Nghe An Tate & Lyle Sugar Company (Vietnam)

Case Study and Analysis

Group 7
Manindra Konda (0181/51)
Kshitij Sharma (0187/51)
N. Prathyusha (0217/51)
Namrata Chauhan (0222/51)
Neharika Nawapet (0231/51)

Introduction

NATL Project

Capital structure: Leverage with 70% debt(63mn)

Equity sponsors:
Tate & Lyle
Mitr Phol: Thailands largest domestic sugar producer
The Vietnam Fund: Irish Asset Management Fund
The Nghe An Sugar Company: SPV to hold Govt.s share of project
$40mn loan from Rabobank
Project details:
Capacity of 900000 tons per year
Sourcing of cane from 22000 farmers cultivating on 18000 hectares of land
Need for 300 trucks to transport produce to mills during harvesting season

Headwinds faced by the project

Inadequate results of farmer outreach program
Farmers dissatisfies with the payment system
Subsequently, farmers selling their produce to local handicraft mills
instead of NATL
Lesser no of trucks available than anticipated
Govt.s failure in shoring up the infrastructure
Consequently, refinancing required for Rabobank bridge loan

Q1) Economic and Financial Analysis

Q2) Risks of the project and measures taken

Commercial Risk
Delay due to scaling issues
The company aimed to achieve its full capacity of 900,000 tons of cane
per year by 2002, for which it required its inputs from 22000 farmers
Measures: Farmer outreach program to persuade more farmers to take
up cane cultivation
Delay due to environmental obligation and permits
Measures: The company successfully achieved high level support to
ensure there was no delays due to regulatory obligations
Delay due to force majeure risk
Recommendation: The company must insure its investment
Delay due to cost underestimation/cost overrun
Measures: The company roped in a local partner to make up for the lack
of local expertise

Operational Risk
Revenue risk from reduced price
Measures: The co doesnt seem to have taken adequate measures to
address this grave risk
Recommendation: The co must safeguard its interests and the interests
of the farmers that work with it, by gaining some form of assurance from
the Govt., that the trade protection would not be withdrawn abruptly
Input supply risk due to transportation issues
Measures: The co offered a decent wage offer to encourage more truck
owners for cane transportation to its mills. However, fewer trucks than
intended were gathered
Recommendation: Tie up with either Govt. or other companies to
provide year round work employment to truck owners. The co. could also
look at offering part time opportunities for the truck owners.

Financial Risk
Risk from variable interest rate
The co is not protected against such risks. This risk could have serious
ramifications for the co. because generally the loans extended by banks
have floating interest rates
Measures: Co. doesnt seem to have taken adequate measures acc. to
the case
Recommendation: Enter into interest rate swaps to hedge this risk
Risk from currency mismatch between revenue and repayment
In the aftermath of Asian financial crisis, Vietnam is expected to witness
steep decline in its growth. The currency mismatch is a grave concern, to
which the co is not hedged against
Measures: Co. doesnt seem to have taken adequate measures acc. to
the case
Recommendation: Utilize currency swaps to hedge against this risk
Risk from cash shortfall for debt service
Unanticipated circumstances could cause cash shortfall, in turn leading to
default on debt repayment. The co., according to the case, witnessed this
problem and was forced to look for refinance to finance its Rabobank

Political Risk

FX Shortage

Legal system
Vietnam, being a developing country doesnt boast of a highly developed
legal system. This could be a risk for the co.
Measures: Co. doesnt seem to have taken adequate measures acc. to
the case
Recommendation: The co. can push the Govt. to improve the legal
system, citing economic benefits from higher ease of doing business.
Trade restriction, import export tariffs
Abrupt change in import export tariffs could significantly affect cos
earnings.

Q3) Incentives and risks for farmers and truckers

Farmers:
INCENTIVES

RISKS

Enhanced net return for

farmers

Risk of company resorting to

predatory practices

Increased return because of switching Co. could achieve a monopoly by wiping out
to cane cultivation= USD
its relatively inefficient peers, and then
~31mn(Calculations discussed later) abuse its dominant position.

Better access to seeds,

fertilizers
NATL was committed to improving
access of farmers to seeds, fertilizer.

Constant source of revenue

The farmer is assured of market for
his produce.

Better infrastructure
Farmer enjoys indirect benefit of
better infrastructure for swift and
efficient transport of his produce

Declining sugar prices

The declining sugar prices all over the world
could severely affect farmers earnings.

Sugar a protected commodity

Dependence on trade protection by the Govt.
for financial viability of sugar plantation did
not inspire confidence .Under duress from
the global champions of free trade, the Govt.
could have to withdraw the trade protection
in the future.

Truckers:
INCENTIVES

RISKS

Enhanced net return for

truck haulers

Risk of not having an year long

employment
The 6 months harvest season earnings

The enhanced net return from

conversion to self-driving truck
owners from drivers is 1.9 million
USD, thus project was extremely
beneficial to truck haulers.

may not be sufficient to tide them over the

whole year. This is applicable to laborers
who made transition to truck owners

Q4) Reasons for the government to support the

project
Governments decision to support the project would be primarily based
on projects social returns. Below are the arguments in favor of the
project:
Future consumption is expected to grow and the presence of
supply-demand gap (360,000 -700,000 tonnes).
Reduce dependency on import of sugar, which will save foreign
exchange
Works on MAFIs objective to make the country more self-sufficient
to attract foreign investors
Job opportunities for 525 workers year-round and an additional 200
during the crushing season.
Overall development of the region with development of new
infrastructure, roads and bridges.
Higher net returns to farmers on switching to cane.
NATL will help farmers to convert to cane, gain access to seed
cane and fertilizers, and advice on cane production.

Impact on various elements:

Real Economic NPV of the NATL Project (in 000s USD)

Private Returns

30883.70

Additional net return to farmer from cane over cash

crop

31429.66

Additional revenue to truckers

Profit taxes gained by government (@25%)
Additional wage of laborers

1940.82
13699.72
5875.94

Import Tariffs lost by Government

-52036.32

Perpetuity Value

179985.00

Total Real Economic NPV

31793.52

Based on the above qualitative and quantitative analysis, the

project seems to be beneficial Socially, Economically and
Environmentally. Hence we suggest, Govt. should go ahead to
implement this project.

Q5) Proposal of project to IFC

Investment Criteria
for IFC
Project to be privately owned
To be located in a developing
country
Has to be commercially viable

Whether the project meets the criteria

Yes. Jointly owned by Tate & Lyle, Mitr Phol, Vietnam Fund and
Nghe An Sugar Company
Yes. Plant to be located in Northern Vietnam
If IFC refinances the project, it will start earning profits from the
fifth year of construction (2001)

Has to be environmentally
and socially sound

The local economy should

gain significant development
benefits

Air emissions + Liquid affluent : according to World Banks

standards
Solid waste Bagasse reused as fuel, filter mud as low grade
fertilizer
Safety equipment, protective clothing given to workers
Construction of new roads to benefit the local residents for
daily activities
Mill workers would be paid double the wage they received
otherwise
Truck owners earning more than what they would have
earned as laborers
Farmers earn more by growing cane as compared to cash
crops

Arguments in favor of the project which can be used by Cobban to propose

the project to IFC:
From the previous table, the project meets most of criteria set by IFC
Presence of strong International sponsors with deep pockets -> Risk of
repayment reduces
Promise by the Vietnamese government to build roads & bridges for
efficient transportation
Large part of the project completed within the stipulated time
Significant financial & non financial returns:
Arguments against the
Justification
FIRR=17.99%
project and EIRR=18.46%
Can enough number of farmers be
persuaded to switch to cane to meet
the requirement of the mill?
Can the target of 300 trucks for
transportation be met successfully?
Will the government be able to
complete the construction of roads
and bridges as promised?
What impact will the Asian crisis and
falling sugar prices have on the
project?

The farmers and truckers have to be shown that the

returns they can earn are higher with the mill in place as
compared to without
The government has to be fairly convinced that the
project generates enough social returns for it to invest in
the construction of roads
Are temporary problems ; if the project goes according
to its plans and meets it yearly targets, it should be
profitable in the long run.

Quantitative Analysis
1) Crop Economics
Cane (Real NPV in $000s)

22,226.95

Cash Crops (Real NPV in $000s)

(9,203)

Additional Net Return by switching to Cane (in $000s)

31429.66

2) Trucking Economics
Total Revenue/season (in USD)
Total Fuel Cost/Season
Total Labor cost per season
Maintenance cost per season
Depreciation cost per season
Financing Cost

(in
(in
(in
(in
(in

4427.5

USD)
USD)
USD)
USD)
USD)

1312.5
300
666.67
437.5
328.77

Net Profit/Loss per growing season (in USD)

1382.07

Profit Margin

31%

Quantitative Analysis (Contd.)

3) FIRR
Terminal value as perpetuity (in $000s)

196,485

FIRR

17.99%

Terminal Value as % of assets (in $000s)

16,500

FIRR (New)

16.31%

NPV of private returns in $000s(@ 10% Real discount rate)

52,324.31

Real EIRR

18.46%

Real Free cash flow (NPV in $000s)

(+) Additional Net return to Farmers (Real NPV in $000s)
(+) Additional Net return to Truckers (Real NPV in $000s)
(+) Profit Taxes gained by Govt (Real NPV in $000s)
(-) Loss of Import Tariffs (Real NPV in $000s)
(+) Additional wage

30,883.70
31,429.66
1,940.82
13,699.72
52,036.32
5,875.94

Total Real Economic NPV (in $000s)

31,793.52

4) NPV of Private Returns

5) EIRR
6) NPV of Social Returns

Quantitative Analysis (Contd.)

7) Distribution of NPV Social Returns
i. Real Economic NPV in $000s (from 6 above)
(a) Terminal value as perpetuity (in $000s)
(b) Terminal Value as % of assets (in $000s)
ii. Difference in Perpetuity Value (a b)

31,793.52
196,485
16,500
179,985.00

Total Social Returns in $000s (i +ii)

8) Shadow Conversion Factors

211,778.52

Sugar
(The imported sugar and the sugar produced by NATL project are sold at
the same price, Hence, Economic Price= Financial Price)
Cane
(Opportunity cost refers to the NPV from cash crops instead of cane
production )
Truckers- Scenario 1
(Scenario 1: Truckers remain idle in off season)
Truckers- Scenario 2
(Scenario 2: Truckers work as laborers in the off season)
Vietnamese labor
(NATL pays double the wage of what the Vietnamese labor would get
elsewhere)

1.00

-0.41
0.75
0.54
0.50

THANK YOU