Pre-Feasibility Study Prime Ministers Small Business Loan Scheme

Fodder Production & Trading Company

Small and Medium Enterprises Development Authority

Government of Pakistan
www.smeda.org.pk
HEAD OFFICE 4th Floor, Building No. 03 Aiwan-e-Iqbal Complex, Egertern Road Lahore Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756 Helpdesk@smeda.org.pk
REGIONAL OFFICE PUNJAB REGIONAL OFFICE SINDH 5TH Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) 111-111-456 Fax: (021) 5610572 Helpdeskkhi@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

3rd Floor, Building No. 03 Aiwan-e-Iqbal Complex, Egertern Road Lahore Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756 Helpdesk@smeda.org.pk

September 2013

Pre-Feasibility Study

Fodder Production & Trading Co.

Contents
1. DISCLAIMER ......................................................................................................................... 3 2. PURPOSE OF THE DOCUMENT ......................................................................................... 4 3. INTRODUCTION OF SMEDA .............................................................................................. 4 4. INTRODUCTION TO SCHEME ........................................................................................... 5 5. EXECUTIVE SUMMARY ..................................................................................................... 5 6. BRIEF DESCRIPTION OF PROJECT ................................................................................... 6 7. CRITICAL FACTORS ............................................................................................................ 6 8. INSTALLED AND OPERATIONAL CAPACITIES ............................................................ 6 9. GEOGRAPHICAL POTENTIAL FOR INVESTMENT ........................................................ 7 10. POTENTIAL TARGET MARKET ..................................................................................... 7 11. PROCESS FLOW ................................................................................................................ 7 12. PROJECT COST SUMMARY ............................................................................................ 8 12.1 Project Economics ..................................................................................................... 8 12.2 Project Financing .......................................................................................................... 9 12.3 Project Cost ................................................................................................................ 9 12.4 Space Requirement ................................................................................................... 9 12.5 Machinery and Equipment ...................................................................................... 10 12.6 Raw Material Requirements ................................................................................... 10 12.7 Human Resource Requirement ............................................................................. 11 12.8 Revenue Generation ............................................................................................... 11 12.9 Other Costs ............................................................................................................... 11 13. CONTACTS - SUPPLIERS .............................................................................................. 11 14. ANNEXURES ................................................................................................................... 13 14.1 Income Statement ................................................................................................... 13 14.2 Balance Sheet ......................................................................................................... 14 14.3 Cash Flow Statement ............................................................................................. 15 14.4 Useful Project Management Tips ......................................................................... 16 14.5 Useful Links ............................................................................................................. 17 15. KEY ASSUMPTIONS....................................................................................................... 18

September 2013

1. DISCLAIMER
This information memorandum is to introduce the subject matter and provide a general idea and information on the said matter. Although, the material included in this document is based on data/information gathered from various reliable sources; however, it is based upon certain assumptions which may differ from case to case. The information has been provided on as is where is basis without any warranties or assertions as to the correctness or soundness thereof. 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, its employees or agents do not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The contained information does not preclude any further professional advice. The prospective user of this memorandum is encouraged to carry out additional diligence and gather any information which is necessary for making an informed decision, including taking professional advice from a qualified consultant/technical expert before taking any decision to act upon the information. For more information on services offered by SMEDA, please contact our website: www.smeda.org.pk

2. PURPOSE OF THE DOCUMENT

The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The document also provides sectoral information, brief on government policies and international scenario, which have some bearing on the project itself. The purpose of this document is to facilitate potential investors in Fodder Production & Trading by providing them a holistic as well as a micro view of business with the hope that such information as provided herein will aid the potential investors in crucial investment decisions. The need to come up with pre-feasibility reports for undocumented or minimally documented sectors attains greater imminence as the research that precedes such reports reveal certain thumbs of rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and its successful management. Apart from carefully studying the whole document one must consider critical aspects provided later on, which form basis of any Investment Decision.

3. INTRODUCTION OF SMEDA
The Small and Medium Enterprises Development Authority (SMEDA) was established in October 1998 with an objective to provide fresh impetus to the economy through development of Small and Medium Enterprises (SMEs). With a mission "to assist in employment generation and value addition to the national income, through development of the SME sector, by helping increase the number, scale and competitiveness of SMEs" , SMEDA has carried out sectoral research to identify policy, access to finance, business development services, strategic initiatives and institutional collaboration and networking initiatives. Preparation and dissemination of prefeasibility studies in key areas of investment has been a successful hallmark of SME facilitation by SMEDA. Concurrent to the prefeasibility studies, a broad spectrum of business development services is also offered to the SMEs by SMEDA. These services include identification of experts and consultants and delivery of need based capacity building programs of different types in addition to business guidance through help desk services.

4. INTRODUCTION TO SCHEME
Prime Ministers Small Business Loans Scheme, for young entrepreneurs, with an allocated budget of Rs. 5.0 Billion for the year 2013-14, is designed to provide subsidised financing at 8% mark-up per annum for one hundred thousand (100,000) beneficiaries, through designated financial institutions, initially through National Bank of Pakistan (NBP) and First Women Bank Ltd. (FWBL). Small business loans with tenure up to 7 years, and a debt : equity of 90 : 10 will be disbursed to SME beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwah, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA).

5. EXECUTIVE SUMMARY
This document is developed to provide the insight of the said business with potential investment opportunity in fodder production and trading unit to cater the need of the emerging market. Fodder business is proposed to be located in rural areas of Sindh, Punjab, KPK and Baluchistan where water is available in abundant quantity. Product(s) include Dry Fodder, and Green Fodder Capacity; Installed capacity 185 Tons / Acre / Crop and initial utilization 90 % Total Cost Estimates is Rs. 2,218,250 with fixed investment Rs.1,312,000 and working capital Rs. 906,250 Given the cost assumptions, IRR and payback are 51 % and 3 years respectively. The most critical considerations or factors for success of the project are 1. Contract Management 2. Applying the correct balance of nutrients

6. BRIEF DESCRIPTION OF PROJECT

Animals consume green fodder in high quantity as it is backed by water so people dont find it economical. While Alfalfah is consumed less as the making process rinse the moisture, but give the same nutrition to the animal. Secondly, the requirement is persistent across Pakistan and round the year vis--vis the international market is also open and looking for a new venture to trade. Technology: This proposed fodder production unit will use new cutting and used bailer machines for cutting and bailing of forage. Location: Fodder can be cultivated in any rural area where water is easily available and land is suitable for optimum fodder yield. Product: The proposed project will produce Green fodder and Dry Fodder Target Market: In addition to local markets of urban and mostly rural areas, there is a huge potential of exports in dry and bailed form. Employment Generation: The proposed project will provide direct employment to 06 people. Financial analysis shows the unit shall be profitable from the very first year of operation

7. CRITICAL FACTORS
The most critical considerations or factors for success of the project are Contract Management Availability of water Applying the correct balance of nutrients Applying fertilizer at the right time.

8. INSTALLED AND OPERATIONAL CAPACITIES

Production capacity of the proposed fodder production and trading unit would be around 25 to 30 tons/acres per annum on contract farming basis. It has assumed that contract farming would be done on 20 acres of land, where 90% of fodder will be sold as Dry Fodder and 10% of total production will be sold as Green Fodder. As moisture contents are up to 70% therefore total production of dry fodder is calculated at 135 Tonnes /

anum (30% of green) and Green Fodder at 50 Tonnes / anum. There will be 6 cut per acre / anum for fodder.

9. GEOGRAPHICAL POTENTIAL FOR INVESTMENT

Pakistan is primarily an agricultural country and majority of population is directly involved in agriculture business. Therefore, for the proposed project location would not be critical in terms of availability of labor, utilities or other production requirements. Fodder business is proposed to be located in rural areas of Sindh, Punjab, KPK and Baluchistan where water is available in abundant quantity.

10. POTENTIAL TARGET MARKET

The fodder industry is becoming progressively more mechanized. Todays producer is becoming more efficient by having tractors, cutters and trucks for logistics. Stakeholders related to this sector agree that providers and sources are not enough to meet annual requirement of fodder. The livestock is increasing in numbers which might increase the size of the market in future, but, to be a successful fodder producer and trader, one requires plenty of experience, energy and a good location. During discussion with stakeholders it was observed that the existing practice of market is that customers come to door step and buy in bulk. But there are several sale points available where a huge amount of fodder is being supplied. These un-served segments comprise of regular and occasional mandis, farm houses and down-town areas or suburbs where people use cattle, buffalo and cows.

11. PROCESS FLOW

Mowing

Swath manipulation

Storage Stacking

Customer
(Local/International )

12. PROJECT COST SUMMARY

A detailed financial model has been developed to analyze the commercial viability of [the project] under the Prime Ministers Small Business Loan Scheme. Various cost and revenue related assumptions along with results of the analysis are outlined in this section. The projected Income Statement, Cash Flow Statement and Balance Sheet are attached as appendix. 12.1 Project Economics All the figures in this financial model have been calculated on contract farming basis on 20 Acres of Land with an assumption of 25-30 tonnes fodder production per acre per anum. There will be 6 crop cut per anum and dry fodder is produced by drying 70% of moisture contents from green fodder. For the proposed project 90% of revenue will come from dry fodder therefore average production of Dry fodder will be 135 Tons / Acre / Anum and Green fodder (10% of Total Production) 50 Tons / Acre / Anum will be produced. The following table shows internal rates of return and payback period.
Table 1 - Project Economics Description Internal Rate of Return (IRR) Payback Period (yrs) Net Present Value (NPV) Details 51% 3.0 10,560,251

Returns on the scheme and its profitability are highly dependent on fertility of land, good agricultural practices and availability of water. In case of fodder production these factors are not very efficient, they will not be able to cover the potential demand of live stock and dairy sector and recover payments; hence cost of operating the business will increase. Similarly, to produce optimum output, using good quality seeds and choosing fertile land will be a better option for this investment.

12.2 Project Financing Following table provides details of the equity required and variables related to bank loan;
Description Total Equity (10%) Bank Loan (90%.) Markup to the Borrower (%age/annum) Tenure of the Loan (Years) Details Rs.221,825 Rs.1,996,425 8% 07

12.3 Project Cost Following requirements have been identified for operations of the proposed business.
Table 1: Capital Investment for the Project

Capital Investment Land (Leased / Rental basis) Tools & Equipments Building / Infrastructure (Office Renovation) Furniture & fixtures Preliminary Expenses Total Capital Costs Initial Working Capital Total Project Cost

Amount (Rs.) 1,030,000 60,000 122,000 100,000 1,312,000 906,250 2,218,250

12.4 Space Requirement Fodder will be cultivated on 20 Acres of fertile land which can be acquired on contract farming basis. Trading will be managed from Head office situated in any major city and can be set up on monthly rental basis. For this project we have assumed the following lease/rentals rates for cultivation and trading office.
Table 2: Land Requirement

Area Required

Area

Monthly Rent Charges (Rs.) 15,000 20,000 35,000

Yearly Rent(Rs.)

Management/ Trading Office Land on Contract Farming Total Rent

500 Sq. Ft. 20 Acres

180,000 400,000 580,000

Total working capital for Land and Office space is calculated to be Rs. 105,000 for 3 months. 12.5 Machinery and Equipment Following table provides list of machinery and equipment required for cultivation of fodder.
Table 3: List of Machinery and Equipment

Description Cutter Bailer Tractor (On rent as per requirement) Raker (On rent as per requirement) Total

Quantity 1 1 1 1

Cost Rs/unit 700,000 300,000

Total Rs. 700,000 300,000

1,000,000

These costs are based on the assumption that a setup will be required for book keeping, marketing and trading of Fodder across the country.
Table 4: Office Equipment Costs Quantity Computers with UPS Computer printer Telephones Fax machines UPS & Battery Furniture Total 1 1 3 1 1 Nos Cost 35,000 10,000 2,000 12,000 25,000 42,000 Amount 35,000 10,000 6,000 12,000 25,000 34,000 122,000

12.6 Raw Material Requirements

Table 5: Cost of Material (Per Acre)

Unit Seeds (Kg / acre) Fertilizers Pesticides Spray PP Bags (50 Kg) Water Cost per Unit 10 1 1 185 1

Rate 450 1,700 1,000 50, 1,200

Rs. / Acre 4,500 1,700 1,000 9,250 1,200 17,650

12.7 Human Resource Requirement

Table 6: Human Resource Requirement

Description Owner Supervisor Machine Operator Land Labor Marketing executive Total Staff

Nos. 01 01 01 02 01 06

Salary per month 25,000 18,000 12,000 10,000 20,000

Total 25,000 18,000 12,000 20,000 20,000 95,000

The table above provides details of human resource required to run a fodder producing and trading company. Salaries of all employees are estimated to increase at 10% annually. 12.8 Revenue Generation In this project it is assumed that 20 acres of land will be cultivated to produce six crops of fodder in a year. Total 810 tons (30% of green) of dry fodder and 300 tons of green fodder will be produced which will generate an average annual revenue of Rs. 5 million. Sales First Year Price Production (Rs./Unit) (6 crops) 5,400 2,100 810 300 First Year Sales Revenue (Rs) 4,374,000 630,000 5,004,000

Product Dry Fodder (30% of Green) Green Fodder Total Sales Revenue

Unit (tons / crop) 135 50

12.9 Other Costs An essential cost to be borne by the company is the miscellaneous cost incurred by management staff during their visits to farmers. It is estimated that average Rs. 30,000 will be incurred in a month. Similarly, electricity, water and telephone expense is estimated to be about 30,000 per month.

13. CONTACTS - SUPPLIERS

1. NEW CHAUDHRY AGRICULTURAL MECHANICAL ENGINEERS Chowk A.T.M. Vehari Road Multan, Lahore Phone: +92-61-36527607, +92-61-36529022, +92-61-36526132. Fax# +92-61-34233706

2. AGROTRACTORS (PVT)LTD 38-AMAINGULBERG Lahore Pakistan Phone: +92 42 35871746

14. ANNEXURES
14.1 Income Statement
FODDER Production & Trading Business
Projected Income Statement (Rs.) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Revenue Sales on Credit Sales on Cash Beginning Inventory Ending Inventory Bed Debt Expenses Net (Adjusted Sales) Cost of Sales Cultivation Cost Cultivation Land Rent

5,004,000 500,400 4,503,600 83,269 10,008 4,910,723 2,998,000 2,598,000 400,000

5,779,620 577,962 5,201,658 83,269 91,804 11,559 5,759,526 3,304,295 2,864,295 440,000 2,455,231 43%

6,675,461 667,546 6,007,915 91,804 101,214 13,351 6,652,700 3,641,885 3,157,885 484,000 3,010,815 45%

7,710,158 771,016 6,939,142 101,214 111,589 15,420 7,684,363 4,013,968 3,481,568 532,400 3,670,394 48%

8,905,232 890,523 8,014,709 111,589 123,027 17,810 8,875,984 4,424,069 3,838,429 585,640 4,451,914 50%

10,285,543 1,028,554 9,256,989 123,027 135,637 20,571 10,252,362 4,876,072 4,231,868 644,204 5,376,289 52%

11,879,802 1,187,980 10,691,822 135,637 149,540 23,760 11,842,140 5,374,259 4,665,635 708,624 6,467,881 55%

13,721,171 1,372,117 12,349,054 149,540 164,867 27,442 13,678,401 5,923,349 5,143,862 779,487 7,755,052 57%

15,847,953 1,584,795 14,263,158 164,867 181,766 31,696 15,799,358 6,528,544 5,671,108 857,436 9,270,814 59%

18,304,386 1,830,439 16,473,947 181,766 200,397 36,609 18,249,146 7,195,576 6,252,397 943,179 11,053,570 61%

Gross Profit Gross Profit Margin General Administrative & Selling Expenses Salaries Office Rent Amortization of Preliminary Expenses Depreciation Expense Maintenance Expense Selling & Distribution Subtotal Operating Income Financial Charges Earnings Before Taxes Tax Net Profit Monthly Profit After Tax

1,912,723 39%

1,140,000 180,000 20,000 121,200 10,300 147,322 1,618,822 293,901 151,702 142,199 142,199 11,850

1,254,000 198,000 20,000 109,080 10,300 172,786 1,764,166 691,065 133,301 557,764 55,776 501,987 41,832

1,379,400 217,800 20,000 98,172 10,300 199,581 1,925,253 1,085,562 113,373 972,189 68,328 903,861 75,322

1,517,340 239,580 20,000 88,355 10,300 230,531 2,106,106 1,564,289 91,791 1,472,498 143,375 1,329,123 110,760

1,669,074 263,538 20,000 79,519 10,300 266,280 2,308,711 2,143,204 68,417 2,074,786 262,457 1,812,329 151,027

1,835,981 289,892 71,867 10,300 307,571 2,515,611 2,860,678 43,104 2,817,574 426,893 2,390,680 199,223

2,019,580 318,881 64,681 10,300 355,264 2,768,705 3,699,175 15,690 3,683,486 643,371 3,040,114 253,343

2,221,537 350,769 58,213 10,300 410,352 3,051,171 4,703,881 4,703,881 933,664 3,770,217 314,185

2,443,691 385,846 52,391 10,300 473,981 3,366,209 5,904,605 5,904,605 1,293,882 4,610,724 384,227

2,688,060 424,431 47,152 10,300 547,474 3,717,418 7,336,153 7,336,153 1,790,153 5,545,999 462,167

14.2

Balance Sheet

14.3

Cash Flow Statement

Pre-Feasibility Study

Fodder Production & Trading Co.

14.4 Technology

Useful Project Management Tips

Cutter Bailer Tractor (On rent as per requirement) Raker (On rent as per requirement) Energy Requirement: Should not be overestimated or installed in excess and alternate source of energy for critical operations be arranged in advance. Machinery Suppliers: Should be asked for training and after sales services under the contract with the machinery suppliers. Quality Assurance Equipment & Standards: Whatever means required products quality standards need to be defined on the packaging and a system to check them instituted, this improves credibility.

Marketing Product Development & Packaging: Expert's help may be engaged for product/service and packaging design & development Ads & P.O.S. Promotion: Business promotion and dissemination through banners and launch events is highly recommended. Product broachers from good quality service providers. Sales & Distribution Network: are required with. Expert's advise and distribution agreements

Price - Bulk Discounts, Cost plus Introductory Discounts: Price should never be allowed to compromise quality. Price during introductory phase may be lower and used as promotional tool. Product cost estimates should be carefully documented before price setting. Government controlled prices shall be displayed.

Human Resources Owner Supervisor Machine Operator Land Labor Marketing executive

16

September 2013

Adequacy & Competencies: Skilled and experienced staff should be considered an investment even to the extent of offering share in business profit. Performance Based Remuneration: Attempt to manage human resource cost should be focused through performance measurement and performance based compensation. Training & Skill Development: Encouraging training and skill of self & employees through experts and exposure of best practices is route to success. Least cost options for Training and Skill Development (T&SD) may be linked with compensation benefits and awards.

14.5

Useful Links

Prime Ministers Office www.pmo.gov.pk Small & Medium Enterprises Development Authority (SMEDA) www.smeda.org.pk National Bank of Pakistan (NBP) www.nbp.com.pk First Women Bank Limited (FWBL) www.fwbl.com.pk Government of Pakistan www.pakistan.gov.pk Ministry of Industries & Production www.moip.gov.pk Ministry of Education, Training & Standards in Higher Education http://moptt.gov.pk Government of Punjab www.punjab.gov.pk Government of Sindh www.sindh.gov.pk Government of Khyber Pakhtoonkhwa

www.khyberpakhtunkhwa.gov.pk Government of Balochistan www.balochistan.gov.pk Government of Gilgit Baltistan www.gilgitbaltistan.gov.pk Government of Azad Jammu & Kashmir www.ajk.gov.pk Trade Development Authority of Pakistan (TDAP) www.tdap.gov.pk Security Commission of Pakistan (SECP) www.secp.gov.pk Federation of Pakistan Chambers of Commerce and Industry (FPCCI) www.fpcci.com.pk State Bank of Pakistan (SBP) www.sbp.org.pk Pakistan Institute of Fashion Design(PIFD) www.pifd.edu.pk Pakistan Fashion Design Council (PFDC) www.pfdc.org

15. KEY ASSUMPTIONS

Description Debt Equity Ratio Interest Rate Loan Tenure Sales Price Growth Rate Depreciation Rate Weighted Average Cost of Capital Prepaid Rent Period Increase in Staff Salaries Increase in Office expense 90:10 8% 7 Years 10% 10% 9.2% 6 Months 10% 10%