Assumptions


Description Rate/Cost Rationale
Cost of goods sold 1 (Yarn Cost) 27 Input price per unit of production
Cost of goods sold 2 1 Input price per unit of production
(Sizing and Warping Cost)
Cost of goods sold growth rate 1% On the basis of 10 years historical
(Yarn price growth/year) data
Operating costs 2 1 Machine maintenance per unit of
(machinery maintenance) production
Operating costs 3 1 Direct electricity cost per unit of
(direct electricity) production
Operating costs growth rate 1.0%
Administration benefits expense 1.0% % of administration expense
Traveling expense 1.0% % of administration expense
Communication expense 2.0% % of administration expense
Office vehicles running expense 3.0% % of vehicles cost
Office expenses 1.0% % of administration expense
(stationery, entertainment, janitorial
services, etc.)
Promotional expense 0.1% % of revenue
Machinery & equipment insurance 0.0%
rate
Office vehicles insurance rate 3.0%
Professional fees 0.1% % of revenue
(legal, audit, consultants, etc.)

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PREF-39/June, 2002/1
Pre-Feasibility Study Fabric Weaving Unit (Auto Looms)

Table 8-6 Depreciation Expense Assumptions


Description
Land Book depreciation rate 0%
Building & infrastructure Book depreciation Rate 5%
Machinery & equipment Book depreciation Rate 10%
Office equipment Book depreciation rate 10%
Furniture & fixtures Book depreciation rate 10%
Office vehicles Book depreciation rate 10%

Table 8-7 Economy Related Assumptions


Description Rate / Cost
Inflation rate 7%
Electricity growth rate 9%
Water price growth rate 10%
Gas price growth rate 10%
Wage growth rate 3%
Office equipment price growth rate 5%
Office vehicles price growth rate 10%

Table 8-8 Miscellaneous Assumptions


Description Rate / Cost
Cash on hand 500,000
Minimum Initial cash Requirement 147,880
Cash required for working capital needs
Starting cash 500,000
Cash to be maintained after startup -
Hours operational/day 24
Shift length (hours) 8
Days operational/year 350

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