Pre-Feasibility Study Prime Ministers Small Business Loan Scheme

(Spices Processing Unit)

Small and Medium Enterprises Development Authority Ministry of Industries & Production
Government of Pakistan
www.smeda.org.pk
HEAD OFFICE
4th Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road, Lahore Tel: (92 42) 111 111 456, Fax: (92 42) 36304926-7 helpdesk@smeda.org.pk REGIONAL OFFICE PUNJAB 3rd Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road Lahore, Tel: (042) 111-111-456 Fax: (042) 36304926-7 helpdesk.punjab@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 KPK 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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Pre-Feasibility Study

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Table of Contents
1. DISCLAIMER .......................................................................................................................................... 2 2. PURPOSE OF THE DOCUMENT ......................................................................................................... 3 3. INTRODUCTION TO SMEDA .............................................................................................................. 4 4. INTRODUCTION TO SCHEME ........................................................................................................... 5 5. EXECUTIVE SUMMARY ...................................................................................................................... 6 6. BRIEF DESCRIPTION OF PROJECT & PRODUCT ........................................................................ 7 7. CRITICAL FACTOR S ........................................................................................................................... 9 8. INSTALLED AND OPERATIONAL CAPACITIES ........................................................................... 9 9. GEOGRAPHICAL POTENTIAL FOR INVESTMENT ..................................................................... 9 10. 11. 12. 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 13. 14. 14.1 14.2 14.3 14.4 14.5 15. POTENTIAL TARGET MARKETS/CITIES ............................................................................... 10 PRODUCTION PROCESS FLOW ................................................................................................ 10 PROJECT COST SUMMARY ....................................................................................................... 10 PROJECT ECONOMICS ...............................................................................................................11 PROJECT FINANCING..................................................................................................................11 PROJECT COST ..........................................................................................................................11 SPACE REQUIREMENT................................................................................................................12 MACHINERY AND EQUIPMENT ....................................................................................................13 OFFICE EQUIPMENT ...................................................................................................................13 RAW MATERIAL REQUIREMENTS ...............................................................................................14 HUMAN RESOURCE REQUIREMENT ...........................................................................................15 REVENUE GENERATION .............................................................................................................16 OTHER COSTS............................................................................................................................17 CONTACTS - SUPPLIERS, EXPERTS/CONSULTANTS ......................................................... 18 ANNEXURE ..................................................................................................................................... 19 INCOME STATEMENT ...................................................................................................................19 STATEMENT OF CASH FLOW........................................................................................................20 BALANCE SHEET .........................................................................................................................21 ANNEXURE-4 USEFUL PROJECT MANAGEMENT TIPS ..................................................22 ANNEXURE-5 USEFUL LINKS ..............................................................................................23 KEY ASSUMPTIONS ..................................................................................................................... 25

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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

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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, and production, marketing, finance and business management. The purpose of this document is to facilitate potential investors in Spices Processing by providing them with a general understanding of the business with the intention of supporting 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 thumb 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.

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3. INTRODUCTION TO 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.

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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).

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5. EXECUTIVE SUMMARY
Spices Processing Unit is proposed to be located at all major cities particularly Karachi, Lahore, Rawalpindi, Faisalabad, Multan, Hyderabad, Peshawar, Sukkur, Quetta and Mirpurkhas. Currently packed spices are commonly used in urban and semi-urban centers of Pakistan. Products include Biryanai Masala, Karachi Masala and Qeema Masala of 50 gram packet. Installed capacity of spices processing unit is 200 kg per day. Initial utilization will be 60 %. Total Cost Estimates is Rs. 2,051,716/- with fixed investment of Rs. 681,000/- and working capital of Rs. 1,370, 716/Given the cost assumptions IRR and payback are 37% and 3 years & 4 months respectively. The most critical considerations or factors for success of the project are 1. Quality & Pricing

2. Recipe & processing 3. Credit Recovery

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6. BRIEF DESCRIPTION OF PROJECT & PRODUCT

There has been an immense progression in the spices industry. Though technological changes have had a great impact on the spices processing, packing and distribution the main thrust for survival has always revolved around quality, pricing, and distribution network. In the last decade the spices processing industry has grown at that point that many of commercial setups of spices processing and packing established to handle the public's demand in both local and international markets. Now the industry is changing again with the introduction of recipe packs and technology. What makes it a lucrative business for an entrepreneur is a high probability of generating increasing profits by maintaining quality and competitive price as the product has vital standing in our daily life. However, a setup can only achieve such fast-track growth if some critical success factors are taken into account to ensure that the business is run properly. High standards of quality control and consistent quality check are two of the important factors that form an integral part of this fast-growth equation. In comparison with other businesses, spices have always been in consistent demand due to typical subcontinent food making curries which are incomplete without having some spices become the integral part of ingredients. That draws a substantial potential in this business, however, sudden increase in demand for spices has never been experienced and market growth largely depends on: Population growth and child to adult conversion rate Ratio of younger people in the population (according to 1998 census 64% belongs to age group of between 15 to 34) Increase in urban life phenomenon; and Conversion from popular home made curries to ready to use curries

Growth in above is a motivating factor to invest in curry based spice business.

Technology: This proposed unit would consist of grinding, mixing and packing machinery. Used machinery would be procured from the market.
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Location:The unit is proposed to be located in Karachi, Lahore, Rawalpindi, Faisalabad, Multan, Hyderabad, Peshawar, Sukkur, Quetta and Mirpurkhas. Product: The unit would process the most common and widely used masalas i.e. Biryanai Masala, Karhai Masala and Qeema Masala. Target Market: All urban and semi-urban areas are potential target markets. But initially products would be sold in same city where spice processing unit is being established. A huge local market of more than 150+ million consumers carries enormous potential for the investment in this business. Employment Generation: employment to 8 people. The proposed project will provide direct

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7. CRITICAL FACTOR S
Following factors should be considered before entering into the pickle business.

I.
ii. iii.

Quality & Pricing Recipe & processing Credit Recovery

8. INSTALLED AND OPERATIONAL CAPACITIES

The daily spices processing capacity of the proposed Spices Processing unit would be 200 kg. Initially operational capacity would be 60% of installed capacity and would be increased 5% annually for five years and then it would increase 8% annually.

9. GEOGRAPHICAL POTENTIAL FOR INVESTMENT

This study proposes for setting up the business in an industrial area surrounded by medium/high income area which will have better communication, power and water facilities, that is expected to provide a reasonable profit margin and market access. The proposed processing unit will be located at any commercial area or lowincome area where basic infrastructure and facilities are available. The unit is proposed to be located in Karachi, Lahore, Rawalpindi, Faisalabad, Multan, Hyderabad, Peshawar, Sukkur, Quetta and Mirpurkhas.

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10. POTENTIAL TARGET MARKETS/CITIES

Our target market would be middle and lower-middle income groups living in urban and semi-urban areas. People in these income groups are price conscious but at same time want better quality. Our products would be 15-20 percent cheaper compared with top brands (National, Shan, Mehran etc) and retailers would also get more margins.

11. PRODUCTION PROCESS FLOW

Process flow consists of four steps: i. Drying Generally dried spices are used which need to be further checked whether humidity has influenced the quality. A finish drying may be needed if material is not completely dried. Various types of dryers are used for processing spices, ranging from simple sun drying to gas or kerosene-fired dryers. Grinding and Mixing mill. Packing automatic Storage warehouse. Spices are grinded and mixed using stone

ii. iii. iv.

Grinded spices are packed into desired sizes using machines. Finished packets are cartooned and stored in

Production Process

Cleaning

Finish Drying

Grinding

Packing

Storage

Distribution

12. PROJECT COST SUMMARY

A detailed financial model has been developed to analyze the commercial viability of this 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.

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The projected Income Statement, Cash Flow Statement and Balance Sheet are attached as appendix.

12.1 Project Economics The following table shows internal rates of return and payback period for Spices Processing unit.
Table 1 - Project Economics

Description IRR NPV Payback Period (Years)

Details 37% 4,344,639 3 Years 4 Months

Returns on the scheme and its profitability are highly dependent on prices of the raw material, achieving production targets and most important recovery from the buyers. 12.2 Project Financing Following table provides details of the equity required and variables related to bank loan;
Table 2 - Project Financing

Description Total Equity (10%) Bank Loan (90 %.) Markup to the Borrower (%age/annum) Tenure of the Loan (Years) 12.3 Project Cost

Details Rs. 205,172 Rs. 1,846,544 8% 7

Total project cost of the Spices Processing Unit would be approximately Rs. 2.052 million. Out of this, Fixed capital cost of the project is around Rs. 0.68 million and remaining 1.37 million will be the working capital.
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Table 3: Capital Investment for the Project

Fixed Capital 1 2 3 4 5 Plant & machinery Office Equipment & Furniture Vehicles (Moter Cycle) Rent in Advance (6-month) Preliminary Expenses

Amount (Rs.) 275,000 141,000 60,000 180,000 25,000

Total Capital Cost

681,000

12.4 Space Requirement

The area has been calculated on the basis of space requirement for raw material storage, processing area, packaging area, finished goods area and management area. Following table shows calculations for project space requirement.
Table 4: Space Requirement

S. No.

Details

Size/Area (Sq. Ft.)

1 2 3 4 5

Raw Material Storage Processing Area Packaging Area Finished Goods Storage Area Admin Area Total Area

400 800 400 300 300 2,200

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12.5 Machinery and Equipment Following table provides list of machinery and equipment:
Table 5: List of Machinery and Equipment

Plant & Machinery Unit Price Grinding 1 Machine 2 Mixing Machine 3 Packing Machine Total 65,000 60,000 150,000 Qty 1 1 1 Total Price(Rs.) 65,000 60,000 150,000 275,000

12.6 Office Equipment A provision of Rs. 141,000/- for procurement of office/factory furniture is assumed. The breakup of Factory Office Furniture & Fixtures is as follows:
Table 6: Office Furniture Cost

S. No. 1 2 3 4 5 6 7 8 9 Total

Item Table & Chair for Owner Tables & Chairs for Staff Carpet for Office Air Conditioner (Used) Waiting Chairs (Used) Curtains & Interior Decoration Electrical Fittings & Lights Computer & Printer Fax Machine

Cost (Rs.) 8,000 4,000 10,000 20,000 2,000 5,000 15,000 40,000 15,000

Quantity 1 4 1 1 6 1 1 1 1

Total Cost (Rs.) 8,000 16,000 10,000 20,000 12,000 5,000 15,000 40,000 15,000 141,000

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Table 7: Office Vehicle Cost

S. No.

Vehicle Type

Required No. of Units 1

Unit Cost (Rs.) 60,000

Total Cost (Rs) 60,000 60,000

1 Total

Motor Cycle

12.7 Raw Material Requirements Following raw material would be required for making Biryani Masala, Karhai Masala and Qeema Masala:
Table 8: Raw material & prices

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Item Red Chilli (Surkh Mirch) Salt (Namak) Coriander (Dhanya) Turmeric (Haldi) Cumin Seed (Sufed Zeera) Black Pepper (Kali Mirch) Clove (Long) Cinnamon (Dar Cheeni) Cardamom (Alaichi) Mace (Jautri) Nutmeg (Jaifal) Bay Leaf (Tez Pat) Mango Powder (Aam Chur) Plum (Aalo Bokhara) Preservatives & Citric Acid

Estimated Whole sale price per Kg (Rs) 150 10 120 180 280 760 1, 600 200 2, 000 2, 500 1, 500 220 120 220 140

Ingredient Ratio in gms/kg 225 185 300 90 20 40 30 30 10 5 5 20 3 5 32

Different quality of above material is available in the market so price may vary accordingly. Also prices of these items vary from season to season and local/international production. This price will also be different from city to city in Pakistan.
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. 12.8 Human Resource Requirement

Table 9: Human Resource Requirement

Title/Designation Owner

No of Employees 1

Salary Per Month (Rs.) 25,000 14,500 15,000 20,000 10,000 20,000 10,000 114, 500

Grinding Mill Operator 1 Trained packing machine operator 1 Packers 2 Helper / Loader 1 Production Incharge Security Guard Total Staff 1 1 8

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12.9 Revenue Generation Table 10: Cost & Revenue Sheet

REVENUE CALCULATIONS Production Rated capacity Estimated No. of Operating Hours Estimated Production Capacity Expected Capacity Utilization (At the beginning of the project) Annual Capacity Utilization Growth Rate Expected Production at the beginning of the project Provision for Wastage Total Realized Production Approximate Net weight of a Spice packet Total packets Produced Total packets Produced Total packets Produced Sales Price / Packet Daily Revenue from Spice Packets Produced per Day Total Price of packets Produced per Month Total Price of packets Produced per Year Provision for Finished Goods Inventory Estimated Finished Goods Inventory - end of the Year Gross Annual Sales Packing Machine Rated capacity No. of hours worked Estimated packets per day Number of Machines Proposed Total Estimated Wrappings per day COST CALCULATION Ingredients Total Quantity 118 BIRYANI MASALA 40% 941 KARAHI MASALA 30% 706 NEHARI MASALA 30% 706

25 8 200 60% 5% 120 2% 118 50 2,352 56,448 677,376 29 68,208 1,636,992 19,643,904 10 682,080 18,961,824 600 4 2,400 1 2,400

Kg / Hr Hrs / Day Kg / Day

Kg / Day Kg / Day grams / pack packets / day packets / month packets / year Rs. Rs. Rs. Rs Days Rs Rs. Packets / Hour Hrs / Day Packets / Day Packets / Day

k.g./day 15,439 11,579 11,579 Rs. Rs. Rs. Rs / day

Total Ingredient Cost Packing Material Cost of Packing per packet Total Packing Cost per packet Total Cost per packet

2352

38,596

5.0 5.00 16.41

Rs / Packet Rs Rs.

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12.10

Other Costs

Considering the industry norms, it has been assumed that 50% of the total sale will be on cash while remaining 50% sales will be on credit to local distributors. A collection period of 30 days has been assumed. A provision for bad debts has been assumed equivalent to 5% of the annual credit sales. The cost of the utilities including electricity, fuel for motor cycle, telephone, and water is estimated to be around Rs. 55,000/- per month. For the purpose of this pre-feasibility, it has been assumed that the spice processing unit will be engaged in local sales for which demand can be created through retailers and directly selling to distributor. As print advertising would be difficult for a new setup as advertising draws substantial funds. Therefore, it has been assumed that relationship building will be followed by the business in order to create consistent demand for the product. For this purpose, an amount equivalent to 20% of the annual sales has been assumed. This amount will be utilized for schemes for distributors, whole sellers and retailers to penetrate in the market in the presence of strong brands. It has been assumed that long-term financing for 7 years will be obtained in order to finance the project investment cost. This facility would be required at a rate of 8% per annum with 84 monthly installments over a period of seven years. The installments are assumed to be paid at the end of every month. Miscellaneous expenses of running the business are assumed to be Rs. 25,000 per month. These expenses include various items like office stationery, daily consumables etc. and are assumed to increase at a nominal rate of 10% per annum. The business is assumed to be run as a sole proprietorship; therefore, tax rates applicable on the income of a non salaried individual taxpayer are used for income tax calculation of the business. The cost of capital is explained in the following table:
Particulars Required return on equity Cost of finance Weighted Average Cost of Capital Rate 20% 8% 9.2%

The weighted average cost of capital is based on the debt/equity ratio of 90:10.

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13. CONTACTS - SUPPLIERS, EXPERTS/CONSULTANTS

Proposed spices processing unit is not using sophisticated machinery and equipment, so grinding and mixing and packing machines are easily available in many cities of Pakistan. Raw material is also available in all areas of Pakistan but prices may vary so interested person may work out his/her costing in location of procurement of raw material

Sama Engineering Sama House, 2-A, 1/32, Nazimabad # 2 Karachi Phone +9221-36602467, 36603311 URL: www.samaengineering.com.pk

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14. ANNEXURE
14.1 Income Statement

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14.2 Statement of Cash Flow

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14.3 Balance Sheet

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14.4 ANNEXURE-4 USEFUL PROJECT MANAGEMENT TIPS Technology List of Machinery & Equipment (As per Section 12.5)

Required spare parts & consumables: Suppliers credit agreements and availability as per schedule of maintenance be ensured before start of operations 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 Brochures from good quality service providers Sales & Distribution Network: agreements are required with. Expert's advise and distribution

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 List of Human Resource (As per Section 12.8)

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.

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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 ANNEXURE-5 USEFUL LINKS Prime Ministers Office www.pmo.gov.pk Small & Medium Enterprises Development Authority (SMEDA) www.smeda.org.pk National Bank of Pakistan (SBP) 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
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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

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15. KEY ASSUMPTIONS

Item Sales Volume Increase Sales Price Increase Increase in Cost of Sales Increase in Staff Salaries Increase in Utilities Increase in Rent Increase in Office Expenses Debt / Equity Ratio Depreciation: Premises Renovation Furniture Lease Period Lease Installments Financial Charges (Lease Rate) Bad Debts Assumption(s) 5% 5% per year for first 5 years. 8% per year from 6th year onwards 10 % 10 % per year 10 % per year 10 % per year 10 % per year 90 : 10 10 % per annum (Diminishing Balance) 10 % per annum (Diminishing Balance) 7 Years Monthly 8 % per annum 5% of Sales

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