Table of Contents

I. EXECUTIVE SUMMARY...............................................................................................................1
II. BACKGROUND INFORMATION..................................................................................................7
2.1. The Applicant.............................................................................................................................7
2.2. Contact Person...........................................................................................................................7
2.3. Certificates and Licenses............................................................................................................7
2.4. Brief History of the Company and the Project...........................................................................8
2.5. Capital Structure of the Company..............................................................................................8
2.6. Past performance of the Project /Business.................................................................................9
2.7. Reason for Expansion & Future Plan of the Project.................................................................13
2.8. Credit Information of the Company.........................................................................................13
2.9. The Loan..................................................................................................................................14
III. KEY SUCCESS AND RISK FACTORS........................................................................................14
3.1. Key Success Factors.................................................................................................................15
3.2. Risk Factors..............................................................................................................................17
3.3. Risk Mitigating Measures........................................................................................................17
3.4. SWOT Analysis.......................................................................................................................17
IV. MARKET STUDY...........................................................................................................................18
4.1. Overview of Global Leather Market........................................................................................18
4.2. Leather Uses by End Product...................................................................................................21
4.3. EU Leather Market...................................................................................................................22
4.4. African Leather Market............................................................................................................23
4.5. Leather Market in Ethiopia.......................................................................................................24
4.6. Export Destination of Ethiopian Leather..................................................................................25
4.7. Marketing Strategy of the Project.............................................................................................26
4.8. Pricing Strategy........................................................................................................................26
V. TECHNICAL STUDY.....................................................................................................................27
5.1. Project Location.......................................................................................................................27
5.2. Land Availability.....................................................................................................................27
5.3. Plant Layout and Civil Work....................................................................................................27
5.4. Machineries and Equipments...................................................................................................29
5.5. Vehicles....................................................................................................................................30
5.6. Generator..................................................................................................................................31
5.7. Utilities.....................................................................................................................................31
5.8. Material Inputs.........................................................................................................................31
5.9. Production Process and Production Capacity...........................................................................32
5.10. Environmental Impact Assessment..........................................................................................37
5.11. Implementation Plan................................................................................................................38
VI. ORGANIZATION STRUCTURE AND MANAGEMENT.........................................................39
6.1. Organizational Structure..........................................................................................................39
6.2. Project Management.................................................................................................................40
6.3. Training Requirement and Employee Remuneration and Benefits..........................................40
VII. FINANCIAL ANALYSIS................................................................................................................42
7.1. Fund Allocation........................................................................................................................42
7.2. Source of Fund.........................................................................................................................43
7.3. Expected Financial Results......................................................................................................45
VIII.SOCIO ECONOMIC BENEFIT....................................................................................................47
IX. CONCLUSION AND RECOMMENDATION.............................................................................48
9.1. Conclusion...............................................................................................................................48
9.2. Recommendation......................................................................................................................49
9.3. Terms and Conditions..............................................................................................................49
X. ANNEXES........................................................................................................................................53

Davimpex Enterprise Bahirdar Tannery PLC i

I. EXECUTIVE SUMMARY

Davimpex Enterprise Bahir Dar Tannery PLC was established in 1998 G.C. by Ato Yigzaw
Assefa and W/ro Hermela Seyoum. The Company was established with an initial capital of Birr
6,000,000, and later raised to Birr 11,000,000. Following its establishment, the Company
established tannery project in Amhara region Bahirdar town kebele 07 on the total land area of
29,929 m2 acquired for 70 years based on lease agreement made with Bahirdar Liyu Zone
Administration on 08/12/1989 E.C.

Initially, the main objective of the company was to produce pickle from sheep and goat skins and
exports these products to the international market. In the mean time, the company upgraded its
sheep and goat skins production to finished leather and has been supplying finished leather to the
global market. The company, which has been in the international leather market for the last 16
years, has got popularity in the export of finished leather to the global leather market.

In order to assess the past performance and project its future, we have tried to review the loan
files of the Company. Since its establishment in 1998, the Company has credit relation with
DBE. Based on the last 8th additional loan and mortgage contract dated on November 19, 2013,
the revised total investment cost of the project was Birr 62,751,712. Among, Birr 43,162,766.40
(69%) was covered by DBE loan while the remaining Birr 19,588,945.60 (31%) was the share of
the Company. Currently, the company’s loan position as at December 12, 2015 shows an
outstanding principal loan of Birr 31.445 million.

The Company has been registering a good progress even though the sector has enormous
challenges. All the proposed loan and equity contribution in former appraisal reports were fully
utilized for the intended purposes. The project’s production and productivity, sales revenue and
profitability have been improving through time. It has been producing high quality glove finished
leather for the international market for the past five years. Gradually, the Company started
producing glove finished leather at a pilot level in 2012. Since then, it has been producing and
exporting glove finished leather for international market at a very level. Moreover, the Company
has distributed samples of leather gloves to various Europe and Japan markets and has received
encouraging responses.

Davimpex Enterprise Bahirdar Tannery PLC 1

Based on its gloves finished leather production and exporting experiences, the encouraging
international market responses, the significance of value addition and foreign exchange earnings,
the Company decided to upgrade from production of finished leather to gloves, bags and leather
garments production. For its achievement, the Company has already acquired 8,714m 2 of land
which last for 80 years based on lease agreement made with Bahirdar Town Municipality Office
on 28/12/2004 E.C. of land in Bahirdar town for the establishment of glove and leather products
Manufacturing Project. After undertaking all the necessary preparations, the Company
approached our Bank for expansion loan to strengthen the existing tannery project and forward
integrate with leather products manufacturing project and requested loan repayment rescheduling
for the existing (original) loan. In addition to this, the Company has also facilitated co-financing
facility with the Netherlands Company named Common Fund for Commodities for loan amount
of USD 300,000. The National Bank of Ethiopia has also given its consent to register the external
loan with its letter dated on February 1, 2016 and ref. no. FEMRMD/1/154/16. After carefully
assessing the status of project as well as the Company, the Credit Process has recommended
financing of the project and forwarded the client’s file to us for further assessment.

Accordingly, the team has carefully assessed the key elements of the project that can determine
the success rate of the project. Since the Company is our existing client, its creditworthiness has
already been verified and confirmed. As a result, the virtual appraisal team has proceeded to
assess the viability of the project.

The next important element that the virtual appraisal team has tried to assess was the past
performance of the project. Building and construction, machineries and equipments, and other
necessary facilities have already been constructed, purchased, and installed and the required and
qualified human resources have already been hired. As we have mentioned above, the project has
been growing since its establishment. Its production and productivity, sales performance and
profitability have been improving through time. All these and others that are not mentioned but
potentially reveal the strength of the Company can easily motivate anybody to help this growing
Company.

Davimpex Enterprise Bahirdar Tannery PLC 2

In view of the fact that market condition for the proposed products has vital role for the
realization of the objectives of establishment of the proposed project, the team has also tried to
review the past, contemporary as well as forecasted demand and supply condition and price of
the planned products based on the past and current performance of the Company and the studied
commodity study. The submitted feasibility and follow-up report of the Credit Process have
confirmed that the project has good market potential. In addition to this, based on commodity
study of the Bank, we have tried to assess future demand of the planned product and we have
confirmed that there is excess demand for the existing and product even at a relatively higher
price. Therefore, instead of threat to the project the prospective market situation of the product
can be seen as an opportunity.

Technical viability of the project has also been assessed. All the required buildings and
constructions of the existing tannery project have already been constructed and their value and
appropriateness are verified by the Bank’s Civil Engineer. Machineries and equipments required
for same has also been procured and installed and they are fully operational. Mechanical
Engineer of the Bank has also valued and confirmed that they are on a good condition. In
addition to these, the Company has submitted pro forma invoices for machineries and
equipments that will be employed for leather products manufacturing expansion project. Besides,
the Company has requested and submitted pro forma invoices of some machinery to strengthen
and solve the bottlenecks of the existing tannery project. Accordingly, Mechanical Engineer has
evaluated and recommended all the necessary machineries and equipments that are technically
viable and their costs are included in the total investment cost of the project.

For smooth and optimal operation of the project, proper organizational structure and human
resource have significant roles. As a result, we have also tried to evaluate the existing and
required organizational structure and human resource of the project. The Company has already
implemented proper organizational structure and hired required human resources for the existing
business. So as to include the expansion part of the project, we have modified the existing
organizational structure and proposed additional required human resources.

Davimpex Enterprise Bahirdar Tannery PLC 3

Based on the detail assessment made by the appraisal team, the total investment cost of the
project (existing plus expansion) estimated to Birr 124,470,733. Among this Birr 64,468,081
(52%) is existing investment cost, whereas the remaining Birr 60,002,652 (48%) is the planned
(expansion) investment cost of the project that will be used to strengthen the existing projects
and planned expansion part of the project. In addition to this, the virtual appraisal team has also
assessed the loan repayment rescheduling request of the Company. The Company has justified
that the last year project’s revenue declined due to economic slowdown of Russia and Far East
Asian countries which are major buyers of the Company’s product. Besides, the Company has
also utilized the existing fund for the facilitation of expansion project. Accordingly, the virtual
appraisal team has carefully assessed and accepted the loan repayment rescheduling request.

The financial projections made shows that the project is financially viable and found to be
lucrative by all parameters of investment decisions employed in the financial analysis. In the
past, the project has been registered good financial progress. The current financial projections of
the combination of existing and expansion part project are also revealing the same. It is found to
be profitable, liquid and with acceptable FIRR, and also less sensitive to adverse scenarios.

Based on the projected financial statement, the project will earn profit of Birr 4,982,799 from
existing part during the base year of its operation and Birr 8,005,113 from expansion part of the
project during its first year of operation. During the last 10 th year of projection, the project will
earn net profit of Birr 8,011,381 from existing and Birr 20,542,709 from expansion part of the
project. The expansion part of the project will increase the net profit of the project by an average
of 273% annually during its operational periods. This indicates that the expansion part of the
project will add values & flourishes the existing.

Furthermore, the forecasted cumulative cash balance of the existing part of the project shows a
balance of Birr 2,239,273 during the base year and will grow up to Birr 52,283,873 at the end of
project period. The expansion part of the project will also have cumulative cash balance of
Birr 7,036,417 during its first operational period and Birr 108,210,999 during the tenth year. Due
to the current expansion, the cumulative cash balance of the project will increase by an average
of 242% annually. These all are demonstrating that the project will not face liquidity constraint
to finance its operational costs as well as debt obligation, and the expansion part of the project
will add value to the existing project.

Davimpex Enterprise Bahirdar Tannery PLC 4

By using budgeting techniques, the project is also financially viable & capable to achieve its
objective covering all its costs even in adverse conditions that can possibly affect either project
cost or revenue. The aggregate before and after tax IRR of the project is 34% and 26%,
respectively. These reveal that the project is financially viable. The sensitivity test carried out
also reveals that the project will not significantly be affected by adverse circumstances that may
happen during operations. The after tax FIRR of the project will decline to 15%, 18%, and 24%,
due to a 10% decline in revenue, a 10% increase in operating cost and a 10% increase in
investment cost, respectively.

Establishment of the project has also various socio-economic importances for the country. Some
of them are: creation of employment opportunity, source of government revenue in the form of
tax and royalty fee, and its GDP contribution are among the benefits of the project. In addition to
these, the subsector has strong linkage with tannery subsector, and can be a potential market for
their output. Above all, the project has significant contribution to generate foreign currency.

However, unhidden fact, it does not mean that the project is free from obvious business risks.
The project has also adverse environmental impact. But, with appropriate mitigating mechanisms
and proper follow-up, associated risks as well as environmental impact can be reduced.

By considering all the above facts and findings, Appraisal Team I found that financing the
proposed expansion project for its implementation is commendable and appropriate. Therefore,
the team has proposed and approved the total loan amount of Birr 49,003,386 at its level along
with additional equity of Birr 4,607,225 and co-financing loan of Common Fund for
Commodities of Birr 6,392,040 ($300,000). In addition to this, the team believed that
rescheduling the previous loan repayment will ease its financial burden and provide breathing
time until the project returns to the right track. The virtual appraisal team also extended the loan
repayment schedule of the project from the beginning of July 31, 2015 to July 31, 2016 and
ending of October 31, 2018 to April 30, 2025 due to delay of implementation schedule so that
the project can service its debt without unnecessary pressure.

Summary of the financial projection is depicted below.

Davimpex Enterprise Bahirdar Tannery PLC 5

I. Revised Project Investment Cost

Davimpex Enterprise Bahirdar Tannery PLC 6

 Existing Investment Expansion Investment Aggregate Investment
Description
Amount Percentage Amount Percentage Amount Percentage
Total Fixed Investment Costs 43,867,586 68% 36,337,635 61% 80,205,221 64%
Pre-production Capital Expenditure 781,893 1% 4,499,945 7% 5,281,838 4%
Working Capital 19,818,603 31% 19,165,071 32% 38,983,674 31%
Total 64,468,081 100% 60,002,652 100% 124,470,733 100%
-

II. Revised Source of Fund

Existing Investment Expansion Investment Aggregate Investment

Description
Amount D/E Ratio Amount D/E Ratio Amount D/E Ratio
Original Investment Cost
Debt -DBE Loan 31,445,388 49% 49,003,386 82% 80,448,775 65%
Debt - CFC Loan - 0% 6,392,040 11% 6,392,040 5%
Equity 33,022,693 51% 4,607,225 8% 37,629,918 30%
Total 64,468,081 100% 60,002,652 100% 124,470,733 100%

III. Expected Financial Results

Existing Investment Expansion Investment Aggregate Investment

Description
Base Year Year-10 Year 1 Year-10 Base Year Year-10
Sales Revenue 88,855,139 114,242,321 41,075,249 61,612,874 88,855,139 175,855,195
Profit (Loss) 4,982,799 8,011,381 8,005,113 20,542,709 4,982,799 28,554,090
108,210,99
Cumulative Cash Balance 2,239,273 52,283,873 7,036,417 2,239,273 160,494,873
9
FIRR before Tax = 24% 42% 34%
FIRR after Tax = 18% 34% 26%

IV. Sensitivity Analysis

Existing Investment Expansion Investment Aggregate Investment

Description IRR IRR IRR IRR IRR IRR
Before Tax After Tax Before Tax After Tax Before Tax After Tax
When Revenue decreased By 10% 1% 1% 34% 28% 19% 15%
When Operating Costs increased By 10% 4% 4% 39% 32% 22% 18%
When Investment Costs increased By 10% 21% 16% 39% 31% 30% 24%

II. BACKGROUND INFORMATION

Davimpex Enterprise Bahirdar Tannery PLC 7

I.1. The Applicant

 Name: Davimpex Enterprise Bahirdar Tannery PLC

 Address
 Region: Amhara  Mobile: +251 911 20 09 97
 Zone: Bahirdar Liyu Zone  Telephone : +251 115 53 59 78
 Town: Bahir Dar  P. O. Box: 482 code 1110
 Kebele: 07

I.2. Contact Person

 Name: Ato Yigzawu Assefa Woldie

 Address:
 City: Addis Ababa  House No.: 479
 Sub-city: Bole  Mobile: +251 911 -20-09-97
 Kebele: 05  Email:[email protected]

I.3. Certificates and Licenses

 Legal form of Business:- Private Limited Company

 License Registration or/and Renewal
 Investment Certificate
- Licensing Agency: Amhara Investment Agency
- Licensing Date: 09/05/2004 E.C
- License Number: ABK/EMA/EF 01-4-1/250/
 Trade License
- Registering Organ: Ministry of Trade
- License Number: 03/213/20435/2004
- Registration Date: 1/03/2004 E.C.
 TIN No.: - 0000961803
 VAT No.: - 012960
 Land Lease Certificate No.: 4/114/04
 Type of the Project: - Finished Leather and Leather Products Manufacturing
 Objectives of the Project: - Production of finished leather, high quality leather gloves, bags
and leather goods for local & international markets.

Davimpex Enterprise Bahirdar Tannery PLC 8

I.4. Brief History of the Company and the Project

Davimpex Enterprise Bahirdar Tannery PLC was established in 1998 G.C. by Ato Yigzaw
Assefa and W/ro Hermela Seyoum. The company was established with initial capital of birr 6
million. Currently its capital is grown to 11 million. Initially, the main objective of the company
was to produce pickle from sheep and goat skins and export those products to the international
market. In the mean time, the company upgraded its sheep and goat production to production of
finished leather and leather products for the global market.

Currently, the company has been supplying products of sheep and goat skins finished leather to
international market mainly Italy, Hong Kong, Germany, China, Korea, France and Philippines.
As per report follow up report of credit process, the sales performance of the company is good,
but it is not satisfactory. As the result, the company is committed itself for a better achievement
and started to solve the bottle necks to be satisfactory.

I.5. Capital Structure of the Company

The Company was established with an initial capital of Birr 6,000,000, and later raised to Birr
11,000,000. Since the registered capital is below the required minimum equity contribution, the
Company should raise its paid-up capital at least to the level of equity contribution. The detail of
the capital structure is shown in the following table.

Table 2.1: Capital Structure of the Company

Sr. Number Share Value Total Share

Name of Share Holders Nationality
No. of Share (Birr) Value (Birr)
1 Ato Yigzaw Assefa Ethiopian 700 11,000 7,700,000
2 W/ro Hermela Seyoum Ethiopian 300 11,000 3,300,000
Total 1,000 11,000,000

Davimpex Enterprise Bahirdar Tannery PLC 8

I.6. Past performance of the Project /Business

I.6.1. Summary of Operational Performance (Physical Performance)

According to the credit team follow up report, the production, the sales performance of the
Company in terms of plan accomplishment is not adequate. Accordingly, the sales performance
submitted by the company, the project processed 314,046 pieces of skin and hides and sold
293,331piece of same in the fiscal year of 2014/15 that is worth of Birr 56,360,291.

The sales business of the tannery constitutes export sales of sheep and goat skin leather and local
sales of both skins and hides leather. As indicated above the major business activity of the
tannery is export oriented and most of the sales revenue of this year is gained from export sales
which accounts for 80.5 % of its sales. The export and local sales revenue have significantly
increased from Birr 40.73 million and Birr 4.99 million in 2011 to Birr 45.34 million and Birr
11.02 million in 2015 respectively. The increase in the revenue of export sales is attributed
mainly to increase in sales prices on the one hand, and the devaluation of Birr against the USD,
on the other, whereas the increase in the revenue of local sales is contributed by increase in sales
is contributed by increase in sales volume and sales price.

The detail of production and sales performance for the past three years is depicted on the below
table.

Davimpex Enterprise Bahirdar Tannery PLC 9

 Table 2.2: Production and Sales Performance
Quantity sold pcs Price per ft 2 Revenue
Sr. Type of
Grade Actual Actua Actual
No product Planned Variance Planned Planned Variance
Local Export Total l Local Export Total
1-3' 100,97
199,001 35,858 136,830 -62,171 44.79 50.89 40,109,973 5,351,012 25,986,084 31,337,096 (8,772,877)
2
Sheep 4 145,934 15,066 69,180 84,246 -61,688 44.79 39.67 29,413,980 1,766,959 13,270,701 15,037,659 (14,376,321)
1
Leather 5 126,034 12,932 39,774 52,706 -73,328 25 27.89 14,178,807 927,848 5,685,965 6,613,813 (7,564,994)
6 79,600 3,745 - 3,745 -75,855 25 13.67 8,955,036 230,305 - 230,305 (8,724,731)
209,92
Sub-total 550,569 67,601 277,527 -273,042 92,657,796 8,276,124 44,942,750 53,218,873 (39,438,923)
6
1-3' 45,874 7,547 2,100 9,647 -36,227 92.4 18.69 19,075,216 465,294 346,134 811,428 (18,263,788)
4 19,021 200 200 -18,821 92.4 33.30 7,909,236 - 29,972 29,972 (7,879,264)
Goat
2
Leather 5 17,902 257 157 414 -17,488 19 16.84 1,530,628 12,425 18,940 31,364 (1,499,264)
6 10,070 - - - -10,070 19 - 860,978 - - - (860,978)
Sub-total 92,867 7,804 2,457 10,261 -82,606 29,376,058 477,719 395,046 872,764 (28,503,294)
1-3' 11,508 4,975 - 4,975 -6,534 17.83 41.36 4,924,709 2,057,469 - 2,057,469 (2,867,240)
4 4,316 - - - -4,316 17.83 - 1,538,971 - - - (1,538,971)
Cow
3
Hides 5 3,596 539 - 539 -3,058 17.83 37.59 923,383 202,444 - 202,444 (720,939)
6 2,158 30 - 30 -2,128 17.83 29.14 8,741 - 8,741 8,741
Sub-total 21,578 5,543 - 5,543 -16,035 7,387,063 2,268,654 - 2,268,654 (5,118,409)
212,38 11,022,49
Total 665,014 80,948 293,331 -371,683 129,420,917 45,337,795 56,360,291 (73,060,626)
3 6
Source: Credit Team follow-up report

Davimpex Enterprise Bahirdar Tannery PLC 10

I.6.2. Summary of Financial Performance (as indicated in financial statements provided)

As the past financial performance of any business is very crucial for future prediction, we have
tried to inspect trend financial performance of the project. The past three years audited financial
statement reports of the project are illustrated and discussed as follows.

i. Balance sheet Statement

In order to assess the assets and capital structure of the project, we have tried to go through
audited Balance Sheet Statement of the Company. Accordingly, the Company’s total assets have
been grown from Birr 60,682,178 on June 30, 2013 to Birr 68,029,397 on July 30, 2014. But it
declined from Birr 68,029,397 of 2014 to Birr 64,307,550 on June 30, 2015. The detail of the
Balance Sheet Statement of the project is shown below.

Table 2.3: Balance Sheet Statement Report of the Company

Description June 30, 2013 June 30, 2014 June 30, 2015
Current Assets 43,861,170 45,665,436 43,188,063
Fixed Assets 16,821,008 22,363,961 21,119,487
Total Assets 60,682,178 68,029,397 64,307,550
Total Current Liability 28,265,312 21,122,468 17,779,307
Total Long Term Liability 19,583,134 29,316,515 29,316,515
Total Capital 11,000,000 11,000,000 11,000,000
Legal Reserve 946,725 1,209,864 1,209,864
Retained Earning 887,006 5,380,550 5,001,865
Total (Liability + Capital) 60,682,178 68,029,397 64,307,550

The rationale behind decline is depreciation since the additional investment undertaken was
immaterial as compared to depreciation expense of the year. Overall, the assets accumulation of
the Company is good.

Davimpex Enterprise Bahirdar Tannery PLC 1

1
ii. Profit/Loss Statement

Based on the submitted audited financial report, we have also tried to assess financial
profitability of the Company. As depicted on the below table, the profitability of the Company is
also inspiring. Over the past three years, the company has been registering profit which is good.
From the table we understood the company got the highest profit in the 2014 fiscal year. The
detail is described in the following table.

Table 2.4: Profit/Loss Statement of the project from July 1, 2011 – July 7, 2014
Description June 30, 2013 June 30, 2014 June 30, 2015
Sales 42,193,983 57,379,278 57,373,266
Operating Expense (34,053,364) (41,659,150) (43,066,411)
Gross Profit 8,140,619 15,720,129 14,306,855
Overhead Costs incl. Depreciation (7,350,947) (5,199,941) (11,404,910)
Net Loss/Profit (Before Tax) 789,672 7,266,384 2,901,945
Profit Tax (388,715) (2,003,604) (1,476,868)
Net Loss/Profit 887,007 4,999,641 1,425,077

iii. Cash Flow Statement

For the periods covered by the audit report, the cash flow status of the Company was not this
much satisfactory. During 2013 and 2014 the cash flow is positive and it is negative in 2015. The
detail of the cash flow under the submitted years is described below.

Table 2.5: Cash Flow Statement of the Company

Description June 30, 2013 June 30, 2014 June30, 2015
Total Cash Inflows 17,796,129 20,417,598 13,152,1977
Total Cash Outflows (17,787,937) 19,889,877 14,076,585
Net Cash Flows 8,192 527,721 (924,388)
Cumulative 8,192 527,721 (924,388)

Davimpex Enterprise Bahirdar Tannery PLC 1

2
I.7. Reason for Expansion & Future Plan of the Project

As per information of credit team follow up report, the company collected the raw skins from
different areas such as West and East Gojjam, North and South Gondar and Addis Ababa
however; securing permanent suppliers of skin and defects in its quality affects negatively the
production capacity of the company.

Despite the attention given to encourage the sector, the country has not yet efficiently utilized its
potential resource of livestock. Shortage of tanneries that can process hides and skins up to the
finishing stage is one of the major factors attributed to this situation. To alleviate such problems
and exploit the benefit expected to be collected from value added production process, enhancing
and upgrading operational levels existing tanneries is crucial measure especially to produce
competitive quality products to the international market.

Therefore, based on its glove production and exporting experiences, the significance of the value
additions and foreign exchange earning the tannery is determined to upgrade its finished leather
production to higher value additions of glove, garment, bags and other leather goods productions.
Moreover, the performance of the existing tannery has been critically reviewed by the company
and as a result, it is identified that the tannery has been suffering from bottlenecks in many stages
of the production process and chronicle shortage of working capital attributed to capital tied up of
unsalable semi-processed skins and hides due to deterioration in quality.

The Company decided to upgrade from production of finished leather to gloves, bags and leather
garments production. After undertaking all the necessary preparations, the Company approached
our Bank for expansion loan to strengthen the existing tannery project and forward integrate with
leather products manufacturing project. After carefully assessing the status of project as well as
the Company, the Credit Process has recommended financing of the project and forwarded the
client’s file to us for further assessment.

I.8. Credit Information of the Company

I.8.1. With DBE

Based on T-24 report, the company has undue principal and interest of Birr 27,062,341.16 and
Birr 342,154.17, respectively and due principal and interest of Birr 4,383,047.13 and Birr
281,862.54, respectively, as at March 11, 2016. The detail is described in the following table.
Davimpex Enterprise Bahirdar Tannery PLC 1
3
 Table 2.6: Loan Position as at March 11, 2016
Undue Loan Balance (Birr) Due Loan Balance (Birr) Commitment
Loan
Loan Number Balance
Principal Interest Principal Interest Status
(Birr)
Special
AA11365C0016 27,062,341.16 342,154.17 4,383,047.13 281,862.54 - Mention
Source: T-24 core banking system

I.8.2. With Other Financial Institutions

As per the credit information of National Bank of Ethiopia dated November 11, 2015 with
enquiry ID: 340780, the company has credit relation with Wegagen Bank S.C. As depicted
below, the Company has pass credit status.

Table 2.7: Company’s Credit Information with Other Local Banks

Current Loan Loan
Name of Institution Loan Amount Purpose
Balance Status
Wegagen Bank S.C 500,000 419,376.73 International Trade (Import) Pass

I.9. The Loan

Sr. Loan Loan Variation

No Description Requested Proposed Reason for Variation
. (Birr) (Birr) (Birr)
The proposed loan is based on the Bank's
1 Building and Construction 16,647,305
Civil and Electrical Engineers revised cost.
2 Machineries & Equipments 7,782,735
The proposed loan is based on the submitted
3 Vehicles 3,947,350
pro forma invoices and recommendation of
4 Generator 542,750
the Bank's Mechanical Engineer, and the
Office Furniture & total cost shall be financed by the loan.
5 39,148,000 419,001 9,855,386
Equipments
The proposed loan is based on estimated
6 Electricity Installation 499,175
electric installation cost by EEU.
The proposed working capital is determined
7 Working Capital 19,165,071 based on the parameters given by commodity
study and data supplied by the Company.
Total 39,148,000 49,003,386 9,855,386

Note: - Based on the submitted feasibility of the project, the total planned investment cost of the project is
Birr 59.87 million. Among this, Birr 14.722 million and Birr 6 million were assumed to be
covered by the Company’s equity contribution and CFC loan, respectively. The remaining Birr
39.148 million was assumed to be covered by DBE loan. However, since the existing investment
of the project is sufficient to meet the required minimum debt-equity ratio of 70-30 as per the
bank policy, except the pre-production expenditures of the project, the planned investment cost of
the project is planned to be covered by DBE and CFC loan. According to the virtual appraisal
team determination, the total planned investment cost is Birr 60,002,652. Among this, Birr
49,003,386 (82%) will be financed by the DBE loan, Birr 6,392,040 ($300,000) (11%) shall be

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 financed by Common Fund for Commodities based on approved co-financing facility and the
remaining Birr 4,607,225 (8%) will be covered by the Company’s own equity contribution.
II. KEY SUCCESS AND RISK FACTORS

II.1. Key Success Factors

II.1.1. Macro Level Success Factors

 The country has registered a continuous economic growth for the past few consecutive years.
Considerable economic growth is also expected for the coming years indicating the right
track the country is following to achieve middle income Ethiopia.

 The government policy and strategies initiates the business persons to invest capital. Among
these low cost of lease land, low bank rate and low taxation rate can be taken as indicative.

 There is stable and conducive economic and political environment in the country which is
one of the factors to attract investors for investment.

 The government has availed different incentive systems to attract investment in the country.
Tax exemption in importation of investment goods, availing land at reasonable price or free
of charge in some regional governments, established bonded manufacturing warehouse
systems, export credit guarantee scheme, voucher systems, etc.

 There is improvement in basic infrastructural facilities like road network, hydro power plants
and telecommunication which are the critical factors in attracting investments

 The government has availed a credit facility to be financed to investment projects with
particular emphasis /priority/ to export oriented and manufacturing projects. This project
could take advantage of it as it is the government's priority area.

 The country as LDC is characterized to have least labor cost. Investments made on labor
intensive industries will take advantage of this low labor cost that could result in low
production cost.

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II.1.2. The Key Sub-sector Success Factors

 The sub-sector is one of the priority areas in the government industrial development strategy
and it has enjoyed every advantage that is rendered for the priority sectors.

 The country has also easily trainable and abundant manpower. Currently, different
governmental Universities and TVET colleges are providing trainings for students on
technical and other related disciplines to fill the gap on trained manpower requirement.

II.1.3. Firm Level Success Factors

 Character: Based on the past track record, the Company has good loan repayment
performance. However, the company should submit the tax clearance letter from ECRA to
verify the whether the company has been meeting tax obligation.

 Capacity/Competence: according to credit follow up report the company employed the

professional employees those produce quality products and make the company to compete
with firms in the market. Therefore, no problem of capacity and competence.

 Capital: The registered paid up capital of the company is Birr 11 million. Since the
registered paid up capital of the Company is below the required minimum equity
contribution, the Company should raise its registered paid-up capital at least to the level of its
required equity contribution.

 Collateral: Since the project is categorized under priority area projects, the project itself is
big enough to mitigate the risk of default.

 Compliance: All permits and licenses required for the project have been submitted. The kind
of business itself is in line with the Government’s laws and regulations and also the project is
one of the priority area projects of DBE. Thus, it is possible to say that the project complies
with all national, local laws and regulations and with all the bank’s policies and procedures.

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II.2. Risk Factors

 Quality product: the nature of the project is quality sensitive. According to the market
strategy of the company, the products sold both at local and international market.
Especially the products needed for export should have quality to compete with the
international firms. But, most of the time the quality product concern with the input used.
The raw material used for this purpose lacks quality from domestic market. To import
raw materials from abroad, it is too cost and affects the profitability. Thus, using poor
quality input gives poor quality product and this is one of the risk factor of the project.

II.3. Risk Mitigating Measures

 The company should work with different organization and institution such as universities and
others that can improve the quality of the skin in domestic market.

II.4. SWOT Analysis

 Strengths  Opportunities
 Well experienced exposure management  Good government police towards tannery
 Prosperous and successful work sector
experience of the owner in similar  Strong support and incentives from
business Governments
 Good Marketing Chanel  Wide market opportunity both globally and
 Additional Investment on machineries locally so long as quality standards are meet;
with own source  Stable political environment, peace and
 Effort of product diversification security for both domestic and foreign investor.
 Good loan repayment performance  Good market arrangement

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  Weaknesses  Threats
 Working capital problem  Low quality of raw material domestically
 Poor quality of raw materials ( hides and  High cost of inputs specially chemical
skins)  Seasonality in availability of raw materials
 Rise in the operating cost of the project  Sudden increase in price of major raw
(i.e. raw hides, skins and chemicals ) materials
 Low production and sales performance  Skillful manpower shortage
 High volume of stock of lower grade
skins/hides which cannot be converted
in to cash shortly
III. MARKET STUDY

III.1. Overview of Global Leather Market

III.1.1.World Production
In recent years, the demand for Leather Goods industry has shown a growing trend. Consumer
demand has been shifting toward new design and innovative leather products with changing
fashion trend and lifestyle. Globally, about 18 billion square feet of leather is produced
worldwide by the leather industry a year, which comes to a total estimated value of about USD
40 billion of plain leather. The share of developing countries is also increasing and they are
becoming the global leather industry’s distinct production hubs. Data show that over 60% of the
world's leather production is from the developing world (Global Industry Analysts, Inc, 2010).

In recent years, the global leather market was affected by the world economic downturn
following the international financial crisis. Towards the end of 2008, markets for finished
products were hit hard by a reduction in orders. The abrupt slowdown in global leather purchases
and bleak prospects for demand was especially felt by important buyers of leather and related
products. The following chart depicts the leather production trend for the years 2007 to 2011.

Figure 4.1 World Leather Production Trend

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 World Leather Production Trend
11,111,13 11,087,77 11,252,22 11,063,93
2 9 5 1 10,039,62
9

2007 2008 2009 2010 2011

1 2 3 4 5

Source: Research Process Commodity Study

Countries of Asia-Pacific Region dominate the global leather production volume, while Latin
America represents the fastest growing market. On Country level, China is by far the world’s
largest leather producer. In China, the demand for imported raw material and high-end leather is
high. On average decline in world leather production in 2008 was about 2 percent, with much of
the contraction concentrated in developing countries. Improvement was seen in 2009, with
developing countries likely to lead a moderate recovery. Asian and Latin American countries
have dominated the dynamic of production in recent years; while European output markets have
shrunk considerably.

Table 4.2: World Leather Production by Region

Year
Continent
2007 2008 2009 2010 2011
Asia 4,428,434 4,408,573 4,551,903 4,523,587 4,484,245
Europe 1,487,042 1,466,641 1,466,564 1,443,206 1,399,010
Africa 1,265,438 1,302,986 1,328,100 1,362,166 467,483
North America 1,223,823 1,244,901 1,241,563 1,243,248 1,232,811
Latin America 2,084,356 2,055,602 2,091,897 1,955,401 1,931,894
Oceania 622,039 609,076 572,198 536,323 524,186
World Total 11,111,132 11,087,779 11,252,225 11,063,931 10,039,629
Source: Research Process Commodity Study

III.1.2.World Export of Leather

World Leather export has reached 564 thousand metric ton in 2011 and has exhibited fast recovery
since 2009. In between 2007 and 2009, global leather export performance has sharply declined due
to the effect of world economic crisis. Since 2009, time when the world economy has started

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recovering, the export of leather has grown on average by 14%. The following chart depicts the
leather export trend for the years 2007 to 2011.

Figure 4.3: World Leather Export Trend

World Leather Eport Trend

750000
650000
550000
450000
350000
250000
150000
50000
1 2 3 4 5
Year 2007 2008 2009 2010 2011
World Leather Export 667225 529987 436578 529829 563903

Source: Research Process Commodity Study

Italy is by far the largest exporter of leather in the world with 19% share out of the world’s total
export in year 2011, followed by Hong Kong, Brazil, India and Republic of Korea. The top five
exporters of leather has accounted for 50% of world’s export in same year. Other top exporters of
leather are Germany, China, Chinese Taipei, Mexico and Austria. The following chart depicts share
of top leather exporters in 2011.

Figure 4.4: World Top Exporter Countries

Top Five Exporters Share in 2011

Italy
Others19%
50% Hong Kong
10%

India
7%Brazil
Republic of Korea
5% 9%

Source: Research Process Commodity Study

III.1.3.World Import of Leather

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The total world leather import has reached 589 thousand metric ton in year 2011 and has shown a
recovery since the economic down turn of 2008. Total import of the world has grown by 14 % since
2009. The following chart depicts the leather import trend for the years 2007 to 2011.

Figure 4.5: World Leather Import Trend

World Leather Import Trend

650000
450000
250000
50000
1 2 3 4 5 6
Series1 0 2007 2008 2009 2010 2011
Series2 0 684135 581004 450826 567415 589279
Series3 0 0 0 0 0 0

Source: Research Process Commodity Study

China is the largest importer of leather in the world by accounting 29% share of world’s import in
the year 2011, followed by Hong Kong, Italy, Germany and Vietnam. Together, the top five leather
importing countries have imported 43 % of the world’s import in year 2011. Other top importers of
leather include USA, Romania, France, Poland and Spain. The following chart depicts share of top
leather importers in 2011:

Figure 4.6: World Top Importer Countries

Share of World top Importres in 2011

China
29%
others
43%

Hong Kong
Vietnam 12%
4%

Germany Italy
5% 7%

Source: Research Process Commodity Study

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III.2. Leather Uses by End Product

Leather is used to produce various end products like footwear, garments, auto furniture, gloves
and other leather products, among these the leather footwear industry uses the lines share of
global leather production. Furniture, auto, garment and glove manufacturers are others users of
leather. The following table depicts use of leather by end products.

Table 4.7: World Leather Use by End Products

Millions of
Products % share
Square Feet
Footwear 11,925 52
Garments 2,290 10
Auto 2,340 10.2
Furniture 3,210 14
Gloves 1,010 4.4
Other leather products 2,155 9.4
Total 22,930 100
Source: Research Process Commodity Study

III.3. EU Leather Market

Europe is an important player in the international trade of leather and leather products as it
represents 25% of the world production. EU is also the largest and most dynamic consumer
market of leather goods. The leather industry in EU is highly fragmented and holds a diversified
product portfolio. Quality, design, flexibility, adaptability and quick response to changes are
some of the characteristics of the EU leather industry. Increasingly retailers and brand owners
are also focusing on product traceability and addressing environmental concerns.

Among EU members, Italy is the leading country in terms of number of establishments, number
of employees, production and sales. Spain is the second largest next to Italy. Together, Italy and
Spain, accounts for over 50% of jobs, businesses and sales of leather products sector. Other EU
member states have also a leather industry dynamics especially that of Portugal seems
particularly promising.

However, EU countries are exposed to increasing competition from many other countries,
including countries with low cost labor. Now, the European market is open to imports from
virtually free world. European rights include very low import rules and tariff barriers are

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nonexistent. However, European players still face trade barriers including import duties, tariffs,
excessive labeling or certification requirements outside the EU.

III.3.1.Leather Supply to EU Market

Brazil is the leading leather exporter to EU market followed by India, Argentina, China and
Russia. Between the year 2005-2008, on average their share out of the total export to the EU is;
Brazil (41%), India (27%), Argentina (33%), China (28%) and Russia (26%). Other large leather
exporter countries to the EU market are USA, Ukraine, Pakistan and New Zealand. Table below
shows the top exporter countries to EU market:

Table 4.8: Top Exporters to EU (In million Euros)

Year 2005 2006 2007 2008
Brazil 354 491 575 475
India 168 193 212 204
Argentina 90 86 183 161
China 164 179 161 128
Russia 125 152 143 117
Source: Research Process Commodity Study
III.3.2.Export from EU Countries
Hong Kong, China, USA, Tunisia and Croatia are the major importers of leather from EU
market countries. They respectively imported 23%, 12%, 9%, 6% and 4% of the total value of
leather exported from EU market between the years 2005 to 2011. The other major leather
importer countries from EU market are India, Turkey, Vietnam, Russia and Morocco.

Table 4.9: Top Importer from EU countries (In million Euros)

Year 2005 2006 2007 2008
Hong Kong 599 677 616 534
China 236 293 369 317
USA 273 278 239 205
Tunisia 140 150 180 183
Croatia 58 61 136 147
Source: Research Process Commodity Study

III.4. African Leather Market

Leather is the main export commodity for many African countries. However, Africa hasn’t yet
properly utilized its potential. The actual production so far is smaller as compared to the

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potential. Improving the performance of the sub-sector is critical as it is strategic for economic
and industrial development. By boosting exports, the entire continent can increase benefit. As a
labor-intensive industry, it is an important source of employment across the leather value chain.

Export of leather and leather products from Africa generally accounts for less than 4% of total
exports. Resource wise, African countries have 15% of the world's cattle and 25% of its sheep
and goats, but produce only 14.9% of global output of hides and skins 8% of bovine hides and
14% of sheep and goat skins. Exports of hides and skins have fallen in recent years to below 4%.
The continent's leather industry has not kept pace with the substantial growth of leather and
leather goods in other developing regions. The major challenges facing African leather are:
The quality of hides and skins
A poor and deteriorating infrastructure that affects the supply chain
A lack of foreign investment
Low labor productivity and poor management
Inadequate levels of technological development
Limited or no access to secure working or low-cost capital.
A lack of marketing information, expertise and control.
As the global leather market expands, Africa needs to act to build on its resource in leather and
become a global player. In this regard, there is an ongoing forum in combining a trade fair
involving buyers from all over the world with events including seminars, expert group meetings,
buyers-sellers meetings and factory visits. In this forum, firms and institutions identify measures
to be taken and valuable partnerships are forged. It also brings together professional associations,
trade support institutions, customs, transport companies and various ministries of the host
country to coordinate each event.

The European Union, the main export market for the African leather industry, applies relatively
lower tariffs, with averages of 5.1% for leather, 6.6% for leather clothing accessories and 7.7%
for leather footwear. Many African countries have preferential access to EU markets under
schemes such as the Generalized System of Preferences or the Convention with the African,
Caribbean and Pacific Group of States (ACP).

III.5. Leather Market in Ethiopia

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The major users of finished leather in Ethiopia are leather products industries like footwear
industry, leather garment and leather goods producers. In the past, most of the leather export in
Ethiopia is in the form of the semi-processed form. Currently however, the 150 % levy taxes
discourage semi-processed export in favor of finished leather export. In year 2011 the country
exported 14,979,000 square feet of semi finished leather, while starting from 2012 the country
exported leather in finished form only.

Currently, there are about 21 factories of leather shoe in Ethiopia which are classified under
formal sector. The installed production capacity of these factories is around 11,275,000 pair of
shoes per year per a shift. The finished leather required to make the factories to operate at their
installed capacity is 70,167,708 square feet per year.

Locally produced supply of shoes emanate from formal and informal sector of foot wear. The 21
large scale shoes factories have a license for production and marketing of shoes in the local and
export market. On the other hand, there are around 3,000 micro & small scale factories.

There are 24 leather garment industries registered for production and marketing of leather
garment product like men leather jackets, ladies leather jacket, men leather coat, ladies leather
coat, leather trousers and over coat in the local and export market. Large, medium and small
size, these products are used as causal or occasional wears for both female and men.

Regarding glove manufacturing industries, there are 5 medium and large scale leather glove
producing factories in the country with installed capacity of 6,552 pairs of glove per day.
According to information from Ethiopia leather and leather product development institute, there
are 471 formal micro and small scale enterprises registered and licensed in leather glove
producing factories which are organized in the formal sector. Moreover, there are 177 micro and
55 leather glove producing enterprise organized in informal sector in the year 2012.

Table 4.10: Existing Glove Manufacturing Factories

Sr. Glove Per-
Leather Glove Producing Companies
No. pair/day
1 Universal Leather Product 75
2 Modern Zega Leather Product 20
3 Pittards Products Manufacturing S.C 3,000
4 Otto Kesler 2,857
5 Dave Imex Enterprise 600
Total Installed Capacity 6,552
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 Source: Research Process Commodity Study

III.6. Export Destination of Ethiopian Leather

Manufacturers from Ethiopia exports their product based on pre order of the buyer and purchase
agreement between buyer and selling company. The major market for Ethiopia’s finished leather
is the export market. China is the largest finished leather importing country from Ethiopia
followed by Italy, India, Hong Kong and United States of America. As can be seen from the
following figure, in year 2009 these countries imported 21%, 19%, 12%, 8% and 8% share of the
total finished leather export of the country respectively.

Figure 4.11: Major Export Destinations of Ethiopia in 2009

Destination of Ethiopian Leather-

Others China
Export
32% 21%

Italy
19%
United States
8%
Hong Kong India
8% 12%

Source: Research Process Commodity Study

III.7. Marketing Strategy of the Project

In leather glove and leather garment business, there are great concerns and big expectations of
the customers, which include: quality of the products prices of the products: and integrity of the
supplier (producer). Hence, in order to be able to meet the customers’ expectations and needs,
the envisaged plant will adopt the following strategies and the like.

 Assessing and identifying customers’ preferences of the products (i.e quality, color,
fashion etc.) and produce accordingly.
 Identifying target markets and prioritizing them and produce and supply accordingly.
 Setting competitive and attractive prices.
 Gaining international reputations in quality of products and business integrity and keep it.
 Being consistent in supplying quality products.
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  Taking in to account the market behavior of particularly glove, establishing the
production system in such a way that the plant will be able to produce the goods in
accordance with seasonal market requirements.
 Fulfilling packing standards and being punctual in delivery time.
 Gathering technological feedbacks and customer reactions and taking timely and
appropriate measures accordingly.
 Introducing products in the international leather market using the various means such as
international leather fairs, leather magazines, leather journals, brochures, etc.

III.8. Pricing Strategy

A business can use a variety of pricing strategies when selling a product or service. The price can
be set to maximize profitability for each unit sold or from the market overall. It can be used to
defend an existing market from new entrants, to increase market share within a market or to enter
a new market. Based on the above fact, the Company will use competitive pricing strategy so as
to penetrate the international market.

IV. TECHNICAL STUDY

IV.1. Project Location

The tannery project is located in Amhara Region, Bahirdar Special Zone, Bahirdar town, kebele
07. Whereas, the leather products manufacturing project, the expansion part of the project, is
located at Bahirdar town, Hidar 11 kebele. Both sites are accessible with all the necessary
utilities and infrastructures such as electricity, main road, water, telephone, etc that are crucial
for smooth operation of the project and marketing of its final product.

IV.2. Land Availability

The Company has already acquired 29,929 m2 of land which last for 70 years based on lease
agreement made with Bahirdar Liyu Zone Administration on 08/12/1989 E.C. The total lease

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payment is Birr 448,935 with annual payment of Birr 39,268.5. The company has already paid
down payment of Birr 56,250.

The Company has also acquired 8,714 m2 additional land which last for 80 years for the
establishment of leather products manufacturing expansion project based on lease agreement
made with Bahirdar Town Municipality Office on 28/12/2004 E.C. The total lease payment is
Birr 522,280 with annual payment of Birr 13,852. The company has already paid down payment
of Birr 107,280.

IV.3. Plant Layout and Civil Work

Since the project is an existing and has been operational, all the required building and
construction for existing operation has already been fulfilled. As per Bank’s Civil Engineer
valuation report, the total value of existing buildings and construction is Birr 16,320,457. The
summary of existing building and construction is summarized as follows.

Table 5.1: Summary of Existing Building and Construction

Sr. No. of Area/ Estimated
Description Blocks
UOM
No. Volume Value (Birr)
1 Office 1 M2 116.58 488,330
2 Cafeteria 1 M2 109.30 457,849
3 Glove Garment Training Centre 1 M2 203.01 731,853
4 Pickle Store 1 M2 600.00 1,421,855
5 Guard House 1 M2 10.25 43,948
6 Power House 1 M2 37.38 228,942
7 Salt Store and Changing Room 1 M2 51.84 217,147
8 Beam House (Tanning Room) 1 M2 1,086.00 2,648,721
9 Finishing Room 1 M2 1,080.00 2,666,377
10 Raw Skin Store (Basement) 1 M2 540.00 1,999,783
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 11 Guest House 1 M2 118.73 497,314
12 Service Quarter 1 M2 28.50 119,381
13 Boiler & Compressor 1 M2 81.37 340,842
14 Toilet and Shower House 1 M2 18.90 79,168
15 Shower and Locker 1 M2 27.02 113,171
16 Workers Toilet 1 M2 2.99 12,524
17 Workshop 1 M2 102.24 428,262
18 Elevated Water Tank Stand 61,224
19 Fence Work ML 236.00 188,806
20 Treatment Plant 2,772,140
21 Septic Tank M3 48.00 68,016
22 Consultancy Fee 272,749
23 Estimated Land Transfer Right M2 38,643.00 462,053
Total 16,320,457

In addition to this, the Company has planned to construct additional buildings and construction
for expansion part of the project and submitted all the necessary drawings. The planned building
and construction composed of factory building, guest house, cafeteria, guard house, toilet, and
other civil works. Based on the submitted drawings, the Bank’s Civil and Electrical Engineers
revised cost of additional building and construction, and the revised cost is Birr 16,647,305.

Table 5.2: Summary of Planned Building and Construction

Sr. Area No. of Total Cost
Description 2
No. (M ) Blocks (Birr)
1 Factory building 1,620.0 1 9,293,931
2 Guest House 310.9 1 1,860,057
3 Cafeteria 225.0 1 1,156,293
4 Guard House 13.3 1 126,183
5 Toilet 12.1 1 236,927
6 Guard House G+1 5.6 1 167,613
7 Fence & Site Work 2,773,819
8 Main Gate 180,124
9 Septic Tank-1 40.0 234,289
10 Septic Tank-2 20.0 118,893
11 Electrical Installation 499,175
Total 16,647,305
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IV.4. Machineries and Equipments

IV.4.1. Existing Machineries and Equipments

Similarly, complete machineries and equipments for tannery has been procured and installed and
they are fully operational. Mechanical Engineer of the Bank has also valued and confirmed that
they are at a good condition. As per Mechanical Engineer’s valuation report, the total value of
these machineries and equipments including supplementary equipments & facilities is
Birr 26,435,884 and its detail is depicted below.

Table 5.3: Summary of Existing Machineries and Equipments

Sr. No. Description Value (Birr)
1 Beam House Machineries and Equipments 8,686,472
2 Finishing House Machineries and Equipments 10,669,950
3 Auxiliary Machineries and Equipments 6,119,522
4 Supplementary Equipments & Facilities 959,939
Total 26,435,884

IV.4.2. Planned Machineries and Equipments

The Company has submitted pro forma invoices for machineries and equipments that will be
employed for leather products manufacturing expansion project. Besides, the Company has
requested and submitted pro forma invoices of some machinery to strengthen and solve the
bottlenecks of the existing tannery project. Accordingly, Mechanical Engineer has evaluated and
recommended all the necessary machineries and equipments that are technically viable and their
cost is estimated to be Birr 14,174,775.

Table 5.4: Summary of Planned Machineries and Equipments

Sr. Estimated
Description
No. Value (Birr)
1 Planned Additional Machineries and Equipments for Existing Tannery 7,869,293
2 Planned Machineries and Equipments for Expansion
2.1. Leather Glove Production Machineries 3,246,952

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 2.2. Machineries for Leather Garment Production 713,929
2.3. Machineries for Leather Bags and Other Leather Goods Production 2,344,600
Total Planned Machineries and Equipments Costs 14,174,775

IV.5. Vehicles

The Company has submitted pro forma invoice from MOENCO for procurement service bus,
minibus, land cruiser and pick-up. After carefully evaluating, Mechanical Engineer of the Bank
has accepted the submitted pro forma invoice and, their total cost is estimated to be Birr
3,947,350. Since the team believed that the vehicles are crucial for smooth operation of the
project, the request has also accepted. The detail is depicted on the below table.

Table: 5.5: Planned Vehicles

Sr. Unit Price Total Price
Description UOM Quantity
No. (Birr) (Birr)
Toyota Hiace Minibus, 4 Doors LWB 2WD,
1 Common Rail Turbo Diesel, Model- Pcs 1 614,000 614,000
KDH202L-REMDY, Grade-BB with AC
Toyota Hilux P/up double cabin 4doors
2 Pcs 1 779,000 779,000
LWB, 4WD, Model-KUN25L-PRMDHN
TATA LPO 1318 Standard Bus 60 Seater,
3 Pcs 1 1,550,350 1,550,350
180HP@2250, 5883 CC, Six Cylinder
Toyota land cruiser prado 5 doors St. Wagon
4 Std roof , 4WD, common rail turbo diesel; Pcs 1 1,004,000 1,004,000
Model-KDJ150L-GKFEY
Total 3,947,350
IV.6. Generator

In order to minimize risks associated with fluctuation of electric power standby generator is one
of the best solutions. Based on this fact, generator is also included in the investment item of the
project. The Company has existing generator and its value is Birr 268,306. In addition to this, the
Company has planned to procure additional generator for expansion part of the project.
Accordingly, Mechanical Engineer of the Bank has accepted the submitted pro forma invoice,
and its cost is estimated to be Birr 542,750. The detail is depicted on the below table.

Table 5.6: Existing and Planned Generator

Sr. Unit Price Total Price
Description Model UOM Quantity Remark
No. (Birr) (Birr)
1 CAT Diesel Generator, 150KVA GEP150 Set 1 268,306 268,306 Existing
2 Cummins Generator, 66KVA C66DS Set 1 542,750 542,750 Planned
Total 811,056

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IV.7. Utilities
It is obvious that utilities like electric power, water and communication devices like telephone,
internet and fax are among important facilities that are supposed to be fulfilled for smooth
operation of every project. Based on assessment report of the Credit Process and various
concerned government organs letters, both existing and planned expansion sites are accessible
with all infrastructures like power, water and communication devices. Electric power is already
for the existing tannery site. Ethiopian Electric Utility confirmed their willingness and ability to
supply 170 KVA electric power by their letter with ref. no. ባ/ሪ/7/31/08 written on 13/05/08
E.C. According to the letter, the estimated electric supply and installation cost is Birr 499,175.10.

IV.8. Material Inputs

IV.8.1. Tannery

The main raw material in producing finished leather is raw hide and skin, processing chemicals
and dyes. Raw hide and skin are a major raw material in soaking stage for producing of finished
leather. Semi processed skins (pickled, wet blue and crust) are uses are raw material in the
different stages. Since the project starts from soaking stage, raw hide and skin are the main raw
materials for the project.

The raw skins and hides are abundantly available in the region, specifically where the project is
established. The source of processing chemicals and dyes are partially domestic and partially
imported from abroad. Based on follow-up report of the Credit Process, there is no shortage of
raw materials supply observed during their field visit.

The team has carefully determined and projected the quantity as well as cost of all the required
raw materials based on the parameter given by 2 nd updated finished leather commodity study
prepared on June 2013 and parameters given by Leather Industry Development Institute.
However, some of their prices are updated based on the submitted pro forma invoices.

IV.8.2. Leather Products Manufacturing

The major raw materials of leather products manufacturing are finished leather, lining, thread,
needle, elastic, zip, button, label, stiffener, foam, packing materials and the like. Finished leather

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is the major raw materials, and it will be supplied from the project’s existing tannery. The rest
will be imported from abroad.

The parameters used to determine material inputs for leather products manufacturing of the
project is supplied by the Company. However, the Bank’s leather and textile Engineer has
carefully assessed and confirmed that the parameters are fairly determined.

IV.9. Production Process and Production Capacity

IV.9.1. Production Process

i. Tannery

The production of finished leather is discussed as follows.

 Curing: To prevent raw hide/skin from putridity by bacteria after the animal is died for the
convenience of storage & transport, in case of the freshly flayed hide tanned directly.
 Trimming: Legs, bones and other unnecessary parts are removed from the skins and the
skins devoid of these parts are sent to the next process.
 Soaking: To make the preserved rawhide/skin re-hydrated; to remove the sand, blood and
dung from raw hide; to remove the preservative and bactericide; to remove the soluble
protein of raw hide.
 Liming: To remove interfibrillary materials; to open up the structure of collagen fiber; and
fleshing will be simple.
 De-liming: To remove the lime in hide; to eliminate the swelling state of limed hide; to
adjust the pH of limed hide for the next bating
 Bating: It is an enzymatic action of expanding the fibers of the skin to make it porous so
that other degreasing chemicals can easily penetrate through.
 Pickling: It stops the bating action of enzyme completely, adjust the pH for the next tanning
process and open up the structure of collagen fiber which is suitable for tanning process.
 Tanning: To form cross links among collagen fibers by the cross linking reaction between
tanning agent with collagen fiber and the structure of collagen is fixed, the thermo-stability
and chemical resistance of collagen fiber are improved. Mostly chromium sulfate is used for
tanning.

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 Splitting: To obtain the resultant leather with required thickness
 Shaving: To obtain the resultant leather with uniform thickness
 Re-tanning: The re-tanning process is performed to improve the leather characteristics,
thermo stability and to overcome the defects of main tannage.
 Dyeing: Re-tanned leathers are dyed using wide range of dyestuffs depending on the type of
leather and the dyeing specialization to play an important part in meeting fashion
requirements.
 Fat liquoring: To lubricate the fibers, to prevent leather from rigidity after the leather is
dried; to make leather be soft, full and flexibility; to improve the stretch ability, handle and
water proof ability of leather
 Drying: Drying fix the appearance and fiber structure of leather make the chemicals
absorbed in leather fixed with leather fibers more firmly and remove the excessive water
from leather
 Conditioning: To add a small amount of moisture to the leather this had been dried and
hardened, and make water content evenly.
 Staking: Soften & workout the creases after conditioning of dried leather by staking machine
 Finishing: Finishing operations enhance the appearance of the leather and provide the
performance characteristics expected in the finished leather with respect to color, gloss, feel,
flex, and adhesion as well as improve a resistant to chemicals and physical influences.
Figure 5.1: General Leather Tanning and Finishing Flow Chart

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 Receiving and Storing Hides(curing)

Trim m ing

Soaking and W ashing

lim ing

delim ing

Bating

Picking

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Tanning Tanning
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ii. Leather Products Manufacturing

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Leather products production process starts with the receipt of customer’s specification and/or
design developed by the designing section. Customer’s specification provides parameters on
quality standard, input, design, stitching styles, packing instructions, accessories to be used and
all other necessary information. The designers also design new styles of leather products or
adapting existing or previous ones and then specifying the materials and components, detailing
the materials and processes to be followed in order that the styles of the product can be produced
in bulk and then satisfies consumer needs.

The major processes involved in leather manufacturing are: Customer specification/ design
development, pattern making, cutting, stitching, inspection and packing.

 Based on customer’s specification and/or new design development, pattern making will
continue. Pattern can be made on chart paper and then on straw board sheet, which will then
be used for cutting leather for confirmed order.
 By using the patterns prepared, cutters cut the leather for gloves using press machines. While
cutting the leather, care is taken to ensure minimum waste.
 Stitching is process that follows cutting. The gloves are stitched by stitching workers using
stitching machines. During the stitching process, accessories are added which mainly include
lining material, foam, clips and labels.
 After the completion of stitching process, quality inspection is carried out. In this process a
thorough inspection is made as to the quality of gloves, its stitching, accessories, lining etc,
to ensure it is according to the specifications of buyers. Moreover, extra threads and fibers
are also trimmed during this process.
 Finally, each pair of glove is labeled, tagged and packed in plastic polythene bags and in a
carton for delivery. The flow of production process of glove is depicted below:

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 Figure 5.2: Leather Products Manufacturing Process Flow Chart

IV.9.2. Production Capacity

The envisaged production capacity of the project is 800 pairs of gloves (240,000 per annum), 80
leather bags (24,000 per annum) and 50 (15,000 per annum) leather products mainly jacket per
day. The project's building & construction, machineries & equipments, and other facilities are
proposed by taking this target into consideration. However, it is obvious that the productivity of
labor intensive industries increase as the laborers trained and got experience without any
additional investment.

Table 5.7: Envisaged Production Capacity and Product Mix

Sr. Production Production Annual
Description
No. Share (%) Per Day (Pcs) Production (Pcs)
1 Gloves
Dressing Glove 60% 480 144,000
Sport Glove 30% 240 72,000
Military Glove 10% 80 24,000
2 Bag 100% 80 24,000
3 Garment 100% 50 15,000

The production capacity utilization rate of the expansion part of the project is assumed to start at
60% and increases by 10% per annum until it reaches a maximum capacity utilization rate of
90% during the fourth operation year of the project.

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IV.10. Environmental Impact Assessment

The leather industry throughout the world is identified closely with generation of air, liquid and
solid waste pollution. Turning skin into leather requires massive amounts of energy and
dangerous chemicals, including mineral salts, formaldehyde, coal-tar derivatives, and various
oils, dyes, and finishes, some of them cyanide-based. As a result, the necessary waste treatment
should be constructed well, if not it can affect the environment negatively.

Davimpex Enterprise Bahir Dar Tannery PLC has already constructed effluent treatment and
Chrome recovery pant to recover chrome and treat waste water with chemicals in the ponds
where the chemically treated water evaporate and the remaining sludge buried safely or used as
fertilizer. The tannery project has seven ponds to make three step treatments by using intensive
chemicals at each stage. According to the banks Civil and Mechanical Engineers valuation
report, the value of the plant is estimated to be Birr 7,633,161.

Accordingly, when slab processing project was established, the Company had been undertaken
environmental impact assessment and set mitigating mechanism which had been approved by
Oromia Regional State Rural Land and Environmental Protection Office by the time. Since its
implementation, the Company has been implementing those mitigating mechanisms and there is
no compliant or warning presented by appropriate government organ.

The Company has also undertaken environmental impact assessment, and Amhara National
Regional State Bureau of Environmental Protection, Land Administration and Use granted EIA
license certificate (No. AmR/IND-556/2007) on 03/03/2015 G.C for the establishment of leather
products manufacturing expansion project. The company shall implement all the necessary
mitigating mechanisms which stated on the environmental impact assessment report and adhere
to the conditions set by the office in order to minimize impact of implementation of the project
on the environment.

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IV.11. Implementation Plan

The project implementation schedule is an important time management document that defines
and schedules the major phases of project work being carried out to fulfill the desired project
objective(s) and achieve the expected deliverables. It clarifies and describes what the project
should deliver and within what time-frames. Based on this concept, all the key operations are
included and appropriate time is allotted. The detail of implementation schedule for expansion
part of the project is depicted as follows.

Table 5.8: Implementation Schedule

2016 2017

September

November

December

February
Sr.

January
October
August
Description
April

June
May

July
No.

1 Loan Processing
2 Electric Power Installation
3 Building and Construction
Procurement of Machineries
4
and Equipments
5 Procurement of Vehicles
6 Procurement of Generator
Procurement of Imported Raw
7
Materials
Installation of Machineries and
8
Equipments
Procurement of Office
9
Furniture and Equipments
Procurement of Local Raw
10
Materials
11 Commencement of Operation

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VI. ORGANIZATION STRUCTURE AND MANAGEMENT

IV.12. Organizational Structure

The Company has already been implemented proper organizational structure and hired the
required human resources for the existing operations. So as to include the expansion part of the
project, we have modified the existing organizational structure. As before, the project will be
headed by the General Manager, who is responsible to control the activities of all staffs and the
overall operations of the tannery and leather products manufacturing projects. The leather
products manufacturing project is headed by Project Manager and controls the staffs and over all
activities of the specific project. Under the Project Manager, major operations will be performed
by the middle level of management that consists of the heads of Production Department,
Administration and Finance Department and Marketing Department.

Summarized organizational structure of the expansion part of project is depicted on the following
chart. This organizational structure is directly taken from the commodity study of the bank
believing that it’s appropriate for the envisaged project.

Figure 6.1 Organizational Structure of the Project

Managing Director

Glove and Leather Products Plant

Administration Production & Quality
Marketing
and Finance Technical Control
Department
Dep’t Dep’t Department
Raw Material
HR and General Purchase & Production Quality Control
Service Section Sales Section Section Section

Account Technical Finished Product

Market Research
Quality Control
Section Section Section Section

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IV.13. Project Management

Ato Yigzawu Assefa is one of the shareholders and General Manager of the company. He has
been managing the project efficiently and effectively in collaboration with other key
management and staffs. The progress that the Company has been registered is the best evidence
of his and coworkers hard work.

The General Manager is delegated and empowered with appropriate managerial decisions
making authority. He is the owner of the project and has Bachelor of Science in Management
from USA and endowed with above three decades of bona fide experience in the leather industry
sector administration and management

Department’s heads, technical and supervisory staffs have all the required technical competence
and are imbued with a sense of purpose, vision and the desire to achieve excellent result.

Besides, the Company has already hired 208 employees for existing tannery project and we have
also proposed additional 113 employees for the leather products manufacturing expansion part of
the project. The detail of planned additional human resources with their respective remuneration
scale is depicted on the table 6.1 below.

IV.14. Training Requirement and Employee Remuneration and Benefits

Training is a process of enhancing the skills, capabilities, and knowledge of employees for doing
a particular job. It is crucial for organizational development and success. It is fruit full to both
employers and employees of an organization. An employee will become more efficient and
productive if he/she IS trained well. As a result, continuous and related training is recommended
as deemed necessary.

Employee remuneration and benefit are also an important factor for employee’s productivity.
Employee remuneration refers to the reward or compensation given to the employees for their
work performances. Similarly, benefits are any perks offered to employees in addition to salary.
The most common benefits are medical, disability and life insurance, retirement benefits and
fringe benefits. Both remuneration and benefits provide basic attraction and motivation to an
employee to perform job efficiently and effectively. These all are considered and included in
project cost.

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 Table 6.1 Planned Additional Manpower with their Respective Salary
Gross
Salary Monthly
Sr. Required Annual
Description Scale Salary
No. Number Salary
(Birr) (Birr)
(Birr)
I Plant Manager
1 Plant Manager 1 20,500 20,500 246,000
2 Secretary 1 2,813 2,813 33,756
Sub-total 2 23,313 279,756
II Production & Technical Dep't
1 Department Manager 1 17,500 17,500 210,000
2 Experts 3 35,000 105,000 1,260,000
3 Supervisor 2 3,750 7,500 90,000
4 Cutters 4 1,500 6,000 72,000
5 Sewers 77 1,313 101,101 1,213,212
6 Helpers 4 938 3,752 45,024
Sub-total 91 240,853 2,890,236
III Finance and Administration Dep't
1 Department Manager 1 9,375 9,375 112,500
2 Accountant 1 4,688 4,688 56,256
3 Store Keeper 1 1,875 1,875 22,500
4 Drivers 4 1,500 6,000 72,000
5 Guards 4 750 3,000 36,000
Sub-total 11 24,938 299,256
IV Marketing and Sale Department
1 Department Manager 1 9,375 9,375 112,500
2 Marketing & Promotion Expert 2 6,500 13,000 156,000
3 Sales Person 4 4,688 18,752 225,024
4 Purchaser 2 4,688 9,376 112,512
Sub-total 9 50,503 606,036
Total 113 339,607 4,075,284

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V. FINANCIAL ANALYSIS

V.1. Fund Allocation

The total project cost is estimated to Birr 124,470,733. Out of this, Birr 80,205,221 (64%) is
fixed assets, Birr 38,983,674 (31%) is part of the project cost that has already been and will be
invested on the working capital and the remaining Birr 5,281,838 (4%) is pre-production
expenditure of the project. As depicted on the table 7.1 below, from the total project cost the sum
of Birr 64,468,081 (52%) has already been invested on fixed assets, working capital and pre-
production expenditures. The remaining cost of Birr 60,002,652 (48%) is the planned expansion
cost of the project.

Table 7.1: Summary Revised Investment Cost

Planned
Existing Total
Sr. Investment Percentage
Description Investment Investment
No. Share (%)
(Birr) (Birr)
(Birr)
1 Land Lease Advance Payment 56,250 107,280 163,530
2 Building and Construction 16,320,457 16,647,305 32,967,761
3 Machineries & Equipments 25,475,945 14,174,775 39,650,719
Supplementary Equipments and
4 959,939 - 959,939
Facilities
5 Vehicles - 3,947,350 3,947,350 64%
6 Generator 268,306 542,750 811,056
7 Office Furniture & Equipments 387,719 419,001 806,720
8 Electricity Installation 398,970 499,175 898,145
Sub-total 43,867,586 36,337,635 80,205,221
9 Pre-production Cost 320,737 298,521 619,257
10 Pre-production Interest 461,156 4,201,425 4,662,581 4%
Sub-total 781,893 4,499,945 5,281,838
11 Working Capital 19,818,603 19,165,071 38,983,674
31%
Sub-total 19,818,603 19,165,071 38,983,674
Grand Total 64,468,081 60,002,652 124,470,733 100%
Proportionate Share (%) 52% 48% 100%

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V.2. Source of Fund

According to credit policy of the Bank, domestic investors’ projects engaged in export business
on leather and leather products that plan to expand through a backward and forward linkage shall
be treated under 70:30 debt to equity ratio. Based on this concept, the Company that we are
dealing with is expected to contribute at least 30% of the total project cost. However, since the
share of existing investment that has already been invested by the Company is greater than the
minimum requirement, the Company shall only be expected to contribute for pre production
expenditure part of the expansion cost.

Accordingly, as we have tried to depict on the below table, the total investment cost of the
project including expansion is Birr 124,470,733. Among, the sum of Birr 64,468,081 (52%) has
already been invested. Out of this, the Company has the share of Birr 33,022,693 (51%) and the
rest of Birr 31,445,388 (49%) has been financed by the DBE loan. The total expansion cost has
planned to be Birr 60,002,652 (48% of the total project cost). Among this, Birr 49,003,386
(82%) will be financed by the DBE loan, Birr 6,392,040 ($300,000) (11%) shall be financed by
Common Fund for Commodities based on approved co-financing facility and the remaining
Birr 4,607,225 (8%) will be covered by the Company’s own equity contribution. When we sum
up, from the total project cost of Birr 124,470,733, the share of DBE loan is Birr 80,448,775
(65%), the share of CFC loan is Birr 6,392,040 (5%) and the share of the Company will be
Birr 37,629,918 (30%). The detail of source of fund is depicted on the following table.

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Table 7.2: Source of Fund

To be printed from Excel

Davimpex Enterprise Bahirdar Tannery PLC 45

V.3. Expected Financial Results

Here, our objective is to provide information about the financial position, performance and
changes in financial position of the project to make rational economic decision. Hereunder, we
will try to look Profit/loss or income statement forecast, cash flow and balance sheet projection,
financial rate of return and sensitivity of the project for potential variables.

V.3.1. Profit/loss forecast

Profit/loss forecast presents the results of project’s operations during a period of time. It shows
income earning from the project and expenses incurred in attaining the income. The projected
profit/loss statement of the project reveals that the project will earn profit of Birr 4,982,799 from
existing part during the base year of its operation and Birr 8,005,113 from expansion part of the
project during its first year of operation. During the last 10 th year of projection, the project will
earn net profit of Birr 8,011,381 from existing and Birr 20,542,709 from expansion part of the
project. The expansion part of the project will increase the net profit of the project by an average
of 273% annually during its operational periods. This indicates that the expansion part of the
project will add values & flourishes the existing.

V.3.2. Cash flow forecast

Cash flow projection provides a look at the movement of cash in and out of the project. It is
important in determining whether or not a project has enough cash to pay its bills, handle
expenses and acquire assets. Thus, it is important to give due attention to identify whether the
total inflows of the project have the capacity to cover all cash outflows during its operational
period. Unless, the project will faces liquidity crisis and fail before achieving its objective.

Based on this fact, the forecasted cumulative cash balance of the existing part of the project
shows a balance of Birr 2,239,273 during the base year and will grow up to Birr 52,283,873 at
the end of project period. The expansion part of the project will also have cumulative cash
balance of Birr 7,036,417 during its first operational period and Birr 108,210,999 during the
tenth year. Due to the current expansion, the cumulative cash balance of the project will increase
by an average of 242% annually. These all are demonstrating that the project will not face

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liquidity constraint to finance its operational costs as well as debt obligation, and the expansion
part of the project will add value to the existing project.

V.3.3. Balance Sheet Projection

Balance Sheet Projection used to provide insight into assets and debts of the project at a
particular point in time. Total assets of the project expected to rise from Birr 66,707,354 to
Birr 126,710,006 due to expansion of the project. During the tenth year of the project, the
aggregate assets of the project will rise to Birr 226,271,165.

V.3.4. Financial Rate of Return

Net Present Value (NPV) Internal Rate of Return (IRR)

Before Tax 146,414,606 34
After Tax 92,867,026 26

V.3.5. Sensitivity Analysis

The profitability of the project will vary under various circumstances that could possibly happen.
Thus, the project's sensitivity to adverse circumstance is analyzed from three different scenarios:
decrease in sales revenue by 10%; increase in operating costs and investment costs by 10%.

i. Decrease on Revenue

Based on financial our findings, when revenue decreases by 10% after tax IRR of the project
reduced from 26% to 15%. From this, we can say that the project is viable and can achieve its
objective of its establishment even in an adverse circumstance that may happen and trigger to
reduce its revenue by 10%.

ii. Increase on operating Cost

Also, if the operating costs of the project may increase by 10% due to unforeseen circumstances;
other things remain constant, after tax IRR of the project anticipated to reduce to 18%. This
means, still the project has the capacity to cover its costs and make profit for stakeholders.

iii. Increase on Investment

When investment costs increase by 10%, after tax IRR of the project anticipated to be 24%.

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To sum up, the project is more sensitive to the sales performance. As a result, the company
should give more focus on pricing strategy and try to maximize its sales performance as much as
possible. Whatsoever will happen, the project has the capacity to absorb external shock and
attain its objectives of its establishment.

VI. SOCIO ECONOMIC BENEFIT

As our country is among the world fastest growing countries, development and establishment of
leather manufacturing projects is very crucial. It is possible to state enormous reasons. Among,
the followings are some of it:

 Increase export earnings: Leather and leather product plays a crucial role in export
earnings. Since the company has fully engaged in export market, the project has significant
contribution for foreign currency generation.

 Positively contributes to GDP Growth: The leather industry has significant contribution for
the economic development of the country and it can be said the driving engine for
development in less developed country like Ethiopia with abundant resource of live- stock
population.

 Employment opportunity: unemployment is one of the major problems of developing

countries. In order to alleviate this, government has designed a policy and made economic
decisions which enhance the creation of job opportunity for unemployed citizens. Towards
this end, the subsector is becoming significant for employment opportunities creation to the
local communities since it is both capital and labor intensive. The project is expected to
create total permanent employment opportunity for about 321 including existing staffs of 208
professionals, skilled, semi-skilled and unskilled workers.

 Linkage effects: Finished leather and leather products manufacturing project has both back
ward and forward linkage back ward and foreword linkage. The forward linkage is the
occurrence of sustainable supply of finished leather for firms engaged in leather and leather
product activities while the back ward linkage is the creation of sustainable supply for hide
and skin materials.

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 Source of Government Income: The government will get income in the form of income tax
from permanent and temporary employees, profit tax, and royalty fee from the business.

VII. CONCLUSION AND RECOMMENDATION

VII.1. Conclusion

As we gone through all the issues that determine the success and failure of project, we have tried
to touch all important aspects. Since the Company is our existing client, its creditworthiness has
already been verified and confirmed. The Company has been paying its previous loans on time
and according to contractual loan agreement and proved that the Company is creditworthy.

In view of the fact that market condition for the proposed product has vital role for realization of
objectives of establishment of the proposed project, we have also tried to review the
contemporary and forecasted demand and supply condition and price of the product. Based on
commodity study of the bank and past performance of the Company, we have observed that there
is excess demand for the product even at a relatively higher price.

Technical viability of the project has also been assessed. All the required buildings and
constructions have already been constructed and their value and appropriateness are verified by
the Bank’s Civil Engineer. Machineries and equipments required for tannery has also been
procured and installed and they are fully operational. Mechanical Engineer of the Bank has also
valued and confirmed that they are on a good condition. In addition to these, the Company has
submitted pro forma invoices for machineries and equipments that will be employed to
strengthen and solve the bottlenecks of the existing tannery project and leather products
manufacturing expansion project. Accordingly, Mechanical Engineer has evaluated and
recommended all the necessary machineries and equipments that are technically viable and their
costs are included in the total investment cost of the project.

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The Company has already implemented proper organizational structure and hired required
human resources for the existing business. So as to include the expansion part of the project, we
have modified the existing organizational structure and proposed additional human resources.

In addition, financial viability of the project is unquestionable to determine acceptance or

rejection of the project. As we tried to gone through each financial components, the project’s
past performance and future projection has also revealed that the project is financially viable &
capable to achieve its objective covering all its costs even in adverse conditions that can possibly
affect either its cost items or revenue.

At the same time, establishment of the project has also various socio-economic importances for
the country. But, the unhidden fact, it does not mean that the project is totally free from obvious
business risks and some environmental impact. But, with appropriate mitigating mechanisms, its
national significances considerably surpass those anticipated risks.

VII.2. Recommendation

By considering all the above facts and findings, Appraisal Team I found that financing the
proposed expansion project for its implementation is commendable and appropriate. Therefore,
the team has proposed and approved the total loan amount of Birr 49,003,386 at its level along
with additional equity of Birr 4,607,225 and co-financing loan of Common Fund for
Commodities of Birr 6,392,040 ($300,000). In addition to this, the team believed that
rescheduling the previous loan repayment will ease its financial burden and provide breathing
time until the project returns to the right track. The virtual appraisal team also extended the loan
repayment schedule of the project from the beginning of July 31, 2015 to July 31, 2016 and
ending of October 31, 2018 to April 30, 2025 due to delay of implementation schedule so that
the project can service its debt without unnecessary pressure.

VII.3. Terms and Conditions

VII.3.1. Terms
i. Disbursement Condition
 Equity Release Schedule
Equity Release Amount to be Balance in To be
Purpose of Release
Plan Released Commitment Released
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 (Birr)
(Birr)
4,201,425
Pre operating Interest 4,201,425 - To DBE
Sub-total 4,201,425
Equity to be paid upon maturity 4,201,425

 Common Fund for Commodities Loan (Co-financing)

Balance in
Loan Amount to be Commitment To be
Disbursement Purpose of Disbursement Disbursed (Birr) Disbursed
Plan (Birr)
6,392,040
Procurement of Machineries & Equipments
To the
1st (Remaining 70% for LC settlement to be 6,392,040
- supplier
Disbursement disbursed along with DBE loan)
Total CFC Loan 6,392,040

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 Loan Disbursement Schedule
Balance in Months to
Loan Amount to be Commitment To be Condition for be
Disbursement Purpose of Disbursement Disbursed (Birr) Disbursed Disbursement Disbursed
Plan (Birr)
49,003,386 (2016)
Electric Power Installation 499,175 To EEU
Building and Construction (30%) 4,994,191 To the contractor
Procurement of Machineries & Equipments (30%
4,252,432 To the supplier
advance payment for LC opening)
1st Procurement of Vehicles (30% advance payment After signing loan
1,184,205 26,022,738 To the supplier May-2016
Disbursement for LC opening) agreement.
Working Capital for Existing Project
For Procurement of Raw Materials (70%) 8,435,451 To the supplier
For Overhead Costs (30%) 3,615,193 To the company
Sub-total 22,980,648
Building and Construction (30%) 4,994,191 To the contractor
Procurement of Generator (30% advance payment After verification of the
2nd 162,825 To the supplier
for LC opening) 16,329,195 effective utilization of Jul-2016
Disbursement
Working for Imported Raw Materials Procurements 4,536,526 To the supplier previous disbursement.
Sub-total 9,693,543
Building and Construction (Remaining 40%) 6,658,922 To the contractor
Procurement of Machineries & Equipments After verification of the
(Remaining 70% for LC settlement to be disbursed 3,530,302 To the supplier effective utilization of
3rd
along with CFC loan) 3,376,826 previous disbursements Sep-2016
Disbursement
Procurement of Vehicles (Remaining 70% for LC and arrival of imported
2,763,145 To the supplier
settlement) items.
Sub-total 12,952,369
Procurement of Generator (Remaining 70% for LC After verification of the
379,925 To the supplier
settlement) effective utilization of
th
4 Procurement of Office Furniture & Equipments 419,001 To the supplier
- previous disbursements Nov-2016
Disbursement
Working Capital For Overhead Costs 2,577,901 To the company and arrival of imported
Sub-total 3,376,826 items.
Total 49,003,386

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ii. Principal Repayment Schedule

- Original (existing) loan shall be repaid within 8 (eight) years beginning from July 31,
2016 and the last repayment shall be made on April 30, 2025. Whereby, the repayment
shall be made quarterly with 31 equal installments of Birr 873,483 and last one
installment shall be Birr 873,483.29.
- The expansion loan shall be repaid within 7 (seven) years beginning from July 31, 2017
and the last repayment shall be made on April 30, 2025. Whereby, the repayment shall
be made quarterly with 31 equal installments of Birr 1,531,356 and last one installment
shall be Birr 1,531,350.
- The CFC loan shall be repaid within 5 (five) years beginning from January 31, 2019 and
the last repayment shall be made on October 31, 2023. Whereby, the repayment shall be
made quarterly with 20 equal installments of Birr 319,602 ($15,000).

iii. Interest Rates and Other Charges

- Pre-operating interest payment of 12% per annum on the outstanding DBE loan balance
shall be paid upon maturity.
- Operating interest rate of 12% per annum on the outstanding DBE principal loan balance
and to be paid quarterly starting from January 31, 2017. However, the preferential interest
rate of 9% shall start to apply if the project proved to perform as per the agreement.
- The company shall pay interest rate of 7.5% per annum on the outstanding CFC principal
loan balance.

iv. Commitment Charge Payment

- 0.5 % per annum commitment charge shall be paid on balance in commitment.

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VII.3.2. Conditions

i. General Conditions
 Collateral:- First degree mortgage on entire assets of the project
 Insurance: - The Company should timely renew insurance policy for the entire fixed
assets and inventories of the project with DBE as a co-beneficiary.
 Current Account: - The company should maintain the current account with DBE
 Record keeping: - The company should maintain proper record keeping system
 L/C Opening: - The Company should use DBE’s L/C facility for both import and export.

ii. Specific Conditions

 The Company should present all the receipts for verification of the pre-operating costs
amounting of Birr 298,521 considered in the appraisal report as equity contribution.
 The Company should settle pre-operating interest of Birr 4,201,425 up on maturity.
 The Company should raise its registered paid up capital at least to the level of required
minimum equity contribution.
 The Credit Process should strictly follow co-financing policy and procedure of the Bank
for effective implementation of the co-financing facility.
 The Company should settle interest arrears before loan contract signing.
 Terms and conditions stipulated in the previous loan contract will remain intact unless
changed by terms and conditions stated here.
 Minor cost variations that may occur during implementation should be covered by the
Company.
 The expansion loan shall be registered.

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X. ANNEXES

- Detail of Existing Investments

- Detail of Planned Investments
- Summary of Investment Costs
- Basic Assumptions
- Operating Cost Determination
- Working Capital Determination
- Depreciation Schedule
- Profit/Loss Forecast
- Cash Flow Forecast
- Balance Sheet Forecast
- FIRR Projection
- Loan Repayment Schedule
- Others

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