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Small and Medium Enterprises Development Authority Ministry of Industries & Production
Government of Pakistan
www.smeda.org.pk
HEAD OFFICE
4th Floor, Building No. 3, Aiwan e Iqbal, Egerton Road, Lahore Tel 92 42 111 111 456, Fax 92 42 36304926-7 helpdesk@smeda.org.pk REGIONAL OFFICE PUNJAB 3rd Floor, Building No. 3, Aiwan e Iqbal, Egerton Road Lahore, Tel: (042) 111-111-456 Fax: (042)6304926-7 helpdesk.punjab@smeda.org.pk REGIONAL OFFICE SINDH 5TH Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) 111-111-456 Fax: (021) 5610572 helpdesk-khi@smeda.org.pk REGIONAL OFFICE KPK Ground Floor State Life Building The Mall, Peshawar. Tel: (091) 9213046-47 Fax: (091) 286908 helpdesk-pew@smeda.org.pk REGIONAL OFFICE BALOCHISTAN Bungalow No. 15-A Chaman Housing Scheme Airport Road, Quetta. Tel: (081) 831623, 831702 Fax: (081) 831922 helpdesk-qta@smeda.org.pk
September 2013
Pre-Feasibility Study
Table of Contents
1 DISCLAIMER .......................................................................................................................................... 2 2 PURPOSE OF THE DOCUMENT ......................................................................................................... 3 3 INTRODUCTION TO SMEDA .............................................................................................................. 3 4 INTRODUCTION TO SCHEME ........................................................................................................... 4 5 EXECUTIVE SUMMARY ...................................................................................................................... 4 6 CRITICAL FACTORS ............................................................................................................................ 4 7 BRIEF DESCRIPTION OF PROJECT & PRODUCT ........................................................................ 5 8 INSTALLED & OPERATIONAL CAPACITIES ................................................................................. 5 9 GEOGRAPHICAL POTENTIAL FOR INVESTMENT ..................................................................... 5 10 POTENTIAL TARGET MARKETS / CITIES ..................................................................................... 5 11 PROJECT COST SUMMARY ............................................................................................................... 6 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 PROJECT ECONOMICS ............................................................................................................ 6 PROJECT FINANCING ............................................................................................................. 6 PROJECT COST ......................................................................................................................... 7 SPACE REQUIREMENT ........................................................................................................... 7 MACHINERY AND EQUIPMENT............................................................................................ 8 FURNITURE & OFFICE EQUIPMENT .................................................................................... 8 RAW MATERIAL REQUIREMENTS ....................................................................................... 8 HUMAN RESOURCE REQUIREMENT ................................................................................... 9 REVENUE GENERATION ........................................................................................................ 9
12 ANNEXURE ........................................................................................................................................... 10 12.1 12.2 12.3 INCOME STATEMENT ...................................................................................................................10 STATEMENT OF CASH FLOW........................................................................................................11 BALANCE SHEET .........................................................................................................................12
13 USEFUL PROJECT MANAGEMENT TIPS ...................................................................................... 13 14 USEFUL LINKS ..................................................................................................................................... 14 15 OPERATING AND FINANCIAL ASSUMPTIONS ........................................................................... 15
Pre-Feasibility Study
DISCLAIMER
This information memorandum is to introduce the subject matter and provide a general idea and information on the said matter. Although, the material included in this document is based on data/information gathered from various reliable sources; however, it is based upon certain assumptions which may differ from case to case. The information has been provided on as is where is basis without any warranties or assertions as to the correctness or soundness thereof. 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, its employees or agents do not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The contained information does not preclude any further professional advice. The prospective user of this memorandum is encouraged to carry out additional diligence and gather any information which is necessary for making an informed decision, including taking professional advice from a qualified consultant/technical expert before taking any decision to act upon the information. For more information on services offered by SMEDA, please contact our website: www.smeda.org.pk
Pre-Feasibility Study
The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of project concept development, start-up, and production, marketing, finance and business management. The purpose of this document is to facilitate potential investors in Subcontractor workshop by providing them with a general understanding of the business with the intention of supporting potential investors in crucial investment decisions. The need to come up with pre-feasibility reports for undocumented or minimally documented sectors attains greater imminence as the research that precedes such reports reveal certain thumb rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and its successful management. Apart from carefully studying the whole document one must consider critical aspects provided later on, which form basis of any Investment Decision. 3 INTRODUCTION TO SMEDA
The Small and Medium Enterprises Development Authority (SMEDA) was established in October 1998 with an objective to provide fresh impetus to the economy through development of Small and Medium Enterprises (SMEs). With a mission "to assist in employment generation and value addition to the national income, through development of the SME sector, by helping increase the number, scale and competitiveness of SMEs" , SMEDA has carried out sectoral research to identify policy, access to finance, business development services, strategic initiatives and institutional collaboration and networking initiatives. Preparation and dissemination of prefeasibility studies in key areas of investment has been a successful hallmark of SME facilitation by SMEDA. Concurrent to the prefeasibility studies, a broad spectrum of business development services is also offered to the SMEs by SMEDA. These services include identification of experts and consultants and delivery of need based capacity building programs of different types in addition to business guidance through help desk services.
Pre-Feasibility Study
INTRODUCTION TO SCHEME
Prime Ministers Small Business Loans Scheme, for young entrepreneurs, with an allocated budget of Rs. 5.0 Billion for the year 2013-14, is designed to provide subsidised financing at 8% mark-up per annum for one hundred thousand (100,000) beneficiaries, through designated financial institutions, initially through National Bank of Pakistan (NBP) and First Women Bank Ltd. (FWBL). Small business loans with tenure upto 7 years, and a debt : equity of 90 : 10 will be disbursed to SME beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwah, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA). 5 EXECUTIVE SUMMARY
This particular pre-feasibility is for setting up a Sub-contract Workshop Facility in any industrial cluster of any major city of Pakistan. Sub contracting workshop comes in the segment of light engineering sector. The workshop is proposed to cater to machine or work on parts for electrical home appliances, pumps, and other engineering products. Most of the subcontracting workshops are part of small and medium scale industry and are operating in cities like Peshawar, Lahore, Gujranwala, Faisalabad, Karachi etc, as a service provider. The workshop is proposed to operate 8 hours daily. The maximum jobs for the project are assumed to be 30,000 per year. The business will provide employment opportunity to 3 individuals including the owner manager. The total project cost for setting up this workshop is estimated at Rs. 1.59 million out of which Rs 1.11 million is capital cost and Rs 0.48 million as working capital. The project is financed through 90% debt and 10% equity. The project NPV is around Rs. 1.54 million, with an IRR of 37% and payback period of 3.36 years. The legal status of this project is proposed as Sole Proprietorship. 6 CRITICAL FACTORS
Following are the factors critical for success of this business venture; Technical knowhow and relevant experience of entrepreneur. Availability of skilled labour having technical knowledge. Ability to generate work orders through industrial networking, direct marketing and negotiating long term contracts. Utilization of job costing and job card with technical specifications sheet.
Pre-Feasibility Study
The project is for establishing a Sub Contract Workshop Facility. The sub contracting workshop will not manufacture its own products instead it will provide the job work facilities to the light engineering sector. This practice is prevalent in the majority of such workshops. The workshop will provide services to businesses such as manufacturers of electrical home appliances, pumps, textile sector, machinery repair shops, auto part makers, etc. This business activity is more suitable for an entrepreneur with mechanical technology background. The prospective entrepreneurs are also recommended to have previous workshop floor experience. Major capital investment is in the procurement and installation of lathe, shaper and cylindrical grinding machines. The workshop will provide machining facility for engineering products such as washing machines, electric motor rotor shafts. A variety of machining services can be carried out on the machinery set proposed under this project, however, for the purpose of calculating cost and revenues electric motor shaft L18 x D has been taken as a standard item. The workshop will require services of two machinists and one helper to carry out requisite job orders. The business will be setup in rented premises having covered area of 400 sqft. 8 INSTALLED & OPERATIONAL CAPACITIES
The installed capacity of the project is to perform 30,000 jobs per year. During the first year it will operate at 70% capacity and perform 21,000 jobs. The total human resource strength will be 3 including the entrepreneur/owner. The workshop will operate for 8 hours daily. 9 GEOGRAPHICAL POTENTIAL FOR INVESTMENT
The subcontracting workshop clusters are mostly operating near industrial areas of Lahore, Faisalabad, Karachi and Gujranwala. The ideal location for the project may be outside municipal and cantonment limits, preferably in a small industrial cluster/estate. Other options could be near an industrial complex like large fertilizer, oil or power units off major highway. 10 POTENTIAL TARGET MARKETS / CITIES The potential target markets could be the local home appliances manufacturing, and electrical pumps manufacturers. The suitable cities for marketing can be Gujranwala, Gujrat, Lahore, Faisalabad Karachi, Peshawar, Gilgit and Quetta.
Pre-Feasibility Study
11 PROJECT COST SUMMARY A detailed financial model has been developed to analyze the commercial viability of Sub Contract Workshop Facility under the Prime Ministers Small Business Loan Scheme. Various cost and revenue related assumptions along with results of the analysis are outlined in this section. The projected Income Statement, Cash Flow Statement and Balance Sheet are attached as appendix. 11.1 PROJECT ECONOMICS All the figures in this financial model have been calculated for the job work processing of 30,000 washing machine motor rotor shafts per year. During the first year of operations the facility will be working at 70% of its installed capacity. The following table shows internal rates of return and payback period;
Table 1: Project Economics
Description Internal Rate of Return (IRR) Payback Period (yrs) Net Present Value (NPV)
Returns on the scheme and its profitability are dependent on getting regular work orders from the local industry and strict compliance to the technical specifications of the finished products. 11.2 PROJECT FINANCING Following table provides details of the equity required and variables related to bank loan;
Table 2: Project Financing
Description Total Equity (10%) Bank Loan (90%.) Markup to the Borrower (%age/annum) Tenure of the Loan (Years)
Pre-Feasibility Study
11.3 PROJECT COST Following fixed and working capital requirements have been identified for operations of the proposed business. Additionally, rented premise has been recommended due to ease of availability and lower costs.
Table 3: Capital Investment for the Project
Capital Investment Machinery Furniture & Office equipment Total Capital Costs Initial Working Capital Total Project Cost 11.4 SPACE REQUIREMENT
The workshop area has been calculated on the basis of space requirement for placement of machinery and holding incoming and outgoing jobs. However, normal workshops in the industry do not follow any set pattern or space standards. Following table shows calculations for project space requirement.
Table 4: Space Requirement
Premises will be obtained on rent @ Rs 15,000 per month having the required building structure along with 3 phase electricity connection.
Pre-Feasibility Study
11.5 MACHINERY AND EQUIPMENT Following table provides list of machinery and equipment required for a typical sub contract workshop facility;
Table 5: Machinery and Equipment
Description Lathe Machine 5 (used) Shaper 8 stroke (used) Center grinding machine 3 (used) Pedestal grinding machine chuck Tool grinder Welding plant 100A Total
Quantity 1 1 1 1 1 1 6
The workshop will take work orders for parts having cylindrical profiles, mostly the rotor shafts of electrical motors and pumps. Lathe machine will be used to bring the shaft to desired diameters, center grinding machine for fine machining and shaper machine to cut notches, etc. Other equipment will be used to support the main machines for finishing or facilitating work. 11.6 FURNITURE & OFFICE EQUIPMENT Following furniture and office equipment full fills the basic requirements, for this operation;
Table 6: Furniture & Office Equipment Costs
Description Chairs Stools Table Steel cupboard Metal working table Measuring instruments set Telephone Total
Quantity 3 4 1 2 1 1 1
11.7 RAW MATERIAL REQUIREMENTS Significant amount of raw materials is not required. Since the job work involves metal forming operations, cost of tooling along with jigs and fixtures have been incorporated.
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Pre-Feasibility Study
Qty 1 1
No. of Employees 1 1 1 3
The table above provides details of human resource required to run such a business. The owner must be a trained machinist preferably with vocational/technical education in mechanical technology. He will communicate with light engineering industries for order taking, operate the machines and take care of payments/receipts matters. A machinist will be hired to perform the work of operating the machines along with the owner. On an average the workshop can process 100 washing machine motor rotor shafts in a day. It is also capable of processing other similar jobs like motor bush, fan rotor shaft, pump shaft, etc. 11.9 REVENUE GENERATION
Table 9: Revenue Generation
Product
Unit
No.
Rs 80
Pre-Feasibility Study
240,000 180,000 18,148 42,000 2,400 16,800 111,400 610,748 278,460 278,460 109,207 169,253 169,253
263,367 198,000 19,963 39,861 2,634 19,272 111,400 654,496 377,750 377,750 95,961 281,789 281,789 169,253 451,042 451,042
289,008 217,800 21,959 45,586 2,890 22,070 111,400 710,714 483,893 483,893 81,615 402,278 228 402,050 451,042 853,092 853,092
317,147 239,580 24,155 52,057 3,171 25,236 111,400 772,746 605,914 605,914 66,079 539,835 13,984 525,852 853,092 1,378,944 1,378,944
348,025 263,538 26,570 59,367 3,480 28,813 111,400 841,194 745,851 746,451 49,252 697,199 29,720 667,479 1,378,944 2,046,422 2,046,422
381,909 289,892 29,227 67,618 3,819 32,854 111,483 916,803 905,896 905,896 31,030 874,866 53,730 821,136 2,046,422 2,867,559 2,867,559
419,092 318,881 32,150 76,926 4,191 37,415 111,483 1,000,139 1,088,749 1,088,749 11,295 1,077,455 84,118 993,337 2,867,559 3,860,895 3,860,895
459,895 350,769 35,365 87,419 4,599 42,560 111,483 1,092,091 1,297,153 1,297,153 1,297,153 117,073 1,180,080 3,860,895 5,040,976 5,040,976
504,671 385,846 38,902 99,242 5,047 48,359 111,483 1,193,550 1,534,248 1,534,248 1,534,248 154,349 1,379,899 5,040,976 6,420,874 6,420,874
553,807 424,431 42,792 110,291 5,538 53,761 111,483 1,302,103 1,728,545 1,728,545 1,728,545 193,209 1,535,336 6,420,874 7,956,211 7,956,211
169,253 169,253
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Pre-Feasibility Study
1,437,188 1,596,876
(159,596) (159,596)
(172,843) (172,843)
(187,189) (187,189)
(202,725) (202,725)
(219,551) (217,637)
(237,774) (237,774)
(257,509) (257,509)
Investing activities Capital expenditure (1,112,500) Cash (used for) / provided by investing a (1,112,500) NET CASH Cash balance brought forward Cash available for appropriation Cash carried forward 375,000
375,000 375,000
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Pre-Feasibility Study
8,802,654
11,995 11,995
13,944 13,944
16,200 16,200
18,817 18,817
21,854 21,854
25,387 25,387
29,503 29,503
34,308 34,308
39,816 39,816
38,432 38,432
1,437,188 1,437,188
1,277,592 1,277,592
1,104,749 1,104,749
917,560 917,788
714,835 729,046
495,283 539,215
257,509 355,170
181,779
298,852
453,201
646,410
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Pre-Feasibility Study
13 USEFUL PROJECT MANAGEMENT TIPS Technology Required spare parts & consumables: The quality of cutting and grinding tools should be ensured. The tools must be regularly checked for dimensional accuracy and physical condition. The preventive maintenance of all the machinery especially the lathe, shaper and centre grinding machines should be done regularly. Energy Requirement: The use of generator is not recommended due to high operating costs. Machinery Suppliers: As per prevalent practices in industry the used machines have been recommended. In selecting the machinery multiple sources must be contacted and thorough inspections be carried out before purchasing the machinery. Quality Assurance Equipment & Standards: While booking job work orders from customers, all the production and inspection drawings must be obtained. Any confusion on the production or quality assurance parameters must be cleared beforehand. Utmost care should be exercised during machining and inspection processes as these items will form part of some other product. Strict quality control procedure will improve the credibility of the workshop.
Marketing Sales & Distribution Network: Owners links within the industry and his technical expertise are key to the continuous flow of job work orders for the workshop.
Human Resources Adequacy & Competencies: Skilled and experienced staff is necessary for the workshop. Only staff having shop floor experience should be considered.
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Pre-Feasibility Study
14 USEFUL LINKS Prime Ministers Office, www.pmo.gov.pk Small and Medium Enterprise Development Authority, www.smeda.org.pk National Bank of Pakistan (NBP), www.nbp.com.pk First Women Bank Limited (FWBL), www.fwbl.com.pk Government of Pakistan, www.pakistan.gov.pk Ministry of Industries & Production, www.moip.gov.pk Ministry of Education, Training & Standards in Higher Education, http://moptt.gov.pk Government of Punjab, www.punjab.gov.pk Government of Sindh, www.sindh.gov.pk Government of Khyber Pakhtunkhwa, www.khyberpakhtunkhwa.gov.pk Government of Balochistan, www.balochistan.gov.pk Government of Gilgit Baltistan, www.gilgitbaltistan.gov.pk Government of Azad Jamu Kashmir, www.ajk.gov.pk Trade Development Authority of Pakistan (TDAP), www.tdap.gov.pk Security Commission of Pakistan (SECP), www.secp.gov.pk Federation of Pakistan Chambers of Commerce and Industry (FPCCI) www.fpcci.com.pk State Bank of Pakistan (SBP), www.sbp.org.pk National Bank of Pakistan (NBP), www.nbp.com.pk Gujranwala Tools Dies and Molds Center (GTDMC) www.gtdmc.org.pk Pakistan Industrial and Technical Assistance (PITAC) www.pitac.gov.pk
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Pre-Feasibility Study
Maximum number of job orders (Annually) Number of job orders Year 1 Hours operational per day Days operational per year
Table 11: Economy-Related Assumptions
30,000 21,000 8 300 10% 10% 15 10 15 30 Rs/Job 10 6.80 10% 8 10% 1% 0.1% 0.5% 10 90% 10% 8% 7 12
Accounts Receivable cycle (in days) Accounts payable cycle (in days) Raw material inventory (in days) Equipment spare part inventory (in days)
Table 13: Expense Assumptions
Cost of raw material Tooling Miscellaneous (jigs, fixtures, etc) Raw material cost growth rate Electricity utilization in hours/day Machinery maintenance (% of machinery cost) Promotional expense (% of revenue) Administration expense (% of revenue) Communication expense ( % of revenue)
Table 14 Financial Assumptions
Project life (Years) Debt Equity Interest rate on long-term debt Debt tenure (Years) Debt payments per year
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Pre-Feasibility Study
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