Project Techno-Economic Viability Study- Why Do We Need It
December 23, 2018
No project can be absolutely risk free and hence the analysis of the degree of technical risk and associated financial viability, through a Techno-Economic Viability Study (TEVS) is necessary to assist lenders to take a view on the acceptability of the degree of risk involved in a project.
HOW TO GO ABOUT IT :
- First and foremost we have to gather information about the project, its promoters – their financial strength, business acumen, experience, key personnel in the organization;
- We have to examine the product description, types and uses, application, etc.In several cases it has been observed that the product has limited use and demand is fluctuating.
- Study the current market scenario, both Indian and global, market forecast – demand/supply scenario, target market, barriers to entry and competition analysis; These are important parameters and must never be ignored in a study.
TECHNICAL ASSESSMENT :
- Availability of land, connectivity, availability of raw material, labour and utilities should be established; the location of a project should be closer to either the source of raw material or market for the finished product. If it is an export oriented product, the location should be closer to sea port/ airport.
- Project configuration and selection of plant and machinery should be commented upon .The cost should be compared to guard against over invoicing. The efficiency and useful life of the machinery should be for a reasonably long period. There should be adequate supply of stores and spares in case of an emergency to prevent loss of production. The estimates for building and civil works should be reasonable, duly certified by a qualified architect. The lay out and design should have the approval of the local authorities.
- The manufacturing process should be well defined and documented. There should be synergies between various departments of production and finished goods..The technical staff should have the requisite experience.
- All Statutory clearances associated with the business should be available to commence production and commented upon in the report.
MARKETING PLAN :
- The competition analysis of other comparable manufacturers should be examined and commented upon. The pricing of the finished goods should be comparable to others;
- The target market should be accessible with a wide distribution and retail network. There should be a well laid out policy of incentivizing sales and marketing.
FINANCIAL VIABILITY :
- The cost of the project and the means of finance should be determined. The source of promoters contribution should be ascertained through bank statements and CA certificates. The Debt-Equity ratio should be within the bench mark for the industry.
- The pricing of raw material, overheads and labour should be reasonable and comparable with the market.The assumptions on pricing of finished goods should be reasonable to arrive at a conservative revenue projections.
- The cost of stores and spares consumed, transportation and freight and other manufacturing expenses and overheads should be a small percentage of the finished product.
- The financial projections of revenue and costs over a sufficiently long period should be prepared based on the above assumptions. It should capture the growth of revenue keeping in view the inflation and growth in the economy and market dynamics.
- The Cash Flow Statement over the period of bank loan and Financial Indicators such as DSCR, IRR, Pay Back Period, ROA, ROCE etc.to be calculated and should be within the bench marks for the industry. These should also be stress tested for changes in pricing of raw material and finished goods by say 5%.
- A SWOT analysis should be prepared and commented upon to understand the strengths and weakness of the business.
It is only when the above analysis indicates that the project is technically feasible and economically viable , the report may be submitted to a lender to take a view. The above guidelines are broad indicators and individual cases have to be examined on merits of each case.
Mr. Pradeep Shankar
ED - Resurgent India Ltd.