Expressway Project 2020

REPORT

ON

Financial Modeling and Analysis of PPP based Expressway

project in Hyderabad, TN

Submitted by

Avinash Singh

N L Dalmia Institute of Management Studies and Research,

Mumbai

Under the Guidance of

CEO Mr. Ashish S Kumar at Vardhan Consulting Engineers

VARDHAN HOUSE, Anand Bazaar, Danapur Cantonment,

Patna, Bihar 801503.

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ACKNOWLEDGEMENT

It is indeed a matter of great pleasure and proud privilege to be able to present this

project on “Financial Modeling and Analysis of PPP based Expressway project

in Hyderabad, TN”.

The Completion of this project work is a milestone in student’s life and its execution

is inevitable in the hands of guide. We are indebted the project guide CEO Mr.

Ashish S Kumar for his valuable guidance and appreciation for giving form and

substance to this report. It is due to his enduring efforts, patience and enthusiasm,

which has given a sense of direction and purposefulness to this project and

ultimately made it success.

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Executive Summary

In the start of the internship I had to go through the Corporate Skill Development

Program offered by Vardhan Consulting Engineers itself. This internship is divided

into five modules and four tasks, Module 0 contain the Corporate Skill Development

Program under the guidance of CEO Mr. Ashish S Kumar where he talked about

analysing the skill set of an individual and how to gain relevant skills where individual

is lagging. He also discussed about success how it is different from what I think

about success, I also learned how to manage my time and energy and where to use

it with full potential, at the end I have performed sensitive analysis guided by my

mentor where I have to list all my weakness and how to overcome that. That is all

about Module 0 Corporate Skill Development Program

Now after this, the module 1 of task 1 has started with the basics of project finance

and how it is different from corporate finance. In this I had learned basic important

points one should have for pursue carrier in finance and the terminologies related to

project finance viz. IRR, NPV, DCF, etc. Which type of debt can be used by

company to finance its project.

After this module 2 of task 2 has started in which I have to make a list of

assumptions that has been used while preparing the financial model and also to

explain the Cost sheet, Revenue sheet, Cash flow sheet, and Debt sheet. I had also

learned various steps involved in making for cash flows. For debt, bank need to

check before financing the project so in this task I have made some points by the

bank before they finance the project.

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Now comes the module 3 of task 3 this task is very interesting task because it

provided me with the lot of information like how new venture assessed to qualify for

the project finance and what are the factors needed to assessed like for example

1. Assessment of promoter history and background

2. Evaluation of the company and project business model

3. Legal due diligence

4. Analysis of financial statements and capital structure

5. Determine major risks associated with the project

6. Analysis of tax effects

7. Credit analysis and evaluation of loan terms

8. Project valuation

These are some points for assessing the new venture. I had also got to learn about

revenue model of Solar PV, Manufacturing unit, Residential unit. And also additional

points that needed to be included in a financial model, if the financing bank is from

abroad and the debt is in US$ but revenue is in INR i.e. FCNR (B) stands for Foreign

Currency Non-Resident (Bank). FCNR (B) loans are thus loans raised by Indian

corporate in foreign currency as per the guidelines issued by Reserve Bank of India.

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Table of Contents

1. Introduction 6
2. Finance Management
8
− The scope of Finance Management
3. What is Financial Modeling
11
− Types of Models
4. Project Finance 15
5. Module 1 17
6. Module 2 19
7. Module 3 20
8. Chapter of success so far in India 21
9. Bibliography 23
10. References 24

Introduction

One needs money to make money. Finance is the life-blood of business and there

must be a continuous flow of funds in and out of a business enterprise. Money

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makes the wheels of business run smoothly. Sound plans, efficient production

system and excellent marketing network are all hampered in the absence of an

adequate and timely supply of funds. Sound financial management is as important in

business as production and marketing. A business firm requires finance to

commence its operations, to continue operations and for expansion or growth.

Finance is, therefore, an important operative function of business.

A large business firm has to raise funds from several sources and has to utilise those

funds in alternative investment opportunities. In order to ensure the most judicious

utilisation of funds and to provide a reasonable rate of return on the investment,

sound financial policies and programmes are required. Unwise financing can drive a

business into bankruptcy just as easily as a poor product, inept marketing or high

production costs.

On the other hand, adequate and economical financing can provide the firm a

differential advantage in the market place. The success of a business enterprise is

largely determined by the way its capital funds are raised, utilised and disbursed. In

the modern money-using economy, the importance of finance has increased further

due to increasing scale of operations and capital intensive techniques of production

and distribution.

In fact, finance is the bright thread running through all business activity. It influences

and limits the activities of marketing, production, and purchasing and personnel

management. The success of a business is measured largely in financial terms. The

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efficient organisation and administration of the finance function is thus vital to the

successful functioning of every business enterprise.

Finance Management

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Financial management is defined as dealing with and analyzing money and

investments for a person or a business to help make business decisions. Financial

management is one of the functional areas of business. Therefore, its objectives

must be consistent with the overall objectives of business. The overall objective of

financial management is to provide maximum return to the owners on their

investment in the long- term. This is known as wealth maximisation. Maximisation of

owners’ wealth is possible when the capital invested initially increases over a period

of time. Wealth maximisation means maximising the market value of investment in

shares of the company.

Wealth of shareholders = Number of shares held ×Market price per share.

− The scope of Finance Management

The introduction to financial management also requires you to understand the scope of

financial management. It is important that financial decisions take care of

the shareholder’s interests.

Further, they are upheld by the maximization of the wealth of the shareholders, which

depends on the increase in net worth, capital invested in the business, and plowed-

back profits for the growth and prosperity of the organization.

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Fig. 1 – The Scope of Financial Management

In organizations, managers in an effort to minimize the costs of procuring finance and

using it in the most profitable manner, take the following decisions:

Investment Decisions: Managers need to decide on the amount of investment

available out of the existing finance, on a long-term and short-term basis. They are of

two types:

 Long-term investment decisions or Capital Budgeting mean committing funds

for a long period of time like fixed assets. These decisions are irreversible and

usually include the ones pertaining to investing in a building and/or land,

acquiring new plants/machinery or replacing the old ones, etc. These decisions

determine the financial pursuits and performance of a business.

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 Short-term investment decisions or Working Capital Management means

committing funds for a short period of time like current assets. These involve

decisions pertaining to the investment of funds in the inventory, cash, bank

deposits, and other short-term investments. They directly affect the liquidity and

performance of the business.

Financing Decisions: Managers also make decisions pertaining to raising finance

from long-term sources (called Capital Structure) and short-term sources (called

Working Capital). They are of two types:

 Financial Planning decisions which relate to estimating the sources and

application of funds. It means pre-estimating financial needs of an organization to

ensure the availability of adequate finance. The primary objective of financial

planning is to plan and ensure that the funds are available as and when required.

 Capital Structure decisions which involve identifying sources of funds. They

also involve decisions with respect to choosing external sources like issuing

shares, bonds, borrowing from banks or internal sources like retained earnings

for raising funds.

Dividend Decisions: These involve decisions related to the portion of profits that will

be distributed as dividend. Shareholders always demand a higher dividend, while the

management would want to retain profits for business needs. Hence, this is a complex

managerial decision.

What is Financial Modeling?

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Financial models serve as a virtual representation of a business. Their main purpose

is to build a reasonable proxy of the future and support informed business decisions.

The best way to assess the profitability of a company or a project is by examining the

financials it is expected to produce in the future.

We can talk about a model when calculations are logically into related and there are

clear relationships between the parts of the model. Just to give you an example, if an

Excel sheet multiplies a firm's debt by the interest rate it pays and obtains the

amount of interest expense it should pay at the end of the year, we can't say this is a

financial model. Now, imagine the amount of outstanding debt comes from a source

sheet. And, the interest expense feeds a P&L statement and a Cash Flow, which

determined the debt that will be repaid, affecting the firm's Balance Sheet. Well then,

that's the type of logical flow and reasoning we would expect to see in a financial

model. Probably, the greatest benefit of financial modeling is scenario building. It

allows executives to play with a company or project's numbers and hypothesize

different developments. In today's environment, financial modeling is one of the main

pillars of Corporate Finance and business decision making.

− Types of Models

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Financial modeling can be used in many situations. Today, it is a tool that facilitates

the decision-making of managers, Bankers, Investors, CFOs, CEOs, founders and

company owners. It is a generic concept, because tens of different types of models

can be built with a specific purpose.

Some models are built around credit analysis; others can be built around equity

investments, acquisitions, LBOs, mergers, joint ventures, or finance transactions.

Each is different in terms of structure and analysis, as it is tailored around the

specific circumstances that require a business decision.

Let's summarize the main goals of these types of models.

Credit analysis is centered on a borrower's ability to repay financing in the future. A

credit analysis model will focus on cash flow generation and debt service coverage

ratios. In addition, financiers will be interested in the guarantees they will be provided

by the borrower firm. They will consider the quality of its assets and will try to

determine their standalone value in case of default.

Equity investments leverage on several valuation techniques. The main goal of

these models is to obtain the actual value of a company and allow investors to

compare this value and its current market price.

Valuation models usually focus on revenue growth, cash flow generation, scenario

building, discounting cash flows, enterprise, and equity value.

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Merger models are similar to equity investment models, with one important

difference. They analyze synergies and value the combination of the two companies

that are about to be merged. If the combination of the two companies is worth more

than their standalone values, then a merger makes sense.

LBO modeling is more specific than typical valuation models. Leveraged buyouts

are a type of M&A deal, in which the acquirer of a firm uses a higher portion of debt

to finance the deal. The collateral for the debt being used are the target's cash flows.

Lenders will provide their funds because the target has a solid underlying business,

which is expected to generate a stable stream of cash flow hence there likely to be

repaid in full LBO modeling revolves around cash flow, modeling, entry and exit

multiples, equity and debt IRR.

Project Finance Models goal is to build a detailed scheme of all expected cash

inflows and outflows that a project is expected to generate. We talk about a project

because, typically, project finance deals are centered on a new company that is a

Special Purpose Vehicle and is being created for the project. The project is likely to

be a big infrastructure energy or public venture that needs financing. Lenders play a

very important role in Project Finance; hence, financial models are very detailed and

provide a great level of information for all expected developments. Lenders and

equity sponsors are interested in developing cash flows, interest rate coverage,

dividend distributions, and asset guarantees and so on.

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Financial models are not used only for huge companies and large infrastructure

projects. A start-up founder can increase his chances of receiving financing

significantly, if he presents a detailed business plan to his investors. That's a

financial model, too. He can prove he has a grasp of financial figures by showing a

detailed model that follows a clear logic and shows great promise.

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Project Finance

Project finance is the funding (financing) of long-term infrastructure, industrial

projects, and public services using a non-recourse or limited recourse financial

structure. The debt and equity used to finance the project are paid back from the

cash flow generated by the project.

Their goal is to build a detailed scheme of all expected cash inflows and outflows

that a project is expected to generate. We talk about a project because, typically,

project finance deals are centred on a new company that is a Special Purpose

Vehicle and is being created for the project. The project is likely to be a big

infrastructure energy or public venture that needs financing. Lenders play a very

important role in Project Finance; hence, financial models are very detailed and

provide a great level of information for all expected developments. Lenders and

equity sponsors are interested in developing cash flows, interest rate coverage,

dividend distributions, and asset guarantees and so on.

In an organization where corporate finance is practiced, the objective of practicing it

is to maximize the wealth of the shareholders. Corporate finance mainly deals with

the sources of funds and how the optimum capital structure will be achieved.

It is useful in cases where the finance is required in case of a large industrial or

renewable energy project. Project finance is used to finance the project in a

sequential process. The whole amount is not invested upfront. In project finance,

financial institutions can’t see your balance sheet upfront in case of a project. They

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finance the project on the basis of the projected cash flow. If the cash flow seems

satisfactory and beneficial to the financial institutions they invest in the project.

Project Finance relies on the credit of the project being financed. So for example say

the Indian government wants a new toll road to be built, and three companies come

together to form a consortium to build and operate the new road, and none of them

wants the road on its own balance sheet. The bank/s financing the new toll road

would consider the possible number of vehicles using the road, the strength of the

operator of the road and all attendant risks, which as you can see is much more

complicated than simple corporate finance. Project Finance involves much more

extensive due diligence than Corporate Finance.

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Module 1

This Module gives the information about finance, Finance defined as the art

and science of managing money. It includes financial service and financial

instruments. Finance also is referred as the provision of money at the time when it is

needed. Finance function is the procurement of funds and their effective utilization in

business concerns. Finance is a broad term that describes activities associated with

banking, leverage or debt, credit, capital markets, money, and investments. And how

it is different from accounting Although Finance is a broader term with respect to that

of Accounts. In general, we can say that Finance and Accounting are two different

facets of the same coin.

The purpose of accounting is to accumulate and report on financial

information about the performance, financial position, and cash flow. This helps to

make decisions on how to manage the business or make an investment. The

purpose of Finance is to help organizations/people save, manage, and raise money

efficiently. This helps companies/people achieve long-term futuristic goals

successfully. Accounting focuses on the daily movement of money within companies

or institutions that require fastidious accountants with details. Finance focuses on the

broad management of money and assets. It also involves planning for long-term

financial growth of the organization that requires highly qualified and experienced

experts. The basic aspects of accounting are Accounting practices, Accounting

Ethics, Business & Tax Law and Accounting theory. The basic aspects of finance are

Macroeconomics, Microeconomics, and Financial Engineering.

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Then I gained some knowledge on different terminologies used in project finance

how it affects the decision making of the company, bankers, lenders, etc. For e.g.

Limited recourse debt, Non recourse debt, Weightage average cost of capital

(WACC), Discounted cash flow (DCF), Sensitivity analysis, Net present value (NPV),

The internal rate of return (IRR), CapEx, OpEx, etc.

The type of debt that uses by firm to finance the project i.e. I have learned non-

recourse debt is a type of loan secured by collateral, which is usually property. If the

borrower defaults, the issuer can seize the collateral but cannot seek out the

borrower for any further compensation, even if the collateral does not cover the full

value of the defaulted amount. This is one instance where the borrower does not

have personal liability for the loan. Mezzanine financing is a hybrid of debt and equity

financing that gives the lender the right to convert to an equity interest in the

company in case of default, generally, after venture capital companies and other

senior lenders are paid. The debt has embedded equity instruments attached, often

known as warrants, which increase the value of the subordinated debt and allow

greater flexibility when dealing with bondholders. Mezzanine financing is frequently

associated with acquisitions and buyouts, for which it may be used to prioritize new

owners ahead of existing owners in case of bankruptcy.

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Module 2

In this module we are talking about the assumptions while making the project

finance, in project finance 4 major sheets are required viz. Cost sheet, Revenue

sheet, Cash Flow sheet, Debt repayment sheet. The cost sheet analyse and make a

list of disbursement of item that are required during the construction of project

basically it calculates the Capital Expenditure and Operating Expenditure that is

require to build the project. And also the revenue that is generated by the company

like what is the cost that they will sell the item or provide on rent will calculate the

revenue for the upcoming years, The main focus on cash flow statement it deals with

how the company will generate cash flow after the completion of the project basically

it decides whether the firm should start this project or not by looking the Net cash

flow and IRR. Net Cash Flow is Calculated by subtracting Total operating expenses

from Total revenue which leaves with EBITDA further, from EBITDA subtracts Total

non operating expenses which gives us Income before taxes and then further

subtract with tax leaves Net income. To get final cash flows add all non cash

expenses in Net income will generate Net project cash flow. But to generate this

cash flow we have to take some assumptions for e.g. Inflation rates, risk free rate,

Market premium risk, discount rate, etc. Now after all this we have to calculate the

debt repayment schedule which will gives us what amount we need to pay to the

bank and it is worth it or not basically the average interest rates in India for amount

more than 100cr is 7.25%.

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Module 3

After learning all the basics about project finance and their terminologies how it is

different from accounting then we move to next task which is talk about factors need

to be consider while assessing the new venture capital to qualify as a project

finance. There are various steps involved in assessing i.e.

1. Assessment of promoter history and background

2. Evaluation of the company and project business model

3. Legal due diligence

4. Analysis of financial statements and capital structure

5. Determine major risks associated with the project

6. Analysis of tax effects

7. Credit analysis and evaluation of loan terms

8. Project valuation

Now after this we have developed a revenue model of Solar PV, Manufacturing unit,

Residential complex. And also additional points that needed to be included in a

financial model, if the financing bank is from abroad and the debt is in US$ but

revenue is in INR i.e. FCNR (B) stands for Foreign Currency Non-Resident (Bank).

FCNR (B) loans are thus loans raised by Indian corporate in foreign currency as per

the guidelines issued by Reserve Bank of India.

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Success so far in India

Expressways are the highest class of roads in India. In India, expressways

are controlled-access highways where entrance and exit is controlled by the use

of ramps that are incorporated into the design of the expressway, whereas National

Highways are at-grade roads. Some roads are not access controlled, but still are

named as expressways, such as the Biju Expressway.

The central government is the major investor in creating expressways. Uttar

Pradesh and Maharashtra are the only states which are investing in expressway

building by having dedicated expressway corporations.

National Expressways Authority of India (NEAI) operating under the Ministry of Road

Transport and Highways will be in-charge of the construction and maintenance of

expressways. The National Highways Development Project by Government of

India aims to expand the expressway network and plans to add an additional

18,637 km (11,580 mi) of expressways by 2022 apart from existing national

highways.

Bharatmala, a centrally-sponsored and funded road and highways project of

the Government of India with a target of constructing 83,677 km (51,994 mi) of new

highways, has been started in 2018. Phase I of the Bharatmala project involves the

construction of 34,800 km of highways (including the remaining projects under

NHDP) at an estimated cost of ₹5.35 lakh crore (US$75 billion) by 2021-22.

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More recent additions to the Indian Highway network are the Yamuna and Taj

Expressways. The 165-km-long six-lane Yamuna expressway opened up in 2012

and has considerably reduced the travel time between the National Capital Region

(NCR) and Agra. It further connects to the 302-km-long Agra-Lucknow or the Taj

Expressway, the longest in India. Not unlike the Mumbai-Pune Expressway, ever

since their commencement, the Yamuna-Taj region has seen an uptick in investment

with the whole stretch along the Yamuna Expressway bustling with real estate

activity. Another example which resonates the success of this up gradation is the

huge interest from major players willing to invest in automobiles, textile and agro-

tech sector’s under the Yamuna Expressway Industrial Development Authority.

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Bibliography

 I.M. Pandey, (1991), Financial Management.

 Prasanna Chandra, (1984), Financial Management: Theory and Practice.

 Michael Rees, (2008), Financial Modelling in Practice: A Concise Guide for

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References

Corporate Finance Institute. (2018, April 17). Retrieved from corporate finance institute:
https://corporatefinanceinstitute.com/resources/knowledge/finance/project-finance-primer/

Corporate Finance Institute. (2028, July 20). Retrieved from Corporate Finance Institute:
https://corporatefinanceinstitute.com/resources/knowledge/modeling/what-is-financial-modeling/

Hayes, A. (2019, April 22). Investopedia. Retrieved from investopedia.com:

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