Mba 2

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Emerging Dairy Markets:

Food service institutional market: it is growing at double the rate

of consumer market.

Defense market: An important growing market for quality products

at reasonable prices.

Ingredients market: A boom is forecast in the market of dairy

products used as raw material in pharmaceutical and allied industries.

Parlor market: The increasing away - from - home consumption

trend opens new vistas for ready - to - serve dairy products which

would ride piggyback on the fast food revolution sweeping the urban

India.

India, with her sizable dairy industry growing rapidly and on the path of

modernization, would have a place in the sun of prosperity for many decades to come.

The one index to the statement is the fact that the projected total milk output over the

next 15 years (1995 - 2010) would exceed 1457.6 million tones which is twice the

total production of the past 15 years!

Penetration of milk products:

Western table spreads such as butter, margarine and jams are not very popular in

India. All India penetration of butter / margarine is only 4%.This is also largely

represented by urban area, where penetration is higher at 9%. In rural areas, butter /

margarine have penetrated in 2.1% of households only. The use of these products in

the large metros is higher, with penetration at 15%.

Penetration of cheese is almost nil in rural areas and negligible in the urban areas. Per

capita consumption even among the cheese - consuming households is a poor 2.4kg

pa as compared to over 20kg expensive products and also non - availability in many

parts of the country Butter, margarine and cheese products are mainly manufactured

by organized sector.

A.K.R.G. P.G. College 49

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Similarly, penetration of ghee is highest in medium sized towns at 37.2% compared to

31.7% in all urban areas and 21.3% in all rural areas. The all India penetration of ghee

is 24 1%. In relative terms, penetration of ghee is significantly higher in North

accounts for 57% of ghee consumption and west for 23%. A large part of ghee is

made at home and by small / cottage industry form milk. The relative share of

branded products in this category is very low at around 1-2%.

Milk powder and condensed milk have not been able to garner any significant

consumer acceptance in India as indicated by a very low 4.7% penetration. The

penetration is higher at 8.1% in urban areas and lower at 3.5% in rural areas. Within

urban areas, it is relatively higher in medium sized towns at 8.5% compared to 7.7%

in large metros.

Market Size And Growth:

Market size for milk (sold in loose / packaged form) is estimated to be 36mnMT

valued at Rs 470bn. The market is currently growing at round 4%pa in volume terms.

The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan,

Gujarat, Maharasthra, Andhra Pradesh, Karnataka and TamilNadu, the manufacturing

of milk products is concentrated in these milk surplus States. The top 6 states viz.

Uttar Pradesh, Punjab, Rajasthan, Gujarat, Tamil Nadu, and Madhya Pradesh together

account for 58% of national production.

Milk production grew by a mere 1% pa between 1947 and 1970. Since the early 70’s,

under Operation Flood, production growth increased significantly averaging over 5%

pa.

About 75% of milk is consumed at the household level which is not a part of

commercial dairy industry Loose milk has a larger market in India as it is perceived to

be fresh by most consumers. In reality however, it poses a higher risk of adulteration

and contamination.

The production of milk products, i.e. milk products including infant milk food, malted

food, condensed milk & cheese stood at 3.07 lakh MT in 2009, whereas that of malted


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food is at 65000MT. Cheese and condensed milk production stands at 5000 and 11000

MT respectively in the same year.

(Source: Annual Report 2009-2010, DEPI)

Major Players:

The packaged milk segment is dominated by the dairy cooperatives. Gujarat Co-

operative Milk Marketing Federation (GCMMF) is the largest player. All other local

dairy cooperatives have their local brands (For e.g. Gokul, Warana in Maharashtra,

Saras in Rajasthan, Verka in Punjab, vijaya in Andhra Pradesh, Aavin in Tamil Nadu,

etc). Other private players include J K Dairy, Heritage Foods, Indiana Dairy, Dairy

Specialties, etc Amrut Industries, once a leading player in the sector has turned

bankrupt and is facing liquidation.

3. EXPORT POTENTIAL:

India has the potential to become one of the leading players in milk and milk product

exports. Locational advantage: India is associated amidst major milk deficit countries

in Asia Africa. Major importers of milk and milk products are Bangladesh, China,

Hong Kong, Singapore. Thailand, Malaysia, Philippines, Japan, UAE, Oman and

other gulf countries, all located close to India.

Low Cost of Production:

Milk production in scale insensitive and labour intensive. Due to low labor cost, cost of

production of milk is significantly lower in India. Concerns in export competitiveness are

Quality:

Significant investment has to be made in milk procurement, equipments, chilling and

refrigeration facilities. Also, training has to be imparted to improve the quality to bring it up to

international standards.


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Productivity:

To have an exportable surplus in the long-term and also to maintain cost competitiveness, it is

imperative to improve productivity of Indian cattle.

There is a vast market for the export of traditional milk products such as ghee, paneer,

shrikhand, rasgolas and other ethnic sweets to the large number of Indians scattered all over the

world.

India's exports of milk products:

Description (Quantity,

M.T: Value,

Rs. Million)

2005-06 2006-07 2007-08

Quantity Value Quantity Value Quantity Value

Skimmed milk powder 4,638.620 335 320 282.700 19.640 5.000 0.375

Milk and milk food for

babies

8.270 2.019 111.370 4,270 11.000 2.020

Milk cream 332.230 28 040 1.000 0.084

-

-

Sweetened condensed

milk

41.730 2.840 9.220 0.970 60.390 7.220

Whey 78.460 3.750 11.500 1.010 6.000 0.342

Ghee / Butter / Butter

oil

7,895.080 431.10 299.970 19.20 452.080 238950


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Cheese

(a) Fresh 0.100 0.0130 - - - -

(b) Processed 5.670 1.200 2.10 0.375 22.100 2.190

(c) Other 66.640 8.350 36.780 0.690 24.840 4.550

Total - 872.70 - 52.40 -

255 .600

What does the Indian Dairy Industry has to Offer to Foreign Investors?

India is a land of opportunity for investors looking for new and expanding markets.

Dairy food processing holds immense potential for high returns Growth prospects in

the dairy food sector are termed healthy, according to various studies on the subject

The basic infrastructural elements for a successful enterprise are in place.

• Key elements of free market system

• Raw material (Milk) availability

• An established infrastructure of technology

• Supporting manpower

An entrepreneur's participation is likely to provide attractive returns on the investment

in a fast growing market such as India, along with an export potential in the Middle

East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and other

countries in the region.

Among several areas of potential' participation by NRI's and foreign investors. The

following list outlines a few promising opportunities:

Biotechnology:

Dairy cattle breeding of the finest buffaloes and hybrid cows

Milk yield increase with recombinant somatotropin

Recombinant chymosin, acceptable to vegetarian consumers


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Dairy cultures, probiotics, dairy biologies, enzymes and coloring materials for

food processing

Fermentation derived foods and industrial products alcohol, citric acid, lysine,

flavor preparations, etc.

Biopreservative ingredients based on dairy fermentation, viz., Nisin,

Pedicoccin, Acidophilin, Bulgarican contained in dairy powders.

Dairy / food processing equipment:

Potential exists for manufacturing and marketing of cost competitive food processing

machinery of world - class quality.

Food packaging equipment:

Opportunities lie in the manufacturing of both machinery and packaging materials

that help develop brand loyalty and a clear edge in the marketing of dairy foods.

Distribution channels:

For refrigerated and frozen food distribution, a world class cold chain would help in

providing quality assurance to the consumers around the region.

Retailing:

There is scope for standardizing and upgrading food retailing in major metropolitan

cities to meet the shopping needs of a vast middle class. This area includes grocery

stores of European and North American quality, warehousing and distribution.

4. PRODUCT DEVELOPMENT:

Dairy foods can be manufactured and packaged for export to countries where Indian

food enjoys basic acceptance. The manufacturing may be carried out in contract

plants in India. An option to market the products in collaboration with local


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establishments or entrepreneurs can also be explored, products exhibiting potential

include typical indigenous dairy foods either not available in foreign countries or

products whose authenticity may be questionable. Gulabjamuns, Burfi, Peda,

Rasagollas, and a host of other Indian sweets have good business prospects.

Products typically foreign to India but indigenous to other countries could also be developed for

export. Such products can be manufactured in retail package sizes and could be produced from

milk of sheep, goats and camel. Certain products are characteristically produced from milk of a

particular species. For example, Feta cheese is used in significant tonnage, in Iran. Sheep milk is

traditionally used for authentic Feta cheese. Accordingly, India's goat and sheep herds can be

utilized for the manufacture of such authentic products.

Ingredient manufacture:

Export markets for commodities like dry milk, condensed milk, ghee and certain cheese

varieties are well established. These items are utilized as ingredients in foreign countries. These

markets can be expanded to include value - added ingredients like aseptically packaged cheese

sauce and dehydrated cheese powers

Cheese sauce:

Canned cheese sauce is made from real cheese to which milk, whey, modified food starch,

vegetable oil, colorings and spices may be added. Cheese sauce is useful in kitchens for the

preparation omelet, sandwiches, entrees, and soups. In addition, cheese sauce is used as a

topping on dishes.

Cheese powders:

cheese powders are formulated for dusting or smearing of popular snacks like potato

chips, crackers, etc. they impart flavor and may be blended with spices.With the

globalization of food items, an opportunity should open up for food service and

institutional markets


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Indian (traditional) Milk Products:

There are a large variety of traditional Indian milk products such as

MAKKHAN - UNSALTED BUTTER GHEE - BUTTER OIL PREPARED BY

HEAT CLARIFICATION, FOR LONGER SHELF LIFE

KHEER - A SWEET MIX OF BOILED MILK, SUGAR AND RICE

BASUNDI - MILK AND SUGAR BOILED DOWN TILL IT THICKENS

RABRI - SWEETENED CREAM

DAHI - A TYPE OF CURD

LASSI - CURD MIXED WITH WATER AND SUGAR / SALT

CHANNA - MILK MIXED WITH LACTIC ACID TO COAGULATE.

(PANEER)

KHOA - EVAPORATED MILK. USED AS A BASE TO PRODUCE

SWEET MEATS

The market for indigenous based milk food products is difficult to estimate as most of

these products are manufactured at home or in small cottage industries catering to

local areas.

Consumers while purchasing dairy products look for freshness, quality, taste and

texture, variety and convenience. Products like Dahi and sweets like Kheer, Basundi,

Rabri are perishable products with a shelf life of less than a day. These products are

therefore manufactured and sold by local milk and sweet shops. There are several

such small shops within the vicinity of residential areas Consumer loyalty is built by

consistent quality, taste and freshness. There are several sweetmeat shops, which have

built a strong brand franchise, and have several branches located in various parts of a

city.


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Branding of Traditional Milk Products:

Among the traditional milk products, ghee is the only product which is currently

marketed, in branded form. Main ghee brands are Sagar, MilkMan (Britania), Amul

(GCMMF), Aarey (Mafco Ltd), Vijaya (AP Dairy Development Cooperative

Federation), Verka (Punjab Dairy Cooperative). Everyday (Nestle) and Farm Fresh

(Wockhardt).

With increasing urbanization and changing consumer preferences, there is possibility

of large scale manufacture of indigenous milk products also The equipments in milk

manufacturing have versatility and ca be adapted for several products for instance,

equipments used to manufacture yogurt also can be adapted for large scale production

of Indian curd products (dhai and lassi). Significant research work has been done on

dairy equipments under the aegis of NDDB.

Mafco Limited sells Lassi under the Aarey brand and flavored milk under the Energee

franchise (in the western region, mainly in Mumbai). Britannia has launched flavored

milk in various flavors in tetra packs.

GCMMF has also made a beginning in branding of other traditional milk products

with the launch of packaged Paneer under the Amul brand. It has also created a new

umbrella brand “Amul Mithaee'', for a first new product Amul Mithaee Gulabjamun

has already been launched in major Indian markets.

Western Milk Products:

Western milk products such as butter, cheese, and yogurt have gained popularly in the

Indian market only during the last few years. However consumption has been

expanding with increasing urbanization.


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Butter:

Most Indians prefer to use home made white butter (Makkhan) for reasons of

taste and affordability.Most of the banded butter is sold in the towns and cities. The

major brands are Amul is the leading national brand while theother players have

greater shares in their local markets. The latest entrantin the butter market has been

Britannia. Britannia has the advantages of a widedistribution reach and a strong brand

recall. Priced at par with the Amulbrand, it is expected to give stiff competition to the

existing players. In 2009-2010 the butter production is estimated at 4 purposes rest all

is in theyellow form.

Cheese:

The present market for cheese in India is estimated at about 9.000 tonnes and is growing at the

rate of about 15% per annum. Cheese is mainly consumed in the urban areas. The four metro

cities alone account for more than 50% of the consumption. Mumbai is the largest market

(accounting for 30% of cheese sold in the country), followed by Delhi (20%), Calcutta (7%)

and Chennai (6%). Mumbai has a larger number of domestic consumers, compared to Delhi

where the bulk institutional segment (Mainly hotels) is larger.

Demand for various types of cheese in the Indian market:

Type of Cheese % of total

consumption

Processed 50

Cheese spread 30

Mozzarella 10

Flavored / Spiced 5

Others 5

The major players are Amul, Britannia, and Dabon international dominating the market. Other

major brands were Vijaya, Verka and Nandini (all brands or various regional dairy

cooperatives) and Vadilal. The heavy advertising and promotions being undertaken by these


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new entrants is expected to lead to strong 20% growth in the segment. Amul has also become

more aggressive with launch of new variants such as Mozzarella cheese (used in Pizza), cheese

powder, etd.

The entry of new players and increased marketing activity is expected to expand the

market. All the major players are expanding their capacities.

Milk powder:

Milk powder is mainly of 2 types

• Whole milk powder

• Skimmed milk powder

Whole milk powder contains fat, as distinguished from skimmed milk powder,

which is produced by removing fat from milk solids. Skimmed milk powder is

preferred by diet conscious consumers. Dairy whiteners contain more fat than

skimmed milk powder but less compared to whole milk powder. Dairy whiteners

are popular milk substitute for making tea coffee etc. The penetration of these

products in milk abundant regions is driven by convenience and non perishable

nature (longer shelf life) of the product.

Dairy sector of advanced nations export milk products with a subsidy of $1000 per

tonne with a level of subsidy more than 60% of the price of milk powder produced

in India, this has led to large scale imports of milk powder both in whole and

skimmed form. To protect the domestic sector from these subsidized imports the

central government has recently increased the basic import duty on all imports of

milk powder more than 10000MT the basic customs duty has been left unchanged at

15%.

In 2009-2010 India is estimated to have imported about 18,000 tonnes of milk

powder against a total estimated production of 2.40 Lakh MTs. In 2010-11 India is

expected to export 10000 MT of skimmed milk powder due to rise in international


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prices to $2300 per MT from last year's levels of $1400per Mt. These expectations

are based on the strong demand from Russia, East Asia and Latin America, and also

on tightening of supply in EU, which accounts for 75% of the annual global

skimmed milk powder exports.

Major players:

Milk powder / Dairy Whiteners: major skimmed milk brands are sagar (GCMMF)

and Nandini (Karnataka Milk Federation), Amul Full Cream milk powder is a

whole milk powder brand.

Leading brands in the dairy whitener segment are Nestele's Everyday, GCMMF's

Amulya, Dalmia industry's Sapan, Kwality Dairy India's KreamKountry,

Wockhardt's Farm Fresh and Britannia's Milkman Dairy Whitener.

Condensed Milk:

The condensed milk market has grown from 9000 MT in 2008 to 11000 MT in

2009. condensed milk is a popular ingredient used in home - made sweets and

cakes. Nestle:s Milkmaid is the leading brand with more than 55% market share.

The only other competitor is GCMMF's Amul.

Value addition in milk powder - infant foods:

Nestle is the market leader in the segment. This is a category where brand loyalties

are very strong as mothers want the best for their babies Heinz is the only other

significant competitor to Nestle in this segment. Nestles Cerelac and Nestum

together have around 80% market share and Heinz's Farex has close to 18% share.

Wockhardt is a relatively new entrant with its First Food Brand. Wockhardt also

proposes to launch a new baby food Easum containing moong (moong is one of the

easily digestible pulses) The Easum brand will directly compete with Nestles

Nestum (made from rice). In infant formula also Nestle’s Lactogen formula and


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Lactogen standard formula are the leading brands with around 75% market share.

Other brands are Heinz's Lactodex Farex, Wockhardt's Raptakos, and Arnul's

Amulspray

5. REGULATORY FRAME WORK:

The dairy industry was de - licensed in 1991 with a view to encourage private

investment and flow of capital and new technology in the segment. Although de-

licensing attracted a large number of players, concerns on issues like excess

capacity, sale of contaminated / substandard quality of milk etc induced the

government to promulgate the MMPO (Milk and Milk Products Order) in 1992.

Milk and Milk Products Order (MMPO) regulates milk and milk products in the

country. The order requires no permission for units handling less than 10,000 liters

of liquid milk per day or manufacturing milk products containing between 500 to

3,750 tonnes of milk solids per year. Plants producing over 75,000 liters of milk per

day or more than 3,750 tonnes per year of milk solids have to be registered with the

Central Government. The stringent regulations, government controls and licensing

requirements for new capacities have restricted large Indian and MNC players from

making significant investments in this product category. Most of the private sector

players have restricted large Indian and MNC Players from making significant

investments in this product category. Most of the private sector players have

restricted themselves to manufacture of value added milk products like baby food,

dairy whiteners, condensed milk etc.

All the milk products except malted foods are covered in the category of industries

for which foreign equity participation up to 51% is automatically allowed. Ice

cream, which was earlier reserved for manufacturing in the small - scale sector, has

now been de - reserved. As such, no license is required for setting up of large - scale

production facilities for manufacture of ice cream. Subsequent to de - canalization,

exports of some milk based products are freely allowed provided these units comply with the


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compulsory inspection requirements of concerned agencies like: National Dairy

Development Board. Export Inspection Council etc, Bureau of Indian standards has

prescribed the necessary standards for almost all milk - based products, which are to be

adhered to by the industry

Amul's secret of success:

The system succeeded mainly because it provides an assured market at remunerative prices

for producers' milk besides acting as a channel to market the production enhancement

package. What's more, it does not disturb the agro - system of the farmers. It also enables the

consumer an access to high quality milk and milk products. Contrary to the traditional

system, when the profit of the business was cornered by the middlemen, the system ensured

that the profit goes to the participants for their socio -economic upliftment and common good.

Looking back on the path traversed by Amul, the following features make it a pattern and

model for emulation elsewhere. Amul has been able to:

Produce an appropriate blend of the policy makers farmers board of

management and the professionals: each group appreciation its roles and

limitations.

Bring at the command of the rural milk producers the best to the technology and

harness its fruit for betterment.

Provide a support system to the milk producers without disturbing their agro -

economic systems

Plough back the profits, by prudent use of men, material and machines in the

rural sector for the common good and betterment of the member producers and


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Even though, growing with time and on scale, it has remained with the smallest

producer members. In that sense, Amul is an example par excellence, of an

intervention for rural change.

The Union looks after policy formulation, processing and marketing of milk, provision of

technical inputs to enhance milk yield of animals, the artificial insemination service,

veterinary care, better feeds and the like - all through the village societies

The village society also facilitates the implementation of various production enhancement

and member education programs undertaken by the union. The staff of the village societies

have been trained to undertake the veterinary first - aid and the artificial insemination

activities on their own.

Amul's success: A model for other districts to follow.

Amul's success led to the creation of similar structures of milk producers in other districts of

Gujarat. They drew on Amul's experience in project planning and execution. Thus the Anand

Pattern' was followed not just in Kaira district but in Mehsana, Sabarkantha, Banaskantha,

Baroda and surat districts also.

Even before the Dairy Borad of India was born, farmers and their leaders carried out

empirical tests of the hypotheses that explained Amul's success. In these districts, milk

producers and their leaders experienced significatnt commonalities and found easy and

effortless ways to adapt Amul's gameplan to their respective areas.

This led to the Creation of the National Dairy Development Board with the clear mandate of

replicating the Anand pattern' in other parts of the country. Initially the pattern was followed

for the dairy sector but at a later stage oilseeds, fruit and vegetables, salt, and tree sector also

benefited from it's success.


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GCMMF: An overview

Gujarat Cooperative Milk Marketing Federation (GCMMF) is India's largest food

products marketing organization It is a state level apex body of milk cooperatives in Gujarat

which aims to provide remunerative returns to the farmers and also serve the interest of

consumers by providing quality products which are good value for money

Members: 12 district cooperative milk producers' union.

No. of Producer Members: 2.12 Mill

No. of Village Societies: 10,411

Total Milk Handling Capacity: 6.1 Million liters per day

Milk Collection (Total 2009-2010): 1.59 billion liters

Milk Collection (Dairy Average 2009-10): 4.47 million liters

Milk Drying Capacity: 450 Metric Tons Per Day

Sales Turnover Rs (Million) US $ (million)

2003-04 11140 355

2004-05 13790 400

2005-06 15540 450

2006-2007 18840 455

2007-08 22192 493

2008-09 22185 493

Cattle Feed Manufacturing Capacity: 1450 MTs Per Day


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Major dairy products manufactures:

Some of the major dairy products manufacturers in the country:

Company Brands Major Products

Nestle India Limited Milkmaid, Cerelac,

Lactogen, Milo,

Everyday

Sweetened condensed milk,

malted foods, milk powder

and Dairy whithner

Milkfood Limited Milkfood Ghee, ice cream, and other milk

products

Smith Kline Beecham

Limited

Horlicks, Maltova, Viva Malted Milkfood, ghee, butter,

powdered milk, milk fluid and

other milk based baby foods.

Indodan Industries Limited Indana Condensed milk, skimmed

milk powder, dairy milk

whitener, chilled and

processed milk

Gujarat Co-operative Milk

Marketing Federation

Limited

Amul Butter, cheese and other milk

products

H.J. Heinz Limited Farex, Compan,

Glactose, Bonniemix,

Vitamilk

Infant Milkfood, Malted

Milkfood

Britannia Milkman Flavored milk, cheese, Milk

Powder, Ghee

Cadbury Bournvita Malted Food


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6 . FUTURE PROSPECTS:

India is the world's highest milk producer and all set to become the world's largest

food factory. In celebration, Indian Dairy sector is now ready to invite NRIs and

Foreign investors to find this country a place for the mammoth investment projects.

Be it investors, researchers, entrepreneurs, or the merely curious - Indian Dairy

sector has something for everyone.

Milk production is relatively efficient way of converting vegetable material into

animal food. Dairy cow's buffalo's goats and sheep can eat fodder and crop by

products which are not eaten by humans. Yet the loss of nutrients energy and

equipment required in milk handling inventory make milk comparatively expensive

food. Also if dairying is to play its part in rural development policies, the price to

milk producers has to be remunerative. In a situation of increased international

prices low availabilities of food aid and foreign exchange constraints, large scale

subsidization of milk conception will be difficult in the majority of developing

countries.

Hence in the foreseeable future, in most of developing countries milk and milk

products will not play the same roll in nutrition as in the affluent societies of

developed countries. Effective demand will come mainly from middle and high

income consumers in urban areas.

There are ways to mitigate the effects of unequal distribution of incomes. In Cuba

where the Government attaches high priority to milk in its food and nutrition policy,

all pre - school children receive a daily ration of almost a liter of milk fat the

reduced price. Cheap milk and milk products are made available to certain other

vulnerable groups, by milk products outside the rationing system are sold price

which is well above the cost level. Until recently, most fresh milk in the big cities of

China was a reserved for infants and hospitals, but with the increase in supply,

rationing has been relaxed.


CAPITAL BUDGETING

CHAPTER-IV


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NON DCF CRITERIA

Table 3.1;

(a) PAY BACK PERIOD (PBP):- (Rs in lakhs_)

The pay back period (PB) is one of the most popular and widely recognized

traditional methods of evaluating investment proposals. Pay back is the number of

years required to recover the original cash outlay invested in a project.

If the project generates constant annual cash inflows, the pay back period can

be computed by dividing cash outlay by the annual cash in flow.

Pay Back Period: Initial Investment

Annual Cash Inflow

C0 : Initial Investment

C : Annual Cash in flow

In case of un equal cash inflows, the pay back period can be found out by adding up

the cash inflows until the total is equal to the initial cash outlay.


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PAY BACK PERIOD

YEAR INCOME

(PAT) (RS

LAKHS )

DEPRECIATIO

N (RS LAKHS )

CASH IN

FLOW (RS

LAKHS )

CUMULATIVE CASH

IN FLOWS (RS LAKHS)

1 12573363.72 16089603.00 28662966.72 28662966.72

2 12573363.72 19701376.88 32274740.60 60937707.32

3 22733566.67 39089995.71 61823562.38 122761269.70

4 47015367.90 40369063.00 87384430.90 210145700.60

5 98786932.00 52675282.00 151462214.00 361607914.60

Initial outlay = 254955806.95 (lakhs)

254955806.95-210145700.60

Pay back period = 4 +

151462214.00

44810106.35

4 +

151462214.00

= 4 + 0.296


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= 4.30 Months

Criteria for evaluation:

The pay back period computed for a project is less than the pay back period set by

management of the company, it would be accepted. A project actual pay back

period is more than the determined period by the management, it will be rejected.

Decision:


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The standard payback period is set by TIRUMALA MILK PRODUCTS PRIVATE

LTD for considering the expansion project is six years, where as actual payback

period is 4.30 months. Hence we accept the Project.

Table3.2(b)

AVERAGE RATE OF RETURN (ARR) (OR)ACCOUNTING RATE OF

RETURN (ARR): as in lakhs

The accounting rate of return (ARR) also known as the return on investment

(ROI) uses accounting information, as revealed by financial statements, to measure

the profitability of an investment. The Accounting rate of return is the ratio of the

average after fax profit divided by the average investment. The average investment

would be equal to half of the original


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AVERAGE OR ACCOUNTING RATE OF RETURN

YEAR EBT TAXATION CASH IN FLOWS

1 12573363.72 4266274,00 8307089.72

2 12573363.72 4341000.00 8232363.72

3 22733566.67 8446490.00 14287076.67

4 47015367.90 13794988.00 33220379.90

5 98786932.00 32986706.00 65800226.00


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Average profit = 129847136.01 = 25969427.20

5

Average investment = 254955806.95 = 127477903.48

2

ARR = 25969427.20 x 100

2

= 0.20 x 100

= 20.00

ROI = Average profit__ x 100

Initial investment

= 25969427.20 x 100

254955806.95

= 0.10 x 100

= 10.00


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According to this method ARR is lower than minimum rate of return set by the

management are accepted. The project is having dissatisfactory ARR so the

management has to reject the project.

PBP>SPBP-Rejected

PBP<SPBP-Accepted

PBP - Indifferent

Decision:

The standard Average Rate of Return set by TIRUMALA MILK PRODUCTS

PRIVATE LTD management is 21%. The actual ARR is 20.00% is lower than the

standard ARR set by the management, hence we reject the project because the rate

of return of the project is lower than the standard.

DCF CRITERIA:

Table 3.3

(a) Net Present Value:- Rs in lakhs

The NPV present value (NPV) method is the classic economic method of

evaluating the investment proposals. If is a DCF technique that explicitly recogniges

the time value at different time periods differ in value and are comparable only

when their equipment present values- are found out.


CAPITAL BUDGETING

N P V = C1 + C2 + C3 + ……………..+ C -C0

(n+k) (1+k)2 (1+k)3 (1+k)n

( o r )

n Ci

N P V = - -C0

i = 0 (1+k) i

Where

N P V = Net present value

Cfi = Cash flows occurring at time

k = The discount rate

n = life of the project in years

C0 = Cash out lay

NET PRESENT VALUE


CAPITAL BUDGETING

YEAR EAT DEP CASH

INFLOWS

DCF

(12%)

PRESENT

VALUE

1 12573363.72 16089603.00 28662966.72 0.893 25596029.28

2 12573363.72 19701376.88 32274740.60 0.797 25722968.26

3 22733566.67 39089995.71 61823562.38 0.712 4401837641

4 47015367.90 40369036.00 87384430.90 0.636 55576498.05

5 98786932.00 52675282.00 151462214.00 0.567 85879075.34

NPV = 236792947.34 - 254955806 95 -18162859.61


CAPITAL BUDGETING


In case of calculated NPV is positive or zero, the project should be accepted. If the

calculated NPV is negative, the project is rejected.

Decision:

The Net Present Value of TIRUMALA MILK PROUDCTS PRIVATE LTD is

Positive. So the project should be acceptedTable 3.4


CAPITAL BUDGETING

(b) INTERNAL RATE OF RETURN: Rs in lakhs

The internal rate of return (IRR) method is another discounted cash flow technique

which takes account of the magnitude and thing of cash flows, other terms used to

describe the IRR method are yield on an investment, marginal efficiency of capital,

rate of return over cost, time- adjusted rate of internal return and soon.

i=0 Cfi SV+WC

N P V =

(1+k) i (1+k) n

Where

Cfi = Cash flows occurring at different point of time

k = The discount rate

n = life of the project in years

C0 = Cash out lay

SV & WC = Salvage value and Working Capital at the end of the n years.

(or)

I R R = L A + ( H - L )

( A - B )

Where

L :Lower discount rate at which NPV is positive

H :Higher discount rate at which NPV is negative

A :NPV at lower discount rate, L

B : NPV at higher discount rate, H

INTERNAL RATE OF RETURN


CAPITAL BUDGETING

YEAR EAT DEP CASH

IN FLOWS

DCF

(12%)

PRESENT

VALUE

1 12573363.72 16089603:00 28662966.72 0.893 25596029.28

2 12573363.72 19701376.88 32274740.60 0.797 25722968.26

322733566.67 39089995.71 61823562 38 0.712 44018376.41

4 47015367.90 40369036.00 87384430.90 0.636 55576498.05

5 98786932.00 52675282.00 151462214.0 0.567 85879075.34

IRR = 12 + 236792947.34-254955806.95 x (12-14)

236792947.34-222028074.10

18162859.61

= 12 + x 2

14764873.24

= 12 + (-1.23* -2)

= 12 + 2.46

= 14.46


CAPITAL BUDGETING


In this method the project is accepted when IRR is higher than its cost of capital or cut

out rate. If the project is not accepted when the IRR is less than cost of capital.

Decision:

The project is accepted because of the calculation IRR is higher than its cost of

capital. The cost of capital fixed by management is 10%; the actual is more than its

standard. Hence, the project is accepted.


CAPITAL BUDGETING

Table 3.5

(C) PROFITABILITY INDEX:

Yet another time- adjusted method of evaluating the investment proposals is the benefit- cost

(B/C.) ratio or profitability index (PI) Profitability Index is the ratio of the present valued of

cash inflows, at the required rate of return, to the initial cash out flow of the investment.

PV of cash inflow

P I =

Initial Cash outlay

Where PV: Present Value


CAPITAL BUDGETING

PROFITABILITY INDEX

YEAR EAT DEPRECIATION CASH IN FLOW (RS

lakhs)

1 12573363.72 16089603.00 286629336.72

2 12573363.72 19701376.88 32274740.60

3 22733566.67 39089995.71 61823562.38

4 47015367.90 40369036.00 87384430.90

5 98786932.00 52675282.00 151462214.00

= 307637088.95

254955806.95

= 1.21


CAPITAL BUDGETING


A project can be accepted if its Profitability Index is greater than one. If the PI is less than one

we should reject the project.

P.I> 1= Accepted

P.I < 1= Rejected

P.I = 1= Indifferent

Decision:

Profitability index of proposed expansion project is found our 1.21 this is more than

the cash outflow. Hence we accept the project


CAPITAL BUDGETING

CHAPTER-V

FINDINGS

1. From the analysis it was observed that the payback period is 4.3 years but

standard pay back period by TIRUMALA MILK PROUDCTS PRIVATE

LTD is 6 years. The actual payback period is lower than the standard set by

the company management because of high yield from the investment as well

as higher cash inflows during the initial years of capital investment period

2. The study results reveals that Average rate of return is fixed by the

TIRUMALA MILK PROUDCTS PRIVATE LTD 21%. But the actual ARR is


CAPITAL BUDGETING

20.00%. The actual ARR is lower than TIRUMALA MILK PROUDCTS

PRIVATE LTD. Because the capital investment required is very low

investment required is very low investment, by TIRUMAL MILK

PRODUCTS PVT LTD.

3. It was observed that the acceptance rule of net present value during the period

of study a project is accepted if the Net Present Value is positive. The project

NPV is -18162859.61 (lakhs) for a capital expenditure of 254955806.95.

4. It was observed that the project investment yields an internal rate of return of

12%. For the period of study, which is more than the it's Cost of capital of

14%

5. It was observed that the profitability index of the proposed expansion project

is more than one. Due to thee positive NPV. Than the project can be accepted.

While P.I is 1.21 lines that is for every One rupee invested is the project yields

1.21 rupees

6. The study needs found that at proposal the company using the payback

period technique for evaluating its capital as budgeting proposal.


CAPITAL BUDGETING

SUGGESTIONS:

1. From the study it has been suggested that the company has to maintain the Pay

back period as though it is prevailing at present ten the actual PBP is less than

the standard PBP. So the project is to be accepted.

2. From the analysis it has been suggested that the company has it maintained the

Average rate of return as it is in the present situation. As the actual ARR is less

than the standard ARR so the project is to be accepted.

3. It has been suggested that the company has to maintained positive NPV value.

As the NPV is positive the project is to be accepted.

4. It has been suggested that the company has to maintained the IRR as it is the

present situation while calculating the IRR the cost of capital is taken in to

consideration on the bases of weighted average cost of capital.

5. It has been suggested that the company has to maintain the PI as it is in the

present situation. As the PI is more than 1 due to the Positive the project can be

accepted.

6. It has been recommended to adopt the DCF based CBDT for the proposal of

evaluating its capital investment proposals alternatives.

7. The calculated payback period is 4.30 years. But standard payback period was 6

years by TIRUMALA MILK PROUDCTS PRIVATE LTD management.


CAPITAL BUDGETING

CONCLUSION

Based on the study in TIRUMALA MILK PROUDCTS PRIVATE LTD there is

forecasting project cash flow involves numerous estimates and many individuals

and departments participate in this exercise. The role of the finance manager in to

coordinate the efforts of various departments and obtain information from them,

ensure that the forecasts are based on a set of consistent economic assumptions,

keep to the exercise focused on relevant variables and minimize the bias is inherent

in cash flow forecasting .

In the study I know that the company is following pay back period. Based on the

data shows that the company can use any criteria to get return on the investment.

The project "A Study on Capital budgeting' in TIRUMALA MILK PROUDCTS

PRIVATE LTD, it is suggested to hold the company is the same situation.


CAPITAL BUDGETING

BIBILOGRAPHY

FINANCIAL MANAGEMENT : I.M PANDEY

FINANCIAL MANAGEMENT : PRASANNA CHANDRA

FINANCIAL MANAGEMENT : M.Y.KHAN&JAIN

FINANCIAL MANAGEMENT : V.K.BHALLA

WEBSITES

WWW.GOOGLE.COM

WWW.ASK.COM

WWW.TIRUMALA MILK PRODUCTS PVTLTD.AC.IN

WWW.TIRUMALA MILK PRODUCTS PVTLTD.COM


http://WWW.ASK.COM/

http://WWW.GOOGLE.COM/

Mba 2

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