bharat parker casestudy v3

7/27/2019 Bharat Parker CaseStudy V3

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BHARAT PARKER LTD (BPL)

It was May 1, 20XX and Amal Mehra had just been promoted as Group Head-Project,

Finance Group, Southern Region of National Bank, one of India's leading banks. He had

all along been in the Project Finance Department of the bank and had worked diligently

on project appraisals. He took particular pride in looking at a project thoroughly from all

angles. He now had before him the first application for a project loan in his new role as

Group Head. It was in many ways an interesting proposal. First of all it belonged to the

automobile sector, which he had been keenly following since the recent de-licensing of

the industry and the recent move by the Government to permit 51% FDI. Secondly, theproject was promoted by two well known groups which attracted a lot of attention

from the media. Thirdly Amal had been on the look out for a good proposal for him to

get noticed by the bank's top management in his new role, and this seemed to fit the bill

perfectly. He decided to target the proposal for sanction at the very next sanctioning

committee meeting, which was scheduled next week.

Amal had before him a note prepared by one of his team members (Exhibit 1). He

quickly went through the note and asked for some additional information. The next day

he found in front of him both the information (Exhibit 2 and 3).

On going through it, Amal was happy that he was indeed on track for taking the,

proposal to his sanctioning committee at the next meeting. Exhibit 4 raises several

questions. What you think are the answers?


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Page No.2

Exhibit - 1

Internal Note on Bharat Parker Ltd.

Proposal

Bharat India Ltd. (BIL) and Automobile Parker (Parker) of Germany propose to set up a

joint venture to manufacture Parker Royal petrol and diesel cars in the country. BIL

proposes to sell its Pune facility, which is at present manufacturing Bharat Monarch cars

to the joint venture company. The joint venture company would be having four products

namely Bharat Monarch petrol and diesel models and Parker Royal diesel and petrol

models. The plant is expected to produce on a yearly basis 26,000 numbers of Monarh

and 46,000 numbers of Royal cars.

Promoters' Background

Parker group is one of the world's largest producers of automobiles with annual sales of

3 million cars. Its diesel engines are well known in the world and are used in. two well

known brands of cars in India. Moreover, the competitors to the diesel version of

Parker in India are costlier than Parker. Parker's turnover was Euro 145 billion in 2009

on which it made an operating loss of Euro 1.4 billion. This is mainly due to the high coststructure, competition from Japanese manufacturers and consequent loss of market

share in Europe. In view of these factors, Parker was trying to diversify to markets

outside Europe. Parker had 20 joint ventures worldwide with plant sizes from 312 to

47520 cars per annum and indigenization levels from 21% to 92%. Parker wanted to

enter the Indian market since it had identified India as a market with good long term

potential. It preferred the joint venture route and had particularly chosen Bharat since it

had in place a well established dealer network in the country.

Bharat, is an existing producer of 54,600 cars at Pune. Its products are Bharat Mini in the

small car segment and Bharat Monarch in the mid size car segment. In the last financial

year it had incurred an operating loss of Rs.44.4 Crores on a turnover of Rs.260.3

Crores due to competition from other players.


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Page No.4

The project envisaged transfer of Bharat's existing facilities including the current assets

for Rs.248 crores and Parker would provide technical know how and sell the tools Idies

for Rs.125 Crores.

The cost of the car project depends upon several factors such as segment of the car,

size and location of the plant and in house component manufacturing facilities. The plan

was to have a phased indigenization programme from 24% in 2010 to 79% in 2012.

Worldwide, car plants are becoming design and assembly oriented and hence vendor

development is a key success factor in automobiles. Maruti with 80% indigenization has

brought down the raw material to sales ratio to 70%. It has almost 18 joint ventures/associate companies for components. Most of the vendors identified for Parker were

the existing suppliers of Bharat.

Mean of Financing

Equity (Rs. in lacs)

-Bharat 8400-Parker 8400

-Fls/Public 6100 22900

PCD-Equity 3560-Debt 14240 17800

Other debt 14100Cash accruals 7330

62100

Project Financial

The ratios were very strong as under:

Debt to equity ratio 0.76:1

Current Ratio. 4.53 times

Fixed Assets Coverage 1.34

Average DSCR 2.4 times

IRR 15.8%

Cost of Capital 11.7% .


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Page No.5

Exhibit 2

A comparison of BPL's project cost with another recent project:

Project Project cost per car Capacity

BPL Rs.1.04 lac/car 60,000 cars

Manufacturer Rs.1.67 lac/car 19,200 cars

The Opal Astra projet was located at Halol, Gujarat.

Exhibit 3

Market

China is the largest producer of the automobiles with 11.6 million vehicles closely

followed by USA with 10.4 million. In India, the car industry is growing at 13 to 14% with

production of 1.7 million vehicles per annum. India is the ninth largest market in the

world and has over taken China in terms of exports. The industry transformation

started with launching of 800 cc entry level cars in India in 1982 by Maruti.

The current segment-wise market is under:

A1/A2 72%

A3 18%

A4 6%

A5 3%

A6 1%

The factors governing the demand for cars are

a) credit availability;b) Buoyancy of economy;c) Infrastructural facilities;d) Supply led demand; ande) Governments fiscal policy.

Presently the faster growing segment is A2 to which the proposed products belongs to.

Hyundai i10/i20, Esteem, Maruti A-Star, Ritz and WagonR and many models from Tata,

Fiat, GM, Honda and Skoda belong to this group. Maruti has an overall market share of


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Page No.6

about 50%. The entry level segment contracted from5% of the market to less than 3%

partly because of the high price differentials between motor cycles and entry level cars.

However, with the recent launch of Nano, this segment may increase its share. In India

65% of the cars are purchased through hire purchase and 50% are the first time buyers.

The population of cars at 10 per thousand is lower than 12 of Sri Lanka and 550 in

developed countries.

The Automobile Mission Plan of the industry envisages a turnover growth from $ 45

billion in 2009 to around $ 145 billion in 2016. The strong engineering base, expertise in

producing low cost, fuel efficient small cars, increasing small car exports are expected to

contribute to the growth. Collapses of the consumer demand coupled with increasing

raw material prices are shifting the industry eastward.

For small cars, the move from two wheeler is important. Presently 2 wheeler market is

growing at 17% per annum with sales in excess of 8.6 million of which motor cycles

accounted for 80%. India is the second largest market for 2 wheelers in the world. The

market for the premium variety of motor cycles is growing faster. 65% of our population

is below 35 years and the average age of car buying has come down to 29 years. The

rural markets are witnessing increasing sales with penetration of Maruti increasing from

3% in 2007 to 16% in 2009.

With low per capita income (though increasing), the above factors are a positive for

entry level car market. Hence Tata has come out with Nano and Hyundai is in the

process of developing a smaller car than Santro. The largest automobile manufacturer in

the world namely Volkswagon and second largest Toyoto have also their presence in

India.

Government has provided several concessions including excise duty reduction for cars in

the smaller segment (entry level and A2). This would reduce congestion on roads and

also the expectation that India would emerge as an export base for such cars. Hyundai,

Tata and Maruti have become leading exporters. Because of incentives offered in

European countries for scrapping old cars for more fuel efficient/environmentally

friendly cars, export of Marutis A-Star and Hyundai i10/i20 did very well. The exports

increased by 30% at 0.3 million vehicles. The exports of small car increased by 38%. The

growth of exports has led to contemporary product technologies and the auto

component industry has like-wise moved up the technology ladder becoming an

exporter by itself. Many Global auto component manufacturers have also set up product

R & D and Technical centres in India. But, the industry which was growing at double

digits till 2008 (20% of turnover in exports) slowed down to a growth rate of 6%

(turnover of Rs.76,000 crores) in 2009 and 2010 due to global recession. However, now

things are improving and the year 2010-11 is expected to be good with high growth rate

returns.


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Page No.7

Exhibit - 4

The questions for discussion:

1) What do you think are the strengths and weaknesses of the project?2) Do you thank there are any areas related to the project which require

further analysis?

3) Would you include any particular covenants if you were a lender to theproject?

4) Indicate the major risks and structure the project with appropriate riskmitigating mechanism.

bharat parker casestudy v3

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