VCE INTERNSHIPS

Module 4 – Internship Report

 ACKNOWLEDGEMENT

The report is prepared by Sahaj Sharma of NMIMS Hyderabad. This report is benefitted from
the contributions of VCE and is prepared under the guidance of Mr Ashish Kumar.
I would like to thank VCE for the knowledge and teachings on how to go about the project
without which I would not be able to do the project.
Secondly, I would like to thank my peers in the internships as their never ending and thought-
provoking doubts helped me to make the project better on the group calls held by the mentor.
I would like to state that the report is genuine and original work of Sahaj Sharma and lastly I
would like to thank VCE for supporting me in this journey.
The project has key insights on a particular case of a project finance.

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 EXECUTIVE SUMMARY

Through the internship in VCE I was able to garner the knowledge of how a special purpose
vehicle works in getting the financials of the project right and is able to predict the cashflows
and returns from the project. In this project we were asked to select a project finance case and
prepare financial model based on the case and calculate the IRR and DSCR and show the
workings. Through the basic assumptions provided to us in the case we have to formulate the
cost, revenue, cash flows and how the debt is going to be paid back to the creditors.

In the internship this project was introduced to us in the end after giving us prior knowledge
of what exactly is a project finance and in Module 2 we were shown a financial model based
on which we have to do this project in this module.

In this internship I have personally learnt how to apply the concepts learnt in theoretical
classes to a real practical problem and how a financial model is made and represented.
Moreover, I have learnt different business models of Project Finance such as Solar Plant,
Expressway Project, Infrastructure Project, etc.

In this project we have concluded the learnings from the internship and prepared a thorough
financial model as well as the interpretation gathered from it.

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Table of Contents

Tables 3
Table of Figures 4
Tables 5
Chapter 1 - Introduction 6
Chapter 2 – Case selected ……………………………………………………………………………………………………………7

Chapter 3 - Costs …………………………………………………………………………………………………………………………8

Capex……………………………………………………………………………………………………………………………………….8

Opex…………………………………………………………………………………………………………………………………………9

Chapter 4 – Revenue……………………………………………………………………………………………………………………..9

Chapter 5 – Fin Flows……………………………………………………………………………………………………………………11

Chapter 6 – Debt…………………………………………………………………………………………………………………………..14

Chapter 7 – Conclusion…………………………………………………………………………………………………………………15

Bibliography and References ……………………………………………………………………………………………………….16

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Table Of Figures

Topic Page Number

Figure 1 - Displaying the proportion of all 8

costs in the total capex of 2,00,00,00,000

Figure 2- Total proportion of different 9

operating costs in 28,00,00,000 Opex

Figure-3 Annual Traffic with 5% Annual 10

Growth

Figure- 4 Annual Revenue with 5% Growth 10

in traffic

Figure 5 Net Income Growth in Crores in 12

20 years

Figure 6 Project Cashflows in 20 Years in 12

Crores

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Tables

Topic Page Number

Table 1 Capex 8

Table 2 Opex 8

Table 3 Revenue Parameters 9

Table 4 Assumptions List 11

Table 5 DSCR and IRR Results 14

Table 6 Debt and Loan Repayment 14

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 A. Introduction

With the Construction of Hyderabad – Anantpur Expressway, accelerated convenient mode

of Transportation shall be available between the two cities via state capital through other
similar Expressways in the state.

Being an Access Controlled Expressway, it would provide benefits like fuel saving, time
saving and Control in Pollution level, along with reduction in accidents.

The areas covered by this Expressway would be benefited in Social & Economical way. The
agriculture, commerce, tourism and other industrial development will also get a fillip.

Industrial Training Institutes, Educational Institutes, Medical Institutes, New Townships and
other various Commercial set ups shall be developed, especially near the Expressway areas,
which will result into more opportunities for employment in the region. The overall
social/economic development in the state will get a boost.

The proposed Expressway will prove to be a catalyst for development of the region and state.

From the above realisation we tried to gauge the financial feasibility of the project through
this financial model wherein all the assumptions, charts, tables and graphs depict the financial
feasibility of the project taken at hand.

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 B. Case Selected

CASE-05

Project Title : Financial Modeling and Analysis of PPP based Expressway Project in
Hyderabad, TN

Techvardhan Infra Pvt. Ltd (Any Company) “CLIENT” has been alloted a project of building
and operating (for 20 years) a new expressway between Hyderabad and Anantapur AP. They
can charge different charges to the vehicles using the expressway through their Schedule of
Charges, which is averagely calculated as Rs. 160 per vehicle.

They are expecting to have a vehicle traffic of 10000 vehicles per day with an increase of 5%
every year. The expected CapEx is Rs. 200 Crore and OpEx is Rs. 28 Crores / per annum for
the whole expressway project.

They are seeking a non-recourse debt (project financing) with 70:30 as D/E ratio from
leading commercial banks in India as a 12 years term loan.

Please prepare a financial model and analyse the cost, revenue and debt repayment along with
finflow / cash flow analysis. Calculate equity IRR and DSCR.

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 C. Cost of Project

Capex

Table 2 Capex

Item Amount
Construction Cost ₹ 50,00,00,000
R&D ₹ 50,00,00,000
Road Material ₹ 1,00,00,00,000
Total Project Cost ₹ 2,00,00,00,000

Capex

₹
500,000,000
Construction Cost
₹ R&D
500,000,000 Road Material
₹ Total Project Cost
2,000,000,000

₹
1,000,000,0
00

Figure 7 - Displaying the proportion of all costs in the total capex of 2,00,00,00,000

OPEX
Table 3 OPEX

Item Amount
Concessionaire Cost ₹ 10,00,00,000
Operation Fixed Cost ₹ 12,00,00,000
Roadway Heavy Maintenance Cost ₹ 3,00,00,000
Other Maintenance Cost ₹ 3,00,00,000
Total O&M Cost ₹ 28,00,00,000

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 OPEX

Concessionaire Cost
₹
100,000, Operation Fixed Cost
000 Roadway Heavy Maintenance
₹ Cost
280,000, ₹
000 120,000, Other Maintenance Cost
000
₹ ₹
30,000,0
30,000,0 Total O&M Cost
00 00

Figure 8- Total proportion of different operating costs in 28,00,00,000 Opex

D. Revenue Parameters
The expressway project in Hyderabad of 200 km would earn from the tolls collected and
for which the average traffic was to be calculated. Since there are different tolls for
different vehicle we averaged that cost to Rs 160/vehicle. The average traffic for the day
was 10000 vehicles and with a growth of 5% every year.

So, we were able to get following values from these assumptions:-

Table 4 Revenue Parameters

Revenue Parameters  
City Hyderabad
Length of Expressway (km) 200
Average Daily Traffic 10,000
Annual Traffic Growth 5%
Average Charge per Vehicle ₹ 160.00
(Rs)

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 Traffi c Per Year
10,000,000
8,000,000
Annual Traffic
6,000,000
4,000,000
2,000,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Number of Years

Figure-9 Annual Traffic with 5% Annual Growth

Revenue Growth Per Year

1,600,000,000
1,400,000,000
1,200,000,000
1,000,000,000
Amount (Rs)

800,000,000
600,000,000
400,000,000
200,000,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
number of Years

Figure- 10 Annual Revenue with 5% Growth in traffic

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 E. Fin Flows

In the Fin Flows sheet the assumptions taken in the project is clearly mentioned based
on which the model is prepared. Here are the following assumptions taken in the
project:-

Table 5 Assumptions List

Assumptions
Inflation 4% Debt rate 10.0%
Tax Rate 25.00% Moratorium 0.25 yrs
Project Duration 20 Years Debt tenure 12.0 yrs
Construction Time 2 Depreciation 10.00%

Rationales behind taking the assumptions:

1. Inflation – For a developing country an inflation rate of 4% is good enough with margin
of +/- 2%, so we have taken an optimum inflation rate for a developing country.
2. Tax Rate – We have taken 25% Tax rate for the project taking into account any rise/fall
in tax rates as the project is of 20 Years duration.
3. Construction Time – The construction time is taken as 2 Years which is a reasonably
good enough time for the expressway project to start fully functioning. If we eliminate
the politics behind and lags in the construction, it can get completed in 2 years.
4. Depreciation – We have taken depreciation as 10% and the depreciable material is the
road material as a part of capital expenditure.

So, based on the above assumptions and the ones mentioned in the table we got fin
flows with following net income and cash flows

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 Net Income
700,000,000 654,234,471
617,420,658
600,000,000 582,337,033
548,875,357
516,930,572
486,400,392
500,000,000 457,184,894
429,186,090
400,000,000 373,723,612
Amount

344,878,532
317,036,316
300,000,000 281,968,972
248,674,053
216,958,227
186,635,707
200,000,000 157,526,760
129,456,243
102,252,166
100,000,000 75,744,256
49,762,515
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Years

Figure 11 Net Income Growth in Crores in 20 years

project Cashfl ows (EQUITY)

700,000,000 664,404,273
629,267,971
596,019,143
600,000,000 564,568,531
534,832,086
506,730,799
500,000,000 480,190,535
455,141,898
AMOUNT

400,000,000

300,000,000 239,557,423
218,314,254
198,357,142
200,000,000 182,386,344
167,278,314
153,023,043
139,611,729
127,037,084
115,293,653
104,378,119
94,289,628
85,030,117
100,000,000

-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years

Figure 12 Project Cashflows in 20 Years in Crores

The above net income and cash flows in 20 years in the two figures given. In Project Cash
Flow graph, after Year 12 the interest obligations of the company finishes and the cashflows
substantially increase.
From the finflows we arrive at the DSCR and IRR of this project.

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 ds cr
2.50
2.20
2.09
1.91 1.99
2.00 1.84
1.70 1.77
1.58 1.64
1.47 1.52
1.50 1.43
DSCR

1.00

0.50

-
1 2 3 4 5 6 7 8 9 10 11 12
Years

Figure 13 DSCR Growth

In general, a good debt service coverage ratio is 1.25. Anything higher is an optimal DSCR.
Lenders want to see that you can easily pay your debts while still generating enough income
to cover any cash flow fluctuations. However, each lender has their own required debt service
coverage ratio.

DSCR is calculated by dividing a company's net operating income by its total debt service
costs. Net operating income is the income or cash flows left after all operating expenses have
been paid. This is called earnings before interest and taxes (Ebit).

In the above case, the DSCR has been above 1.25 constantly and increasing till the 12th year
till which the interest is paid.

Average DSCR is 1.76, which is an optimal DSCR which is good for the project.

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Table 6 IRR and DSCR Results

RESULTS
Equity IRR 18.79%

Min DSCR 1.43

Avg DSCR 1.76

Project IRR 13.02%

IRR calculated from the FCFE – Free cash flow to equity is the Equity IRR on the other hand
IRR calculated from the FCFF – Free cash flow to Firm is the Project IRR.
Equity IRR which is 18.79%, which is on the basis of the assumptions the expressway project
generates more than required rate of return hence the project is financially viable.
Project IRR also known as WACC which is 13.02% which is on the basis of the assumptions
the expressway project generates more than required rate of return hence the project is
financially viable.
Equity IRR which is the return of a project to providers of equity capital which is cost of
equity which is more than the Project IRR that is WACC which is favourable for the
investors and in this case as well as the Equity IRR is greater than the Project IRR.

F. DEBT/LOAN Repayment Schedule

A loan of 140 crores was taken for the project as given by the D/E of the project that is 70/30.
Table 7 Debt Repayment Schedule Assumptions

Debt Amount 1400000000

Debt rate 10.00%
Moratorium 0.25 yrs
Term 12.0 yrs
Payment 48
Periods

Based on these assumptions, A debt/loan repayment schedule is prepared.

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 G. CONCLUSION

After taking into account cost, revenue, fin flows and debt repayment schedule we can
safely say that the project is financially feasible with a project IRR of 13.02% given
the assumptions taken in the model.

The project would take a construction time of 2 years after which it provides profit
from year 1 and it increases every year as given in the model thanks to the increasing
traffic on the expressway, more the traffic, more would be the revenue of the project.

The D/E strategy of 70/30 works for the project as it not only provides with enough
DSCR in the 12 years but also provides above optimal DSCR which if not used can be
put back to profits.

The tax rate assumed at 25% can be changed in the model based on the current tax
rate regime as there is interlinkage in the model it would work perfectly fine even if
one of the assumptions is tweaked.

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References

 http://yamunaexpresswayauthority.com/yep.html

 https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit-russian/6/pdf-
version/numerical_model.pdf

 http://103.241.144.46:81/pdf/road_show/9_Project_Finance_in_PPP_By_Sri_Chaitanya_Tal
walkar_AXIS_Bank.pdf

 https://www.researchgate.net/publication/327232517_A_New_Financial_Model_of_Toll_R
oad_Infrastructure

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