Pre-Feasibility Study

LEATHER GOODS MANUFACTURING UNIT

(Ladies Hand Bags, Brief Cases, Belts, Wallets)

Small and Medium Enterprise Development Authority

Government of Pakistan
www.smeda.org.pk
HEAD OFFICE Waheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA Lahore Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756 helpdesk@smeda.org.pk
REGIONAL OFFICE PUNJAB Waheed Trade Complex, 1st Floor, 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA Lahore. Tel: (042) 111-111-456 Fax: (042) 5896619, 5899756 helpdesk@smeda.org.pk REGIONAL OFFICE SINDH 5TH Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) 111-111-456 Fax: (021) 5610572 helpdesk-khi@smeda.org.pk REGIONAL OFFICE NWFP Ground Floor State Life Building The Mall, Peshawar. Tel: (091) 9213046-47 Fax: (091) 286908 helpdesk-pew@smeda.org.pk REGIONAL OFFICE BALOCHISTAN Bungalow No. 15-A Chaman Housing Scheme Airport Road, Quetta. Tel: (081) 831623, 831702 Fax: (081) 831922 helpdesk-qta@smeda.org.pk

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DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject matter and provide a general idea and information on the said area. All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. Although, due care and diligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA does not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. Therefore, the content of this memorandum should not be relied upon for making any decision, investment or otherwise. The prospective user of this memorandum is encouraged to carry out his/her own due diligence and gather any information he/she considers necessary for making an informed decision. The content of the information memorandum does not bind SMEDA in any legal or other form.

DOCUMENT CONTROL
Document No. Revision Prepared by Approved by Issue Date Issued by PREF-61 1 SMEDA-Punjab GM Punjab September, 2002 Library Officer

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1
1.1

Introduction
Project Brief

The objective of this pre-feasibility study is to provide information regarding manufacturing of leather goods. The leather goods include items like ladies purses, ladies handbags, travel bags, waist belts, wallets, briefcases, etc. This project has the capability of diversifying the product mix and enlarging the product length by producing other related products with the same infrastructure facilities. Passport holder, visiting card holder, mobile cover, optical glasses cover, phone index cover, key chains, camera cases, bandoleers, and hand gloves are some of the products that can be manufactured in this unit. 1.2 Opportunity Rationale

Leather goods industry of Pakistan enjoys active demand in the foreign as well as domestic markets. Besides being a potential source of foreign exchange earnings, it provides an important means of diversification within leather industry by allowing conversion of domestically produced leather into higher value added leather goods. Pakistan has an established manufacturing base for leather garments, leather gloves, leather goods and leather footwear. This sector is an important foreign exchange earner. The exports of this sectors were $ 734.4 million during the year 2000-01. This industry also provides employment opportunities for skilled and semi skilled labor, which is easily available in areas, where the clusters of this industry exist. The development of this industry not only offers attractive return on capital but is also advantageous to the economy as its exports maximize value addition to raw hide and skins. The manufacturing bases for leather and leather products are shifting towards developing countries, primarily due to the high labor costs involved and the polluting nature of the industry. Pakistan has an edge of having vast resources of the raw material viz. hides and skins. The livestock raised in Pakistan includes cattle, buffaloes, sheep and goats, which provide a wide range of hides and skin resources. There were 7.4 million hides and 36.2 million skins available in 1999-00 with an average annual growth of 2.92% and 1.47% respectively. It is a traditional industry in Pakistan, with wide availability of skilled manpower, and personalized knowledge of raw materials and prices. The industry tends to be labor intensive. The low cost labor in Pakistan provides a cost advantage over other East Asian and developed countries. Government has also offered a variety of incentives to encourage the leather-related exports, which include: Duty free imports of hide and skins Duty drawback on exports of leather goods. No duty no draw back facility under duty and tax remission system (the DTRE system allows exporters to make duty free import of accessories or make sale tax free purchases form the local market on a permit issued by export collectorate) Technical and marketing assistance for the private sector to promote the exports. Participation in international fairs and exhibitions at subsidized rates through EPB. Total duty exemption on import of machinery plant and equipment
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1.3

Sales tax on exports at zero-rated. Proposed Capacity

The economic size of this pre-feasibility report is based on a unit with 12 stitching machines. The 12 stitching machines have a capacity to produce a product mix of 3,000 ladies handbags, 9,000 Wallets, 15,000 belts, and 3,000 briefcases per annum. 1.4 Total Project Cost

The total initial cost of the project is approximately Rs 1.8 million.

2
2.1

Current industry structure

Industry Cluster and Size

According to the Leather directory 1994, there were 134 leather goods manufacturing units in the organized sector with an installed capacity of 7.5 million pieces per annum. Exact data of the size of the industry is not available due to the fact that most of the production comes from cottage industry and it is difficult to get precise statistics of the size of the industry and their installed capacity. The leather goods industry generally operates on small and unorganized scale and these units normally lacks modern technology and has underdeveloped accessories. The clusters of these industries are mostly concentrated in Karachi, Sialkot and Lahore. Largest cluster is in Karachi that comprised of 86 units and accounted for 64% of the total units and 66% of total labor employed. Table 2-1 Cities Karachi Sialkot Islamabad Gujrat Lahore Total Leather Goods Industrial Structure in Pakistan Units 86 42 4 1 1 134 Installed Capacity (Million Pcs.) 2.63 4.15 0.26 0.06 0.40 7.50 Employment 1,707 773 50 8 35 2,573

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Production process flow

Process Flow Diagram
Pattern/Frames of the Product & Cutting of leather

Figure 3-1

Skiving

Folding of edges

Sticking of different parts

Stitching

Fixing of locks & Accessories

Finishing quality check & Packing

3.1.1 Pattern/frames of the product & cutting of leather In this process, dyes/pattern are made according to the shape and design requirements of the product and leather is cut into pieces of different sizes and shapes with the help of these dyes/patterns and hydraulic cutting press. For briefcases, wooden and hardboard frames are readily available in the market in different standard sizes like: 3.1.2 Skiving Skiving is a process of scuffing the edges of the leather pieces, so that the leather can stick more effectively.
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3.1.3

Folding of edges

Skived edges are folded and different parts are glued before stitching. 3.1.4 Stitching

Glued parts of the product are stitched and unnecessary parts of leather and threads are removed/picked in this process. 3.1.5 Fixing of locks and accessories

The locks and accessories are fixed, which are easily available in local market 3.1.6 Finishing quality check and packing

Finished product is checked for the assured standards and products are packed.

Raw material
List of Raw Material

Table 4-1

Description Buffalo Calf Leather Silk Lining Metal Corners Zip Adhesive Material Buttons Wooden frame (for briefcases) Lock set and other allied accessories (for briefcases) Inner lining (for briefcases ) Industry mainly uses locally produced leather; however imported leather is also used, when specifically required by the buyers/importers for high quality leather goods. Imported as well as local accessories like zips, locks, buttons, hooks, etc. are available in the market. 4.1 Packing

From commercial point of view, there are leather goods (such as most of the travel goods and handbags), which are sold over the counter without special packaging and those (e.g. wallets, engagements pads or diaries) which are mostly presented and sold in their own (gift) boxes or bags. Normally, an exporter in Pakistan uses cardboard boxes/cartons of different sizes depending on the buyers specifications and size of the products as packaging material.

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5
5.1

Production
Product Mix

The proposed unit can produce a variety of leather products with the same infrastructure but it has been proposed in this study that the unit will produce the following products initially in the percentages mentioned below: Table 5-1 Product Mix Details Production Percentage 10% 30% 50% 10% 100% Description Ladies Handbags Wallets Belts Briefcases Total Production 5.2 Production Capacity

The production capacity of the project is based on 12 stitching machines, which have a capacity to produce a product mix of 3,000 ladies handbags, 9,000 Wallets, 15,000 belts, and 3,000 briefcases per annum at 100% capacity. Capacity utilization for the first year is 60%, with 5% annual growth in production capacity and the maximum capacity utilization for the project of 90%. Table 5-2 Capacity Details 100% Utilization 3,000 pieces 9,000 pieces 15,000 pieces 3,000 pieces 30,000 pieces 1st Year (60%) 1,800 pieces 5,400 pieces 9,000 pieces 1,800 pieces 18,000 pieces Description Maximum Production per Year Ladies Handbags Wallets Belts Briefcases Total

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Marketing

The size of local market in Pakistan for leather goods is very small. In order to cater to this market segment, marketing expenses will considerably rise so, the primary target of this unit will be the export market. The leather goods for consumers amount to almost 90 % of total goods market, while 10% is for industrial leather goods. America and Europe are the major markets for leather goods, and account for 85% of total imports of leather goods in the world. 6.1 Global Trade of Leather Goods

Total global trade for leather goods was almost US$ 5.7 Billion in 1999. Historical Detail of leather goods export is given in the below table: Table 6-1
Description World Growth %age

Global Trade of Leather Goods1 (US$ Millions)

1995 5,911 1996 6,006 2% 1997 5,905 -2% 1998 5,732 -3% 1999 5,653 -1%

6.2

Major World Exporters

Italy is the largest exporter of leather goods as a whole and exported 16.54% of the leather goods trade in 1999. Other exporters of leather include China and Korea, which accounted for about 43% of the total international market of leather. Major world exporters of leather goods are Italy, China, France, Germany and Korea. The export details are given in the following table: Table 6-2 Country Italy France China Korea 6.3 Major World Importers Details of Major Exporter Countries in US Dollars (Millions)2 % Share in 1999 16.54% 16.16% 13.36% 5.08%

USA is the biggest importer of leather goods and, in 1999, accounted for 26% of the total imports, an average amount of US$ 3,000 million. Hong Kong is second with nearly 17% of total imports. The details of the major importers are given in the below table:

1 2

Trade Analysis System, year 1999, UNSD Trade Analysis System, year 1999, UNSD 7

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Table 6-3 Country USA Hong Kong Japan Germany 6.4

Details of Major Importer Countries in US $ (Million) % of Share in 99 25.84% 17.12% 15.93% 6.39%

European Market

The European Union ranks amongst the leading markets for leather goods in the world. In 1997, EU demand for leather products was estimated to be US$ 7,000 million. Four countries dominate the EU leather goods market and their detail is given below: Table 6-4 Germany France Italy United Kingdom Others Total Details of Major Importer Countries in EU Market Country % of Total EU Market 20% 16% 16% 10% 38% 100%

Demand for travelers requisites (suit cases, brief cases, document cases, travel bags, rucksacks and computer cases, and other office related cases) has increased vigorously as more people travel on holiday or business. The EU ranks among the leading importers of leather goods in the world. In 1997, the EU imported more than 25% of the worlds leather goods or 529 thousand tons with a value of US$ 5,094 million. 6.5 Pakistans Exports of Leather Goods

In 1999, Leather goods accounted for $9 million in foreign exchange earnings, which is nearly 2% of total leather exports of Pakistan. The leather goods market as a whole has shown a negative trend, in Pakistan, the leather goods market has decreased by an annual average of 3% in last five years. In the year 2000-2001, the exports of Pakistan have increased from $9 million to nearly $15 million, which is an increase by more then 66%. Table 6-5 Years Value Growth % Pakistan Leather Export Trends in US Dollars (Million) 1995-96 11.16 1996-97 12.06 8% 1997-98 13.46 11.6% 1998-99 8.81 -34.5% 1999-00 9.02 2.8% 2000-01 15 66%

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6.6

Pakistans Trading Partners

Some of the leading importers from Pakistan include USA, Germany and United Arab Emirates. The details of the major importers of Pakistani leather goods are given in the below table: Table 6-6 Pakistan Trading Partners of Leather Goods 1998 1.335 1.079 1.673 0.408 % Share 15.15% 12.24% 18.99% 4.63% 1999 1.656 0.944 0.748 0.515 % Share 18.37% 10.47% 8.30% 5.71% Country USA Germany United Arab Emirates United Kingdom

Within the leather goods category, Pakistan produces both industrial and consumer leather goods. Leather industrial goods comprise of the bulk of Pakistans exports of leather goods. Table 6-7 Pakistan Exports Details of Leather Goods in US Dollars (Million) 1995 6.36 4.81 1996 8.61 3.45 1997 9.80 3.66 1998 4.75 4.06 1999 6.25 2.77 Description (Category Wise) Industrial Goods Consumer Goods

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Machinery & EQUIPMENT

Machinery Details Machines Required 1 1 1 2 12 1 1 60 Cost/Machine (Rs) 430,000 96,000 20,000 25,000 31,000 41,000 110,000 200 Total Cost (Rs) 430,000 96,000 20,000 50,000 372,000 41,000 110,000 12,000 1,131,000

Table 7-1 Description

Hydraulic Cutting Press

(Ngaushing SL 999-5, Japan)

Cutting Machine Strap Cutting Skiving Machine Needle Lock stitch Machine Single Needle Block Single Needle Post-Bed Needle Feed Dyes for Hydraulic Cutting Total (Rs)

All the required stitching machinery is easily available in the market. The stitching machinery is available in quite a diversified range of suppliers & origins, i.e. Japanese, Italian, Chinese, Korean and Taiwanese origin. Other brands of stitching and other machines are also available i.e. Brothers, Singer, etc. Juki machines have been suggested due to their durability and easy availability of spare parts in the market. Table 7-2 Other Equipment Details Number Rate (Rs) 75,000 10,000 30,000 20,000 40,000 Cost (Rs) 75,000 10,000 30,000 20,000 40,000 175,000 Description Furniture & Fixtures Office Equipment Fax Machine Computer Printer Air conditioner Total Cost

1 1 1 1

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Human resource requirement

This sector normally follows piecework system. Normally, there are 10-15 different process involved in leather goods manufacturing. The leather goods industry of Pakistan, especially export based, is dependent on job orders and thus, there is an aversion to employ workers on long term basis. So, the exporters prefer to employ labor under contract system. However, the units that have regular export orders prefer to employ permanent labor on piece rate system. The detail of the human resource requirement for the proposed unit is given in the below table: Table 8-1 Description Production Staff Production Supervisor/Manager Cutting Master Cutter Labor (Stitching & Skiving)3 Quality Supervisor /Controller Helper Administrative Staff
Owner

Human Resource Requirement Detail Number Salary/month (Rs.) Annual salary (Rs) (1st Year) 120,000 84,000 36,000 927,000 72,000 144,000 360,000 72,000 24,000 30,000 1,869,000

1 1 1 1 4 1 1 1 1

10,000 7,000 3,000 6,000 3,000 30,000 6,000 2,000 2,500

Accounts officers Peon Security Guards Total

Paid on per piece basis. The staff is paid Rs. 150 per ladies bag, Rs 30 per wallet, Rs 15 per belt and Rs 200 for each briefcase manufactured. 11

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9
9.1

Land & Building

Total Land Requirement

The detail about the area requirement for the proposed leather goods manufacturing unit of 12 stitching machines is given below: Table 9-1 Covered Area Requirement Required Area (sq. ft). 1,400 400 250 300 150 2,500 Description Stitching & Finishing Hall Inspection & Cutting Area Store Accounts & Admin. Office Owner's Office Total: 9.2 Rent Details

It is recommended that this project should be started in a rented building, as this will reduce the initial capital cost of the project. An appropriate premises is generally available in many commercial/industrial areas of the main clusters of leather industry. One year rent will be paid in advance. Table 9-2 Rent Cost Building rent cost 9.3 Suitable Locations Rent Cost Monthly Rent (Rs) 15,000 Annual Rent (Rs) 180,000

The clusters of leather goods manufacturing industry exist predominantly in Karachi, Sialkot and Lahore. Most of the manufacturers are based in these major cities, so it is recommended that such unit should be started in these areas. The basic criteria for the selection of location within these clusters should be the accessibility of skilled manpower and easy accessibility of raw material. Also, basic utilities like electricity, water and public transport are a must for the establishment of such sort of unit. 9.4 Utilities Requirements Electricity Telephone Water

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10 Project Economics
Table 10-1 Project Cost/Capital Requirements 1,131,000 75,000 100,000 30,000 1,336,000 50,000 197,680 180,000 33,930 461,610 1,797,610 50 % 50 % Project Returns 62% 3,872,486 2.41 898,805 898,805 1,797,610 Project Costs Plant & Machinery Furniture & Fixtures Office Equipment Pre-Operating Costs4 Total Fixed Cost Minimum Cash on hand Raw Material Inventory Advance Building rent Pre paid Insurance Working Capital Total Investment in Project Table 10-2 Equity Debt Total Financing Table 10-3 Internal Rate of Return Net Present Value (NPV) (Rs) Payback Period (Years) Financing Plan

These expenses are incurred before the unit is operational, e.g. salaries of key personal for 1 month, stationery, company formation expenses, legal and registration charge, etc. 13 PREF-61/September, 2002/1

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11 Key success factors

The commercial viability of the leather goods manufacturing unit depends on the regular export orders, which means a very effective marketing of the product in the international market. Following are some of the important factors for success of such a business: Producers should not restrict themselves to copying. They should be more innovative and develop their own designs, which can be adapted to the buyers specifications. When setting up export line for the first time, producers should not start with the most fashion-sensitive items like womens handbags, which change style every six months or so. Producer could start, for example, with travel goods, small leather goods, lines that stay longer in fashion and therefore offer producers a greater chance of setting up a stable export business. Leather goods producer should concentrate on producing goods that can be made from leather that is easily available in the local market.

Real commercial power lies only in cooperation between an exporter and an importer. Becoming a team and working closely together is the best way and perhaps the only way to success. To achieve this, trading partners must listen to each others ideas and understand each others problems. Some other factors which are important and have be ensured to make this business a success are as following: Assurance of high consistent quality. Surety of products delivery on time. Competitive Rates. Cost efficiency through better managerial techniques. Better services to customers, i.e. claim settlement, etc.

12 Threats for the business

12.1 Threats The level of technology being used is very low. This not only reduces the production capacity of the smaller manufacturers, but also affects the quality of their product, thereby affecting their competitive edge in the international markets. Some of the threats of the business are as following: Underdeveloped accessories. Inefficient marketing. Lack of modern technology in SMEs and difficult access of credit for SMEs are the major problem hindering growth of this industry. Economies of scale is a important factor, as most of units in Pakistan have small capacity, which means higher cost, and this results in decreasing competitiveness in the international markets.
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13 financial analysis
13.1 Projected Income Statement
PROJECTED INCOME STATEMENT SMEDA
Const Year Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10

Sales

8,208,806

9,481,171

10,950,752

12,648,119

14,608,577

16,872,907

19,488,207

22,508,880

25,997,756

29,033,903

COST OF GOODS SOLD Raw Material Packaging Cost Payroll (Production Staff) Machine Maintenance Direct Electricity Stationary Freight Charges Total Gross Profit OPERATING EXPENSE Payroll (Admin) Fixed electricity Insurance Expense Administrative & Factory Overheads Amortization (Pre-operational Expenses) Depreciation Total Operating Profit NON-OPERATING EXPENSE Financial Charges on Long-term Loan Building Rental L C Charges Total PROFIT BEFORE TAX Tax PROFIT AFTER TAX Retained Earnings beginning of year Retained Earnings end of year

4,023,792 88,200 1,383,000 30,173 203,040 82,088 164,176 5,974,469 2,234,337

4,647,480 101,871 1,572,285 23,338 223,344 94,812 189,623 6,852,753 2,628,418

5,367,839 117,661 1,788,401 18,141 245,678 109,508 219,015 7,866,244 3,084,509

6,199,854 135,898 2,035,257 14,180 270,246 126,481 252,962 9,034,879 3,613,240

7,160,832 156,963 2,370,047 11,152 297,271 146,086 292,172 10,434,522 4,174,056

8,270,760 181,292 2,697,786 8,829 326,998 168,729 337,458 11,991,853 4,881,054

9,552,728 209,392 3,136,139 7,040 359,698 194,882 389,764 13,849,644 5,638,564

11,033,401 241,848 3,570,794 5,657 395,668 225,089 450,178 15,922,634 6,586,245

12,743,578 279,334 4,067,677 4,582 435,234 259,978 519,955 18,310,338 7,687,418

14,231,837 311,956 4,523,723 3,741 478,758 290,339 580,678 20,421,032 8,612,871

486,000 41,040 25,448 123,132 3,000 300,250 978,870 1,255,468

534,600 45,144 19,086 142,218 3,000 227,813 971,860 1,656,558

588,060 49,658 14,314 164,261 3,000 173,222 992,516 2,091,993

646,866 54,624 10,736 189,722 3,000 132,043 1,036,990 2,576,249

711,553 60,087 8,052 219,129 3,000 100,946 1,102,765 3,071,290

782,708 66,095 6,039 253,094 3,000 77,431 1,188,367 3,692,687

860,979 72,705 4,529 292,323 3,000 59,624 1,293,159 4,345,405

947,077 79,975 3,397 337,633 3,000 46,113 1,417,195 5,169,051

1,041,784 87,973 2,548 389,966 3,000 35,840 1,561,111 6,126,307

1,145,963 96,770 1,911 435,509 3,000 28,010 1,711,162 6,901,709

153,696 180,000 24,626 358,322 897,146 61,560 835,586 835,586 835,586

121,339 198,000 28,444 347,782 1,308,776 71,102 1,237,674 835,586 2,073,260

88,982 217,800 32,852 339,634 1,752,359 82,123 1,670,236 2,073,260 3,743,496

56,625 239,580 37,944 334,149 2,242,100 94,852 2,147,249 3,743,496 5,890,745

24,268 263,538 43,826 331,631 2,739,659 109,554 2,630,105 5,890,745 8,520,850

289,892 50,619 340,511 3,352,177 126,534 3,225,642 8,520,850 11,746,493

318,881 58,465 377,346 3,968,059 146,147 3,821,912 11,746,493 15,568,404

350,769 67,527 418,296 4,750,755 168,800 4,581,955 15,568,404 20,150,359

385,846 77,993 463,839 5,662,468 194,964 5,467,504 20,150,359 25,617,863

424,431 87,102 511,532 6,390,176 217,733 6,172,444 25,617,863 31,790,306

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13.2 Projected Balance Sheet

PROJECTED BALANCE SHEET SMEDA
Const Year Current Assets Cash Up-Front Insurance payment Stocks and Inventory Receivable Pre-paid building rent Total Gross Fixed Assets Less: Accumulated depreciation Net Fixed Assets Intangible Assets Pre-operational Expenses Total Total Assets Current Liabilities Accounts payable Total Long-term liabilities Long-term Loan Total Equity Paid-up Capital Retained Earnings Total Total Liabilities And Equity Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10

50,000 33,930 197,680 180,000 461,610 1,306,000 1,306,000

133,076 25,448 228,320 1,231,200 198,000 1,816,043 1,306,000 300,250 1,005,750

1,243,419 19,086 263,710 1,422,036 217,800 3,166,050 1,005,750 227,813 777,938

2,702,596 14,314 304,585 1,642,452 239,580 4,903,526 777,938 173,222 604,716

4,564,706 10,736 351,795 1,897,032 263,538 7,087,807 604,716 132,043 472,673

6,841,180 8,052 406,323 2,191,071 289,892 9,736,518 472,673 100,946 371,727

9,826,737 6,039 469,303 2,530,688 318,881 13,151,648 371,727 77,431 294,296

13,341,856 4,529 542,045 2,922,944 350,769 17,162,144 294,296 59,624 234,672

17,547,390 3,397 626,063 3,376,000 385,846 21,938,696 234,672 46,113 188,559

22,587,637 2,548 699,177 3,899,281 424,431 27,613,073 188,559 35,840 152,719

29,139,314 1,911 4,354,658 466,874 33,962,756 152,719 28,010 124,709

30,000 30,000 1,797,610

27,000 27,000 2,848,793

24,000 24,000 3,967,987

21,000 21,000 5,529,242

18,000 18,000 7,578,480

15,000 15,000 10,123,245

12,000 12,000 13,457,944

9,000 9,000 17,405,816

6,000 6,000 22,133,255

3,000 3,000 27,768,793

34,087,466

395,359 395,359

456,640 456,640

527,419 527,419

609,169 609,169

703,590 703,590

812,647 812,647

938,607 938,607

1,084,091 1,084,091

1,252,125 1,252,125

1,398,354 1,398,354

898,805 898,805

719,044 719,044

539,283 539,283

359,522 359,522

179,761 179,761

898,805 898,805 1,797,610

898,805 835,586 1,734,390 2,848,793

898,805 2,073,260 2,972,065 3,967,987

898,805 3,743,496 4,642,301 5,529,242

898,805 5,890,745 6,789,550 7,578,480

898,805 8,520,850 9,419,655 10,123,245

898,805 11,746,493 12,645,297 13,457,944

898,805 15,568,404 16,467,209 17,405,816

898,805 20,150,359 21,049,164 22,133,255

898,805 25,617,863 26,516,668 27,768,793

898,805 31,790,306 32,689,111 34,087,466

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13.3 Projected Cash flow Statement

PROJECTED CASH FLOW SMEDA
Const Year Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10

Net profit Amortization (Pre operational expense) Depreciation Account Recievables Up front Insurance Payment Raw Material Inventory Account Recievables Cash Provided by Operations Financing activities Long term debt principal repayment Addition of Long Term Loan Add: building rent expense Building rent payment Issuance of share Cash provided by/ (used for) financing activities Total Investing activities Capital expenditure Cash (used for)/ provided by investing activities Net Cash Cash balance brought forward Cash carried forward

(33,930) (197,680)

835,586 3,000 300,250 (1,231,200) 8,483 (30,640) 395,359 280,837

1,237,674 3,000 227,813 (190,836) 6,362 (35,390) 61,281 1,309,904

1,670,236 3,000 173,222 (220,416) 4,771 (40,875) 70,779 1,660,718

2,147,249 3,000 132,043 (254,580) 3,579 (47,211) 81,750 2,065,829

2,630,105 3,000 100,946 (294,040) 2,684 (54,528) 94,421 2,482,588

3,225,642 3,000 77,431 (339,616) 2,013 (62,980) 109,056 3,014,547

3,821,912 3,000 59,624 (392,257) 1,510 (72,742) 125,960 3,547,007

4,581,955 3,000 46,113 (453,056) 1,132 (84,017) 145,484 4,240,611

5,467,504 3,000 35,840 (523,280) 849 (73,115) 168,034 5,078,832

6,172,444 3,000 28,010 (455,377) 637 699,177 146,229 6,594,120

(231,610)

(179,761) 898,805 (180,000) 898,805 1,617,610 1,386,000 180,000 (198,000) (197,761) 83,076

(179,761) 198,000 (217,800) (199,561) 1,110,343

(179,761) 217,800 (239,580) (201,541) 1,459,177

(179,761) 239,580 (263,538) (203,719) 1,862,110

(179,761) 263,538 (289,892) (206,115) 2,276,473

289,892 (318,881) (28,989) 2,985,558

318,881 (350,769) (31,888) 3,515,119

350,769 (385,846) (35,077) 4,205,534

385,846 (424,431) (38,585) 5,040,248

424,431 (466,874) (42,443) 6,551,677

(1,336,000) (1,336,000) 50,000 50,000 50,000

83,076 50,000 133,076

1,110,343 133,076 1,243,419

1,459,177 1,243,419 2,702,596

1,862,110 2,702,596 4,564,706

2,276,473 4,564,706 6,841,180

2,985,558 6,841,180 9,826,737

3,515,119 9,826,737 13,341,856

4,205,534 13,341,856 17,547,390

5,040,248 17,547,390 22,587,637

6,551,677 22,587,637 29,139,314

17 PREF-61/September, 2002/1

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Leather Hand bags, Briefcases, Belts & Wallets

13.4 Ratio Analysis

Ratio Analysis
Year 1 Profitability ratios Gross profit margin on sales Operating Profit on Sales Net profit margin on sales ROA ROE Liquidity ratios Current ratio Quick ratio (Acid Test) Asset management ratios Days sales outstanding Fixed assets turnover ratio Total assets turnover ratio Debt management ratios Debt ratio Times interest earned 22 8.16 2.88 42 12.19 2.39 42 18.11 1.98 42 26.76 1.67 42 39.30 1.44 42 57.33 1.25 42 83.04 1.12 42 119.37 1.02 42 170.23 0.94 43 232.81 0.85 27.2% 15.29% 10.18% 29.33% 68.14% Year 2 27.7% 17.47% 13.05% 31.19% 55.62% Year 3 28.2% 19.10% 15.25% 30.21% 46.03% Year 4 28.6% 20.37% 16.98% 28.33% 39.23% Year 5 28.6% 21.02% 18.00% 25.98% 33.80% Year 6 28.9% 21.89% 19.12% 23.97% 30.38% Year 7 28.9% 22.30% 19.61% 21.96% 27.26% Year 8 29.3% 22.96% 20.36% 20.70% 25.33% Year 9 29.6% 23.56% 21.03% 19.69% 23.81%

SMEDA
Year 10 29.7% 23.77% 21.26% 18.11% 21.59%

4.66 4.08

6.99 6.41

9.34 8.76

11.66 11.09

13.86 13.28

16.20 15.62

18.29 17.72

20.24 19.66

22.06 21.50

24.29 24.29

25% 8.17

14% 13.65

7% 23.51

2% 45.50

126.56

18 PREF-61/September, 2002/1

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Leather Hand bags, Briefcases, Wallets & Belts

14 Key Assumptions
Table 14-1 Operating Assumptions 8 25 300 30,000 pieces 60% 5% 90% 18,000 pieces 10% 10% 5% 45 30 15 50,000 25% 10% Reducing Balance Method Reducing Balance Method Hours operational per day Days operational per month Days operational per year Table 14-2 Production Assumptions Annual production capacity Capacity utilization (1st Year) Capacity growth rate (yearly) Maximum Capacity utilization First Year production utilization Table 14-3 Economy Assumptions Electricity growth rate Wages growth rate Office equipment growth Table 14-4 Cash Flow Assumptions Accounts Receivable cycle (in days) Accounts Payable cycle (in days) Raw material inventory (in days) Cash at the start of Operations (Rs) Table 14-5 Depreciation Assumptions Machinery & Equipment depreciation rate Furniture & Fixtures Table 14-6 Revenue Assumptions 1,000 Per piece 270 Per piece 150 Per piece 2,000 Per piece 1% of Leather Sale price 10% 1% $1= Rs 60 Weighted average sale prices Ladies Bags (Rs) Wallets (Rs) Belts (Rs) Briefcases (Rs) Wastage Leather sale Rate Sale price growth rate Wastage Price Growth Rate Dollar conversation rate

19 PREF-61/Sepetember, 2002/1

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Leather Hand bags, Briefcases, Wallets & Belts

Table 14-7

Raw Material Assumptions Rate 60 per sq. ft 10 5 15 150 400 32 3% 10% Usage per piece 3 zips per Purse Per product Per Product Per Briefcase Per Briefcase Per Briefcase 0.8% of leather Cost Total Leather input

Description Leather Price (Rs) Zip for Purses (per zip) (Rs) Buttons for Purses (Rs) Buckle for belts (Rs) Wooden Box (Rs) Lock Set. (Rs) Inner Linings (Rs) Adhesive material & Other Leather Wastage Rate Raw material price growth rate Table 14-8

Expense Assumptions 1.5% of Revenue 1% of Revenue 2% of Revenue 3% of Fixed Assets 3% 10% 12 0.3% of Revenue 0.75% of Revenue 10 50% 50% 18% 2 5 25%

Administrative overhead (% of sales) Office Expenses (stationery, entertainment, etc.) Freight charges Machine Maintenance cost Insurance rate (Annual) Rent growth rate Pre-paid building rent (months) LC Charges Tax Rate Table 14-9 Financial Assumptions Project life (Years) Equity Debt Interest rate on Long term Debt Debt repayments (Installment per year) Debt Tenure (Year) Discount rate for calculation of NPV

20 PREF-61/Sepetember, 2002/1

Pre-Feasibility Study

Leather Hand bags, Briefcases, Wallets & Belts

Table 14-10

Material Cost of Ladies Bag Quantity 4.5 sq. ft 3 1 0.8% Per Unit Rs 60 per sq. ft Rs 10 per Zip Rs 15 per piece Rs 5 per Button of leather consumption Total Cost in (Rs) 270 30 15 5 2.16 322.16 Total Cost in (Rs) 105 8 0.84 3 116.84 Total Cost in (Rs) 37.5 15 0.3 3 55.8 Total Cost in (Rs) 720 150 400 32 5.76 20 1,327.76 150 per piece 200 per piece 15 per piece 30 per piece
21

Description Leather consumption Zip Parachute Lining Button Adhesive material Total material cost Table 14-11 Description Leather consumption Parachute Lining Adhesive material Packaging cost Total material cost Table 14-12 Description Leather consumption Buckle Adhesive material Packaging cost Total material cost Table 14-13 Description Leather consumption Wooden box Lock set Inner lining Adhesive material Packaging cost Total material cost Table 14-14 Ladies Bag Briefcase Belt Wallet

Material Cost of Wallet Quantity 1.75 sq. ft 0.8% 1 Per Unit Rs 60 per sq. ft Rs 8 per piece of leather consumption Rs 3

Material Cost of Belt Quantity 0.625 sq. ft 1 0.8% Per Unit Rs 60 per sq. ft Rs 15 of leather consumption Rs 3

Material Cost of Briefcase Quantity 12 sq. ft Per Unit Rs 60 per sq. ft 150 400 32 of leather consumption Rs 20

0.8%

Direct Labor Costs

PREF-61/Sepetember, 2002/1