Project Proposal For Setting up An Instant Tea Manufacturing Plant In Sri Lanka

Prepared & Presented by

COMMONFUND CAPITAL PARTNERS, SRI LANKA.

JUNE, 2009
. 1

Executive Summary
This is a project proposal for commencement of an Instant Tea Factory in Sri Lanka.

1) Rationale for this Project

a) Increasing global demand for instant tea In a world where people are demanding many of their requisites almost instantly, tea also is becoming an instant consumable. Being in line with the ultra fast lifestyles, the trends in the world market also advocates that there is a growing demand for instant tea supplies over black tea and tea in bags. There are four types of instant tea powder types currently in the market. 1. 2. 3. 4. Natural instant tea cold water soluble powder Natural instant tea hot water soluble powder Natural green instant tea cold water soluble powder. Chemically treated cold water soluble powder

The current annul demand for the respective powders are as follows.
TYPE OF INSTANT TEA Cold Water Soluble Powder Hot Water Soluble Powder Green Tea Powder Chemically Treated Powder TOTAL DEMAND DEMAND IN MT 15,000 3,000 5,000 10,000 33,000

Global Instant tea demand in 2009

10,000 , 30% 15,000 , 46%

Cold Water Soluble Powder Hot water Soluble Powder Green tea powder Chemically treated Powder

5,000 , 15%

3,000 , 9%

Currently, there are no sufficient arrangements to meet the global demand for Instant Tea from Sri Lanka. The only factory in Sri Lanka contributes with only 1,500 tons of instant tea which is only 4.5% of the total global demand. b). Availability of raw material The raw material used for instant tea manufacturing is called BMF (Broken Mixed Fanning's), which is obtained from black tea processing. The total tea production for year 2006 was 300,000 Metric tons. The BMF made out of this is approx. 30,000 tons. The factory currently operating in Sri Lanka uses only 9,000 tons. There is a balance of 21,000 tons available for use by the proposed factory. Therefore raw material is totally available for the new factory.

c). Encouragement from govt. authorities The highest governing authority of tea industry in Sri Lanka has already indicated their consent to this project as this project will generate more value addition to the industry and brings in additional revenue to the country. If the available facilities and products are completely used for instant tea manufacturing, this will generate more value addition to the industry. All the initial discussions are already completed and formal approvals from all the relevant authorities can be obtained within a short period.

d). Availability of technical know how Currently there is a monopoly in instant tea manufacturing in Sri Lanka due to unavailability of technical know how. This has acted as an entry barrier for many investors who were interested in this field. However, we have already secured the complete process know how which will be a key success factor for this project.

2) Market Analysis
Current Suppliers There are only few major suppliers of instant tea for the world market. They are; Unilever Finlays Nestle Deminfoods Out of the total global demand, Sri Lanka provides only 4.5 %. Even though there is a local market for Sri Lankan products, the total quantity manufactured in this plant is exported.

Current Buyers Following are the direct buyers for instant tea; Unilever Nestle Halassen & Lyon Mitsui Average price of instant tea in the world market is around USD 8 per Kg. and the main distribution is undertaken in the Europe.

Financial Analysis
Following is the financial analysis carried out on the proposed project. Following table gives a summary of the initial setup cost.
Machineries and Setup cost for Natural Instant Tea Factory Assumptions: 41 M tons Daily Raw Material Input 6 M tons Daily Production Output 22 Monthly Minimum No of Working Days Rs.110 Exchange Rate - 1 USD + I SLRs.

Estimated cost in US $

Description

1,115,455 Extraction Process 518,182 1 st Concentration 1,154,545 Polishing & Cleaning 472,727 2nd Concentration 447,278 Final Concentration 663,636 Spray Drying 689,091 Packing area 445,455 Services area 409,091 Work Shop & Other facilities 3,872,727 Building, Land & Other structures 101,276 Admn Strucutres & equipment 540,909 Treatment of Insolubles 241,538 Water, Waste Treatment & Disposal 10,671,910 Total Setup cost

Table 1: Summary of the initial set up cost The costing shown below has been worked out for 22 days operation considering the cost to be in marginal levels. It is assumed that the operational cost will be increased 5%, where as the selling price to be constant over the time.

COMPUTATION OF CAPITAL COSTS

Annual Working Capital Cost Six (6) Months Working Capital Cover 1590 Annual production in MT

2,952,864 USD 324,814,985 SL Rs.

Total Project Cost

1,476,432 Working Capital Cover

10,671,910 Total Setup cost

Annual Working Capital Cost Three () Months Working Capital Cover 1590 Annual production in MT

12,148,342 SL Rs.

1,476,432 USD 162,407,493 SL Rs.

Annual Operating & Prformance Costs 110 Exchange rate 1590 Annual production in MT Details Total Price SLR 324,000,000 1,200,000 24,000,000 168,000,000 3,000,000 45,000,000 4,500,000 NOS 56,818 32,727 10,909 17,455 272,727 117,818 181,818 5,905,727 6,250,000 3,600,000 1,200,000 1,920,000 30,000,000 12,960,000 24,000,000 649,630,000 90,000 Annual Maintenance 144 Shipping & Transport (Container loads) Admin & Insurance cost 125 30 200,000 24,000 Unit Price Rs 30,000 1,000 80,000 70,000 500 12 Production Cost Raw Materials

Total in USD 2,945,455 10,909 218,182 1,527,273 27,273 409,091 40,909

No of Units

10,800 Tea - Broken Mixed Fannings(MT) 1,200 Viscosym (MT) 300 Diesel(MT) 2,400 Fuel oil(MT) 6000 Water 3,750,000 Electricity (kW) water treatment & ETP operation Packing 50,000 Corrugated cartons 120,000 Polythene Bags 6 Staff with Managers 80 Workers including Security

Table 2: Detailed operational cost break down

Below table shows the projected annual revenue generation considered as at current market demand and market rate.

Annual Revenue on Sales Revenue in $ 9,540,000 1,200,000 10,740,000 Selling price USD 6,000 4,000 Volume Tonns 1,590 300 Description Annual Production 265 days Income from Insoluble's(Chemical powders) Total

Table 3: Annual revenue on sales

Loan Repayment schedule In case if the project to be funded by a loan, it was assumed that a dollar loan can be obtained at an annual rate of 8.5 % for a period of one year with a one year grace period. Below table shows the loan payment schedule.

Repayment terms - 5 years with a grace period of one 1 year 8.50% Interest rate Year 6 0 2,429,670 2,429,670 Year 5 2,429,669 2,429,669 206,522 2,636,191 Year 4 4,859,337 2,429,669 413,044 2,842,713 Year 3 7,289,005 2,429,669 619,565 3,049,234 Year 2 9,718,674 2,429,669 826,087 3,255,756 Year 1 12,148,342 Total Loan amount Payment for the year 1,032,609 Total Interest Payment 1,032,609 Total annual payment

Table 4: Loan repayment schedule

Net Present Value Calculation The net present value of the project was calculated using the above cost and revenue details. A 10% cost of capital was assumed for the calculation.
NPV Calculation all in US D Year 5 -8,651,175 -2,429,669 15,510,000 4,429,156 0.7513 3,327,625 Year 4 -8,014,799 -2,429,669 14,556,000 4,111,532 0.7513 3,088,994 Year 3 -7,394,700 -2,429,669 13,602,000 3,777,631 0.7513 2,838,134 Year 2 -6,790,104 -2,429,669 12,648,000 3,428,227 0.8264 2,833,087 Year 1 -5,905,727 9,540,000 3,634,273 0.9091 3,303,918 Year 0 Set up fee Annual Operation cost Loan repayment Annual Revenue Generation Net Cash Flow 1.00 Discount Factor @ 10 % Discounted Cash Flow 15,391,757 Total NPV

Table 5: Net Present Value Calculation

Pay back Period Calculation Pay back period YE Balance -12,148,342 -12,148,342 Initial Investment -8,514,069 3,634,273 Year 1 -2,656,173 5,857,896 Year 2 3,551,127 6,207,300 Year 3 10,092,328 6,541,201 Year 4 16,951,153 6,858,825 Year 5 N/A N/A Year 6 From the above table it can be seen that the investment can be recovered just within first two year of operation.

Project Profitability Statement 2385

50% Year 5 15,510,000 -8,651,175 6,858,825 Year 4 14,556,000 -8,014,799 6,541,201

2226
40%

2067
30% Year 3 13,602,000 -7,394,700 6,207,300

1908
20% Year 2 12,648,000 -6,790,104 5,857,896

1590 Units Produced

Year 1 Description

9,540,000 Annual Revenue Generation -5,905,727 Annual Operation cost 3,634,273 Annual Net Revenue

Table6: Project Profitability Computation

From the above table it can be seen that the full investment [including working capital] can be recovered just within first two and half years of operation. Project Schedule The implementation period for the factory will be approximately one year period. A detailed project schedule will be provided later. Conclusion: Considering all above factors, this project will be attractive for a potential investor due to the higher return with a very low risks involvement. Recommendation This is a project with high returns and very short period of total re-coupe of full investment. As such, the proposal is recommended to any prospective investor. Mode of Investment The investment can be made as a term loan or equity investment. The details could be discussed later.