Pre-Feasibility Study

LEATHER GARMENTS MANUFACTURING UNIT

Small and Medium Enterprise Development Authority

Government of Pakistan
www.smeda.org.pk
HEAD OFFICE
6th floor, LDA plaza, Egerton road, Lahore
Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756
REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE
PUNJAB SINDH NWFP BALOCHISTAN

8th floor, LDA Plaza, 5TH Floor, Bahria Ground Floor Bungalow No. 15-A
Egerton road, Complex II, M.T. Khan Road, State Life Building Chaman Housing Scheme
Lahore Karachi. The Mall, Peshawar. Airport Road, Quetta.
Tel: (042) 111-111-456 Tel: (021) 111-111-456 Tel: (091) 9213046-47 Tel: (081) 831623, 831702
Fax: (042) 5896619, 5899756 Fax: (021) 5610572 Fax: (091) 286908 Fax: (081) 831922
helpdesk@smeda.org.pk helpdesk-khi@smeda.org.pk helpdesk-pew@smeda.org.pk helpdesk-qta@smeda.org.pk

June, 2005
Pre-Feasibility Study Leather Garments Manufacturing Unit

1 INTRODUCTION TO SMEDA...................................................................................................... 4

2 PURPOSE OF THE DOCUMENT ................................................................................................. 4

3 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT....................... 5

3.1 STRENGTHS .............................................................................................................................. 5
3.2 WEAKNESSES............................................................................................................................ 5
3.3 OPPORTUNITIES ........................................................................................................................ 5
3.4 THREATS .................................................................................................................................. 5
4 KEY SUCCESS FACTORS/PRACTICAL TIPS FOR SUCCESS ................................................ 6

5 PROJECT PROFILE...................................................................................................................... 6
5.1 PROJECT BRIEF ......................................................................................................................... 6
5.2 OPPORTUNITY RATIONALE ........................................................................................................ 6
5.3 VIABLE ECONOMIC SIZE ............................................................................................................ 6
5.4 PROJECT COST .......................................................................................................................... 6
5.5 PROCESS FLOW CHART ............................................................................................................. 7
5.6 PROCESS DESCRIPTION .............................................................................................................. 8
6 CURRENT INDUSTRY STRUCTURE.......................................................................................... 9
6.1 EXISTING CAPACITY ................................................................................................................. 9
6.2 PRODUCTION SEASONALITY .................................................................................................... 10
7 MARKETING ............................................................................................................................... 10
7.1 TOTAL MARKET SIZE .............................................................................................................. 10
7.2 TARGET CUSTOMERS .............................................................................................................. 11
8 RAW MATERIAL ........................................................................................................................ 11

9 MANPOWER REQUIREMENTS................................................................................................ 12
9.1 TYPES OF SKILLS REQUIRED .................................................................................................... 12
10 MACHINERY DETAILS.............................................................................................................. 13
10.1 OTHER OPTIONS AVAILABLE FOR MACHINERY ........................................................................ 13
11 LAND & BUILDING .................................................................................................................... 14
11.1 TOTAL LAND REQUIRED (AREA).............................................................................................. 14
11.2 RECOMMENDED MODE FOR ACQUIRING LAND ......................................................................... 14
11.3 SUITABLE LOCATIONS ............................................................................................................. 14
11.4 UTILITIES REQUIREMENTS ....................................................................................................... 14
12 PROJECT ECONOMICS............................................................................................................. 15

13 REGULATIONS ........................................................................................................................... 15
13.1 SPECIAL INCENTIVES ............................................................................................................... 15
14 FINANCIAL ANALYSIS.............................................................................................................. 16
14.1 PROJECTED INCOME STATEMENT ............................................................................................. 16
14.2 PROJECTED CASH FLOW STATEMENT ....................................................................................... 17
14.3 PROJECTED BALANCE SHEET ................................................................................................... 18
15 KEY ASSUMPTIONS................................................................................................................... 19

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

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

DOCUMENT CONTROL
Document No. PREF-13
Revision 2
Prepared by SMEDA-Punjab
Issue Date April 2002
Revised In June 2005
Issued by Library Officer

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

1 INTRODUCTION TO SMEDA
The Small and Medium Enterprise Development Authority (SMEDA) was established
with the objective to provide fresh impetus to the economy through the launch of an
aggressive SME support program.
Since its inception in October 1998, SMEDA had adopted a sectoral SME development
approach. A few priority sectors were selected on the criterion of SME presence. In depth
research was conducted and comprehensive development plans were formulated after
identification of impediments and retardants. The all-encompassing sectoral development
strategy involved recommending changes in the regulatory environment by taking into
consideration other important aspects including finance, marketing, technology and human
resource development.
SMEDA has so far successfully formulated strategies for sectors including, fruits and
vegetables, marble and granite, gems and jewelry, marine fisheries, leather and footwear,
textiles, surgical instruments, transport and dairy. Whereas the task of SME development
at a broader scale still requires more coverage and enhanced reach in terms of SMEDA’s
areas of operation.
Along with the sectoral focus a broad spectrum of business development services is also
offered to the SMEs by SMEDA. These services include identification of viable business
opportunities for potential SME investors. In order to facilitate these investors, SMEDA
provides business guidance through its help desk services as well as development of
project specific documents. These documents consist of information required to make
well-researched investment decisions. Pre-feasibility studies and business plan
development are some of the services provided to enhance the capacity of individual
SMEs to exploit viable business opportunities in a better way.
This document is in the continuation of this effort to enable potential investors to make
well-informed investment decisions.
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
to facilitate investment and provide an overview about leather garments manufacturing
unit. The project pre-feasibility may form the basis of an important investment decision
and in order to serve this objective, the document covers various aspects of leather
garment manufacturing start-up, production, 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.
This particular pre-feasibility is regarding “Leather Garments” which comes under
“Leather” sector. Before studying the whole document one must consider following
critical aspects, which form the basis of any investment decision.

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

3 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR

INVESTMENT
Before making the decision, whether to invest in this project or not, one should carefully
analyze the associated risk factors. A SWOT analysis can help in analyzing these factors
which can play important role in making the decision.

3.1 Strengths
 Large domestic population of cattle resulting in excess supply of hides and skins.
 Meat eating habits of population
 Availability of skilled workforce
 Access to international markets
 Well established repute of country in international markets

3.2 Weaknesses
 Shortage created in local market due to exports of raw and finished leather
 Requirement of high working capital
 Tendency of skilled labour to shift towards textile sector
 High cost of electricity
 High cost of raw material inventory and obsolescence
 Exports mostly in low to medium end segment
 Quality hides and skins are abundantly and cheaply available immediately after
religious festival (Bakar Eid). Rest of the year prices are very high.

3.3 Opportunities
 World export trade market of leather goods is growing at an average rate of 8%
during 1998-2003
 Better policies by government in livestock sector resulting in higher availability of
hides and skins
 Low to medium end garments stitching being shifted from China to Pakistan
 Conducive policies of government for encouraging leather garment exports by
providing export and freight rebates.

3.4 Threats
 Exponential increase in prices of finished leather due to exports.
 Non availability of leather during peak production season
 Impact of environment regulations under WTO on tanning industry resulting in
shortages of finished leather.
 Abrupt change in international fashion trend can result in increase inventory of
finished leather and accessories
 Increasing prices of POL
 Animal protection rights issue in western hemisphere markets.
 Stakes concentrated in few traditional international markets.
 Hot local climate not conducive for local leather garments consumption
5

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

4 KEY SUCCESS FACTORS/PRACTICAL TIPS FOR SUCCESS

 A high break even of 50% requires consistent availability of export orders.
 Availability of consistent quality raw material & accessories.
 Knowledge of international fashion trends both in garments and leathers.
 Participation in international trade fairs.
 Better production operations management especially in cutting and finishing
sections.
 Liaison

5 PROJECT PROFILE

5.1 Project Brief

The proposed project presents an investment opportunity in Leather Garments
manufacturing unit. Major products will include Leather Jackets, Biker Jackets and Over-
coats for men, women and children. However, the product line can be extended to
manufacture all kinds of leather upper garments.

5.2 Opportunity Rationale

The size of the total global export market of leather garments is estimated to be around
$4.92 billion. This makes the business an attractive export opportunity. Pakistan has an
inherent advantage due to local availability of quality hides & skins. The country has also
developed a large tanning base. As a result, good quality leather for leather garments is
easily available.
In addition to easy availability of primary raw material, Pakistan is also well recognized in
the international market as a manufacturer of quality leather garments and is ranked third
amongst the top three exporters of leather garments in the world. Moreover, because of the
presence of large number of leather garments manufacturing units in the country, a pool of
trained skilled workers is also available.

5.3 Viable Economic Size

This pre feasibility report is based on a unit capable of manufacturing 60 leather garments
per day. Total number of stitching machines required to obtain this production is 30.

5.4 Project Cost

Total project cost of a unit producing 60 leather garments per day is Rs 3.68 million. This
includes a fixed cost of Rs 1.81 million and a working capital of Rs 1.87 million.

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study
5.5 Process Flow Chart
P ro c e s s F lo w f o r L e a th e r G a rm e n ts M a n u fa c tu rin g
F in is h e d L e a t h e r
• S h e ep , G o a t, C o w &
B u f fa l o
• A v e ra g e l ea t h er re q u ir e d
p e r g a rm e n t 3 5 S q .F t.
• T h ic k n e s s 0 .6 -1 .4 m m
PREF-13/June, 2005/ Rev 2
Leather Garments Manufacturing Unit
M a t c h in g C u tt in g A s se m b ly
G ra in a n d c o lo u r m a t c h i n g P a n e l c u tt in g w it h t h e h e lp F u si n g ( H a lf & F u ll)
o f l ea t h e r o n p e r g a r m e n t o f d e sig n te m p la t e s
P a n e ls= F ro n t, B a c k , P a n el s a r e r o l le d to g et h e r
basis
w i th a c c e s so r i es
C o lla r , B el t, S l e ev e s, C u ff
F u si n g , P a d d i n g , L i n i n g ,
E la s ti c, L a b el s , Z i p p er s,
S h o u ld er s p a d , B u tt o n s
F in is h in g S titc h in g
B u tto n in g , T r im m in g , T o u c h i n g a n d T w o M et h o d s
Iro n in g
1 ) O n e S titc h er o n e G a rm e n t
2 ) C h a i n p ro c e s s
F o l d i n g , L in in g , S le e v e s,
b a ck , F r o n t, P o c k e ts ,
J o i n in g , F in is h i n g
Pre-Feasibility Study Leather Garments Manufacturing Unit

5.6 Process Description

The process starts with customer providing the manufacturer details regarding quantity
requirement, type of leather, design specifications , accessories detail, stitching style etc.
Upon recieving the information, a sample garment is prepared and sent onward to the
customer for final approval. Once the sample is approved and order is confimed, the
design template for producing the the reguired quantity are developed by Pattern Cutting
department.
 Matching
Leather made from different skin/hides inhernently vary in grain style for each other.In the
matching process the grain and colour of leather are matched on per grament requirement.
This the most critical part in the whole process and requires expertise of the matcher.
 Cutting
After the matching, the cutter cuts different panels of a jacket with the help of the design
patterns and knives. The list of panels include Front , Back, Collar, Sleeves, Cuff etc.
Generally, design patterns made of cardboard are used in cutting process. In case single
type/design garments are to be manufacturered in large quanities, then press machines
with metal dyes can also be used. Average wastage of leather in cutting process ranges
between 15 to 25%. In Pakistan, a cutter cuts 15 to 20 jackets per day per shift (shift 8
hours).
 Assembly
After the cutting process, fusing is added to different panels of the garment, as per design
requirement. Fusing machines or irons are used for this purpose. Generally, half fusing is
done on the end area where stitching is to done and full fusing is applied on front & back
panel for providing garment outlook. Fusing reduces stretchability and adds stiffness to
the leather making it convenient for the stitcher to stitch. In this process, accessories are
added and rolled together for sending to the stitchings section. Major accessories include
lining (Cotton, Viscose, Satin), zippers (Metal, Nylon), padding, wadding, shoulder pads,
buckles, buttons, labels and thread.
 Stitching
Next to assembly is the stitching of different panels of the garments by using sewing
machines. Two stitching methods, depending upon the quantity produced, are currently
being employed in the industry.
1. One stitcher one garment
2. Chain process (Assembly Line)
In the first method, one stitcher stitches together all the panels of the garment. All the
allied processes (folding etc.) required during sticthing are also perfomed by one person.
Depending upon the garment type & size, on an average, output per stitcher per shift is
between 1 to 2 garments.
The second method is more efficient and average productivity level per stitcher in some
cases rises between 4-8 garments per day. In the chain process , an assembly line is made
8

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

in which each stitcher is assigned one specific process out of the total processes required
for garment manufacturing. Ultimately, the stitcher gets specialized by constantly
performing one task resulting in production efficencies and better quality. In each
assembly line, there are seven stitchers who perform the following sub-processes:
1. Folding
2. Lining Stitching
3. Sleeves
4. Back
5. Front
6. Pocket
7. Panel Joining
 Finishing
Finishing is the last process in leather garments manufacturing. In the finishing process,
buttons/snaps are attached to the garment, extra thread and fibres are clipped off. After
this process garments passs through touching process, in which chipped off and out of
matching leather grains are treated to give the garment a good look. The garment then
moves to ironing stage after which hangtags, price tickets, etc are attached.. The final
stage is the quality check by the quality inspectors. Their job is to check the conformance
of the manufactured garment to the customer’s specifications. The quality check is follwed
by the final packing of the garment.

6 CURRENT INDUSTRY STRUCTURE

6.1 Existing Capacity

There are about 350 leather garment manufacturing units in the organized sector in the
country. Total annual installed capacity of these units is estimated to be 15 Million leather
garments (of all kinds) per annum.
Sialkot has the largest number of leather garments manufacturing units in the country.
There are more than one hundred and eighty six units installed in the city that covers 60%
of total installed manufacturing capacity. Karachi is the second largest cluster with 130
units, followed by Lahore with around 20 units.1. The overall geographical distribution of
leather garment units is exhibited in the table 6-1:

1
The source of this information is leather directory 1994. After 1994, no nation wide survey of leather
industry has been initiated. However some updated information of leather industry of Sialkot is available in
the leather directory updated in 1997.
9

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

Table 6-1: Geographical Distribution of Leather Garment Units in Pakistan2

Average Capacity
Production Capacity
City No. Of Units (Million
(Million Pieces/Annum)
Pieces/Unit)
Karachi 163 4.64 0.028
Gujranwala 4 0.10 0.025
Islamabad 4 0.04 0.010
Kasur 3 0.05 0.017
Lahore 26 1.14 0.044
Multan 2 0.06 0.030
Rawalpindi 6 0.08 0.013
Sahiwal 3 0.22 0.073
Sialkot 166 9.05 0.055
Mirpur 1 0.01 0.010
Total 378 15.39 0.041

6.2 Production Seasonality

Leather garments is seasonal product as such the capacity utilization of the manufacturig
unit correspondingly varies with the demand over the year. The period between June to
Oct is the peak season with capacity utliization reaching 100%. During the months of
November, December, January and May, the production capacity utiliztion comes down to
50%. February, March and April months are catgorised as the lean months and most of the
garment units operate at about 10% of their installed capacity.

7 MARKETING

7.1 Total Market Size

95% of the leather garments manufactured in the country are targeted towards exports. In
2003, an estimated 8 million pieces of leather garments were exported from the country.
Local consumption of leather garments is minimal and is estimated to be less than 90,000
pieces per annum.
Table 7-1: Major Importers
Market Imports ($ Million)
USA 1,449
Germany 687
France 240
United Kingdom 224
Italy 237

2
Source: Leather Directory 1994
10

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

Japan 171
Hong Kong 165

7.2 Target Customers

Export market is the primary market for a leather garment-manufacturing unit. In the
export market, major customers include chain stores and major garment brands in Europe
and USA. Major customers of Pakistani leather garments are Germany, USA, United
Kingdom, and UAE & France. The business is done either directly to the buyers or
through middlemen.
Figure 7-1: Pakistan’s Export Partners for Year 2003

Pakistan's Export Partners (2003)

USA
17%
Others UK
44% 12%

UAE
Italy 8%
Germany
France
7% 10% 2%

8 RAW MATERIAL
Table 8-1: Raw Material
Description Price/Unit (Rs) Required Cost (Rs.)
3 4
Leather (Local) 65/Sq. ft 34 sq. ft . 2210
Lining (Satin, Cotton) 21/yards 2.25 yards 47
Pocket Lining 29/yard 0.2 yards 6
Front Zipper 75 1 75
Pocket Zipper 10 1 10
Fusing 15 1 15
Stitching Tape 5 1 5
Packing 10 1 10
Total Cost/Piece 2378
For the purpose of this pre-feasibility, the leather garments are categorized according to
the type of leather used. The different kinds of leather used are; cow, goat, buffalo and
sheep leathers. The sales price of leather garments also depends on leather type. The
garments made from cow and sheep leather are expensive as compared to garments from
buffalo and goat leather.

3
The prices of leather range from Rs. 50 to Rs.110 per sq. ft depending on the type.
4
Leather required for a normal jacket
11

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

9 MANPOWER REQUIREMENTS
Table 9-1: Manpower Requirements
Job Description Nos. Salary Rs/Month Annual (Rs.)
Production Staff
Stitching Supervisors 1 15,000 180,000
Quality Controllers 2 8,000 192,000
Final Inspector 1 10,000 120,000
Electrician (part time) 1 1,500 18,000
Skilled Stitchers5 30 150/piece 2,025,0006
Cutting Masters7 8 30/piece 378,0008
Total Production Staff 43 2,913,000
Administrative Staff
Manager/Owner 1 30,000 360,000
Accounts/ Store Clerk 1 7,000 84,000
Export Documentation Officer 1 5,000 60,000
Security Guards 2 3,500 84,000
Total Administrative Staff 5 588,000
Total 48 3,501,000

9.1 Types of Skills Required

Pattern-making, designing, cutting & stitching are the primary skills required for running
the unit. Moreover, matching of leather from different skins also requires an experienced
matching expert. Development of leathers and its timely procurements is an important
skill also. Similarly knowledge about international trends in fashion and prices is also
comes as a handy skill.

5
Each skilled stitcher stitches 2 pieces per day.
6
Calculated at 75% production capacity.
7
Each cutting master cuts 7-8 pieces per day.
8
Calculated at 75% production capacity
12

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

10 MACHINERY DETAILS
Mostly Japanese stitching machinery is being proposed in this pre-feasibility study.
Although, the Japanese machinery is expensive but it has an established market share,
because of the easy and speedy availability of spare parts and machine mechanics.
Table 10-1: Machinery List
Cost/Machine Total Cost
Machinery and Other Equipment Machines
(Rs.) (Rs.)
Lock stitch Machine (Single Needle) 30 34,500 1,035,000
Lock Stitch Machine (Double Needle) 1 80,000 80,000
Fusing Machine 1 20,000 20,000
Skiving Machine 1 40,000 40,000
Snap Machine (manual) 2 5,000 10,000
Overlock Machine (Chinese) 1 10,000 100,000
Electric wiring (per machine) 34 500 17,000
Machine base table 31 1500 46,500
Generator (50 KVA) 1 350,000 350,000
Total Costs 1,608,500

10.1 Other Options Available for Machinery

Stitching machinery from Korea, Taiwan, Hong Kong and China is also available in the
local market. These machines are comparatively less expensive than the Japanese
machinery. Second hand machinery is also available and can be used.
Table 10-2: Furniture & Fixture
Furniture & Fixture Required Cost (Rs.) Total (Rs.)
Factory Tables 15 1500 22,500
Office Chairs 8 500 4,000
Office Tables 3 2,000 6,000
Computer (Celeron) 1 25,000 25,000
Printer 1 15,000 15,000
Telephone 2 950 1,900
Fax Machine 1 8,000 8,000
Carpet (sq. ft) 150 30 4,500
Air-conditioners (Split 18,000 BTU) 1 30,000 30,000
Office Equipment 1 21,000 21,000
Total Cost 137,900

13

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

11 LAND & BUILDING

11.1 Total Land Required (Area)

Table 11-1: Building Covered Area Requirement
Construction
Description Area (Sq.ft) Total
(Rs./Sq.ft)
Raw Materials Store 1,000 350 350,000
Matching & Cutting Section 1,000 350 350,000
Role Checking and Fusing 625 350 218,750
Stitching Hall 1,650 350 577,500
Finishing 625 350 218,750
Inspection & Packing Section 625 350 218,750
Manager Office 150 600 90,000
Accounts Section 350 400 140,000
Cafeteria 500 400 200,000
Misc. (washrooms) 250 400 100,000
Pavements/Driveway 400 100 40,000
Free Space 700
Total Construction Cost 7,875 2,503,750

11.2 Recommended Mode for Acquiring Land

It is recommended that this project should be started in a rented building. This will help to
reduce the initial capital cost of the project. Usually, appropriate premises are available in
the commercial/industrial areas of under-mentioned clusters. These premises can be easily
hired at approximately Rs. 10,000/kanal.

11.3 Suitable Locations

Suitable locations for a leather garment-manufacturing unit in order of preference are:
 Sialkot
 Karachi
 Kasur

11.4 Utilities Requirements

 Electricity
 Telephone
 Water

14

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

12 PROJECT ECONOMICS
The project entails the following costs at the start of project.
Table 12-1: Project Costs
Account Heads Cost (Rs.)
Plant and Machinery 1,608,500
Furniture / Fixture & Equipment 137,900
Pre-operational Expenses9 64,000
Total Fixed Cost 1,810,400
Stocks & Raw Material 1,605,184
Up-Front Insurance payment 52,392
Up front for building rental 210,000
Total Working Capital 1,867,576
Total Project Cost 3,677,976
Table 12-2: Financing Plan
Financing Ratio Rs.
Equity 50% 1,838,988
Debt 50% 1,838,988
Table 12-3: Project Returns
IRR 91.66%
NPV (Rs.) 10,988,118
Payback Period (Years) 3.01

13 REGULATIONS

13.1 Special Incentives

 Government offers 5.33 % at f.o.b. value export rebate on the exports of leather
garments.
 If imported wet blue leather is used, then rebate rate is 1.85% at f.o.b. value.
 If imported finished leather is used, the rebate is 2.43% at f.o.b. value.

9
Pre operating cost includes salaries of staff hired and utility bills before the starting of business
15

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

14 FINANCIAL ANALYSIS

14.1 Projected Income Statement

PROJECTED INCOME STATEMENT in Rs
Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10

Sales 43,740,000 48,988,800 51,438,240 57,385,787 60,255,076 66,989,467 70,338,940 77,958,992 81,856,941 90,473,462
COST OF GOODS SOLD
Raw Material 32,103,675 35,956,116 37,753,922 42,119,219 44,225,180 49,167,994 51,626,394 57,219,253 60,080,216 66,404,449
Payroll (Production Staff) 2,913,000 3,388,203 3,735,494 4,333,065 4,777,204 5,527,817 6,094,418 7,036,281 7,757,500 8,938,184
Machine Maintenance 40,500 43,632 44,068 47,291 47,764 51,079 51,590 55,001 55,551 59,059
Direct Electricity 159,821 175,804 193,384 212,722 233,995 257,394 283,133 311,447 342,592 376,851
Petrol, Oil & Lubrication 437,400 489,888 514,382 573,858 602,551 669,895 703,389 779,590 818,569 904,735
Stationary 109,350 122,472 128,596 143,464 150,638 167,474 175,847 194,897 204,642 226,184
Freight 810,000 864,000 864,000 918,000 918,000 972,000 972,000 1,026,000 1,026,000 1,080,000
Total 36,573,746 41,040,115 43,233,846 48,347,620 50,955,331 56,813,652 59,906,772 66,622,469 70,285,069 77,989,461
Gross Profit 7,166,254 7,948,685 8,204,394 9,038,167 9,299,745 10,175,814 10,432,168 11,336,523 11,571,872 12,484,001
OPERATING EXPENSE
Payroll (Admin) 528,000 554,400 582,120 611,226 641,787 673,877 707,570 742,949 780,096 819,101
Payroll (Marketing) 60,000 63,000 66,150 69,458 72,930 76,577 80,406 84,426 88,647 93,080
Fixed electricity 836,258 919,884 1,011,872 1,113,060 1,224,365 1,346,802 1,481,482 1,629,630 1,792,593 1,971,853
Insurance Expense 52,392 47,153 41,914 36,674 31,435 26,196 20,957 15,718 10,478 5,239
Administrative & Factory Overheads 1,530,900 1,724,406 1,821,017 2,043,279 2,157,860 2,412,974 2,548,408 2,841,037 3,000,641 3,336,092
Amortization (Pre-operational Expenses) 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400
Depreciation 174,640 174,640 174,640 174,640 174,640 174,640 174,640 174,640 174,640 174,640
Total 3,188,590 3,489,882 3,704,112 4,054,737 4,309,418 4,717,466 5,019,863 5,494,800 5,853,497 6,406,405
Operating Profit 3,977,663 4,458,803 4,500,282 4,983,430 4,990,327 5,458,349 5,412,305 5,841,723 5,718,375 6,077,596
NON-OPERATING EXPENSE
Financial Charges on Running Finance 257,458 251,820 0 0 0 0 0 0 0 0
Building Rental 210,000 231,000 254,100 279,510 307,461 338,207 372,028 409,231 450,154 495,169
Total 467,458 482,820 254,100 279,510 307,461 338,207 372,028 409,231 450,154 495,169
PROFIT BEFORE TAX 3,510,205 3,975,983 4,246,182 4,703,920 4,682,866 5,120,141 5,040,277 5,432,493 5,268,222 5,582,427
Tax* 218,700 244,944 257,191 286,929 301,275 334,947 351,695 389,795 409,285 452,367
PROFIT AFTER TAX 3,291,505 3,731,039 3,988,990 4,416,991 4,381,590 4,785,194 4,688,582 5,042,698 4,858,937 5,130,060
Retained Earnings beginning of year 0 3,291,505 7,022,544 11,011,534 15,428,525 19,810,116 24,595,310 29,283,892 34,326,589 39,185,526
Retained Earnings end of year 3,291,505 7,022,544 11,011,534 15,428,525 19,810,116 24,595,310 29,283,892 34,326,589 39,185,526 44,315,586

*Tax is calculated on the basis of Turnover tax of 0.5%

16

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

14.2 Projected Cash Flow Statement

PROJECTED CASH FLOW STATEMENT in Rs
Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10

Operating activities
Net profit 3,291,505 3,731,039 3,988,990 4,416,991 4,381,590 4,785,194 4,688,582 5,042,698 4,858,937 5,130,060
Amortization (Pre-operational Expenses) 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400
Depreciation 174,640 174,640 174,640 174,640 174,640 174,640 174,640 174,640 174,640 174,640
Accounts receivable (6,561,000) (787,320) (367,416) (892,132) (430,393) (1,010,159) (502,421) (1,143,008) (584,692) (1,292,478)
Equipment Spare Parts Inventory 0 (3,375) (261) (36) (269) (39) (276) (43) (284) (46) (292)
Up-Front Insurance payment (52,392) 5,239 5,239 5,239 5,239 5,239 5,239 5,239 5,239 5,239 5,239
Stocks-RM (1,605,184) (192,622) (89,890) (218,265) (105,298) (247,141) (122,920) (279,643) (143,048) (316,212) 3,320,222
Accounts payable 0 3,390,486 394,259 201,611 447,086 235,314 506,601 273,809 573,619 317,722 300,430
Cash provided by operations (1,657,576) 111,273 3,434,106 3,791,163 4,052,658 4,125,610 4,344,719 4,366,563 4,516,256 4,461,988 7,644,221
Financing activities
Add: building rent expense 210,000 231,000 254,100 279,510 307,461 338,207 372,028 409,231 450,154 495,169
Building rent payment (210,000) (231,000) (254,100) (279,510) (307,461) (338,207) (372,028) (409,231) (450,154) (495,169) (544,686)
Running Finance Repayment (1,838,988) (1,798,715) 0 0 0 0 0 0 0 0
Issuance of share 1,838,988
Cash provided by/ (used for) financing activities 1,628,988 (1,859,988) (1,821,815) (25,410) (27,951) (30,746) (33,821) (37,203) (40,923) (45,015) (49,517)
Total (28,588) (1,748,715) 1,612,291 3,765,753 4,024,707 4,094,864 4,310,899 4,329,360 4,475,333 4,416,973 7,594,704
Investing activities
Capital expenditure (1,810,400)
Cash (used for)/ provided by investing activities (1,810,400)
Net Cash (1,838,988) (1,748,715) 1,612,291 3,765,753 4,024,707 4,094,864 4,310,899 4,329,360 4,475,333 4,416,973 7,594,704
Cash balance brought forward 0 0 50,000 1,662,291 5,428,044 9,452,751 13,547,615 17,858,514 22,187,874 26,663,207 31,080,180
Cash Balance (1,838,988) (1,748,715) 1,662,291 5,428,044 9,452,751 13,547,615 17,858,514 22,187,874 26,663,207 31,080,180 38,674,884
Running Finance 1,838,988 1,798,715 0 0 0 0 0 0 0 0 0
Cash carried forward 0 50,000 1,662,291 5,428,044 9,452,751 13,547,615 17,858,514 22,187,874 26,663,207 31,080,180 38,674,884

17

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

14.3 Projected Balance Sheet

PROJECTED BALANCE SHEET in Rs
Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10

Current Assets
Cash 0 50,000 1,662,291 5,428,044 9,452,751 13,547,615 17,858,514 22,187,874 26,663,207 31,080,180 38,674,884
Equipment Spare Parts Inventory 0 3,375 3,636 3,672 3,941 3,980 4,257 4,299 4,583 4,629 4,922
Up-Front Insurance payment 52,392 47,153 41,914 36,674 31,435 26,196 20,957 15,718 10,478 5,239 0
Stocks and Inventory 1,605,184 1,797,806 1,887,696 2,105,961 2,211,259 2,458,400 2,581,320 2,860,963 3,004,011 3,320,222 0
Receivable 0 6,561,000 7,348,320 7,715,736 8,607,868 9,038,261 10,048,420 10,550,841 11,693,849 12,278,541 13,571,019
Pre-paid building rent 210,000 231,000 254,100 279,510 307,461 338,207 372,028 409,231 450,154 495,169 544,686
Total 1,867,576 8,690,334 11,197,957 15,569,598 20,614,715 25,412,659 30,885,495 36,028,925 41,826,282 47,183,981 52,795,511

Gross Fixed Assets 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400 1,746,400
Less: Accumulated depreciation 0 174,640 349,280 523,920 698,560 873,200 1,047,840 1,222,480 1,397,120 1,571,760 1,746,400
Net Fixed Assets 1,746,400 1,571,760 1,397,120 1,222,480 1,047,840 873,200 698,560 523,920 349,280 174,640 0

Intangible Assets
Pre-operational Expenses 64,000 57,600 51,200 44,800 38,400 32,000 25,600 19,200 12,800 6,400 0
Total 64,000 57,600 51,200 44,800 38,400 32,000 25,600 19,200 12,800 6,400 0
TOTAL ASSETS 3,677,976 10,319,694 12,646,277 16,836,878 21,700,955 26,317,859 31,609,655 36,572,045 42,188,362 47,365,021 52,795,511

Current Liabilities
Running Finance 1,838,988 1,798,715 0 0 0 0 0 0 0 0 0
Accounts payable 0 3,390,486 3,784,745 3,986,356 4,433,442 4,668,756 5,175,357 5,449,166 6,022,785 6,340,507 6,640,937
Total 1,838,988 5,189,201 3,784,745 3,986,356 4,433,442 4,668,756 5,175,357 5,449,166 6,022,785 6,340,507 6,640,937

Long Term Liabilities

Long Term Loan 0 0 0 0 0 0 0 0 0 0 0
Total 0 0 0 0 0 0 0 0 0 0 0

Equity
Paid-up Capital 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988 1,838,988
Retained Earnings 0 3,291,505 7,022,544 11,011,534 15,428,525 19,810,116 24,595,310 29,283,892 34,326,589 39,185,526 44,315,586
Total 1,838,988 5,130,493 8,861,532 12,850,522 17,267,513 21,649,103 26,434,298 31,122,880 36,165,577 41,024,514 46,154,574

TOTAL LIABILITIES AND EQUITY 3,677,976 10,319,694 12,646,277 16,836,878 21,700,955 26,317,859 31,609,655 36,572,045 42,188,362 47,365,021 52,795,511

18

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

15 KEY ASSUMPTIONS
Table 15-1: Machinery Assumptions
Number of Machines Installed 35
Maximum Capacity Utilization 100%
Capacity Utilization (Year 1) 75%
Total Production of units per day (garments) 60
Total Production of units per month 1,500
Total Production of units per year 18,000
Total Production of units in Year 1 13,500
Table 15-2: Operating Assumptions
Hours operational per day 8
Days operational per month 25
Days operational per year 300
Table 15-3: Economy-Related Assumptions
Electricity growth rate 10%
Wage growth rate 5%
Table 15-4: Cash Flow Assumptions
Accounts Receivable cycle (in days) 45
Accounts payable cycle (in days) 30
Raw material inventory (in day) 15
Equipment and spare part inventory (in months) 1
Table 15-5: Revenue Assumptions
Production capacity in first year 75%
Sale price per unit in year 1 (in Rs.) 3,240
Sale price growth rate 5%
Export sales 100%
Rupee Dollar Exchange Rate Rs 60/$

19

PREF-13/June, 2005/ Rev 2

Pre-Feasibility Study Leather Garments Manufacturing Unit

Table 15-6: Expense Assumptions

Administrative & Factory overhead (% of Sales) 3.5%
Office expenses (stationery, entertainment etc)(% of Sales) 0.25%
Machine maintenance (per piece) Rs 3
Machine maintenance growth rate 1%
Pre-paid building Rent (months) 12
Rent growth rate 10%
Petrol Oil & Lubrication(% of Sales) 0.5%
Raw Material Price Growth Rate 5%
Insurance rate (% of net fixed assets) 3%
Freight Charges/Piece (in Rs) $1
Table 15-7: Financial Assumptions
Project life (years) 10
Debt 50%
Equity 50%
Interest rate on long-term debt 14%
Interest rate on short term debt 14%
Debt tenure (years) 5
Debt payments per year 1
Discount rate (weighted Avg. cost of capital for NPV) 20%
Minimum Cash Balance Required Rs.50,000

20

PREF-13/June, 2005/ Rev 2