pellets 6 finale

Bio Mass Pellet JV proposal

August, 2011

Who are we ?

• ADVANCE HYDRAU-TECH PVT LTD of SUBHA GROUP, is a forerunner in the field of manufacturing state of the art scrap processing machines

• The company was established in 1981 and since then has built a complete range of manufacturing capabilities, including those for microprocessor controlled machines

Our manufacturing range includes machines for nearly all kinds of scraps, including:

Ferrous and Non-ferrous Scrap Balers in various models including Fully Automatic Microprocessor controlled Balers.

Scrap Shredders Turning Crushers Scrap Shears Hydraulic/Mechanical Briquetting Machines for Sward, Chips and

Shavings Vertical and Horizontal Balers for Paper, PVC etc. Block Makers for Agro waste. Tyre Shredders Various types of Crushers

• We have sold over 3000 machines, to customers worldwide

• We have successfully completed prestigious special assignments, like developing Special Purpose Machines (SPM's) for the Indian Railways, Indian Navy, Cattle Feed Compactors

• Our manufacturing and designing is in-house, which enables us to effect total quality control

• On-time delivery and quality excellence drives manufacturing at Advance Hydra-Tech Ltd.

Who are we ?

• SUBHA INTERNATIONAL of SUBHA GROUP, is a unit devoted to export of scrap processing machines as well as expertise through securing several turnkey projects worldwide

• The company was established in 1989 and since then has built a strong brand for reliable, efficient and technologically advanced machines

• ADVANCE HYDRAU COMPONENTS of SUBHA GROUP, is a trading company involved in supplying Special Purpose Fastners to multinational companies in India and their principals abroad.

– Steel rolling mill with a capacity of 24000 in UAE– Steel melting unit, with a capacity of 18000 tons per

annum, in Chittagong, Bangladesh– Galvanized Tube Mill in Dhaka, Bangladesh, , with a

capacity of 9000 tons per annum– Aluminum Spl Alloys Melting and DC castings for

Extrusions, with a capacity of 5000 tons per annum– Oil recycling plants in Tanzania and Egypt

Projects secured & executed world wide

Aluminum melting and casting project, capacity 5000 tons, in Riyadh, Saudi ArabiaMechanized scrap container handling yard, capacity 10000 tons, in MauritiusMS Melting and Rolling unit, capacity 18000 tons, in MauritiusScrap processing yard for a Melting Plant, capacity 30000 tons, in Bangladesh

Projects in line

Global Presence

STAR AWARD recipient, in Geneva, for Quality and Leadership

Best Exhibitors’ Award for Indonesia by EEPC

of India

Proposal

• There is a strong and growing demand for alternate fuel in developing economies and bio mass pellets present an opportunity to capture a sizable share of this market. India presents a unique opportunity for manufacturing and marketing these pellets

• Advance Hydrau-Tech proposes the formation of a JV, Advance Energy Solutions, with Høst Verdien i Avfall AS (HVA), for the sales and marketing of Bio Mass pellets in India, Africa and Nepal & Bangladesh

• $1M in equity for both partnes followed by a $8-10M soft loan from HVA to Advance Energy Solutions• Share capital will be utilized for running the venture, sourcing of pellets, pellet burner, smokeless

coking stoves, advertisement and marketing• Soft Loan will be used for procuring plant machinery, and leasing for future expansion• The personnel for Advance Energy Solutions will be technical and non-technical staff taken from

AdvanceHydrau-Tech, HVA and local recruitment agencies• Advance Energy Solutions will perform the following functions:

– Sourcing and supply of Bio Mass pellets for Industrial, Commercial and Residential consumers.– Sourcing and supply of clean and efficient Bio Mass burners and stoves to industrial, commercial and residential consumers.

Stoves will be supplied at a subsidized rate to induce usage of our pellets– Provide plant and machinery to pellet manufacturing plants in minimum six strategic locations in India and Nepal within one

year – Establish a strong sales and distribution network. The networks will be established at a very local level– R&D for plant & machinery, stoves & burner– After Sales Service– Expansion of markets by identifying potential manufacturing partners and target markets– Establish a carbon foot print

Rationale

Energy Cost Savings

Raw Materials

Existence of Market

Government Benefit

Technological advancement

Rationale

Somesh, a professional sweet seller, needs 5 LPG cylinders a day to meet his daily customer demand. One cylinder costs ~$35 in India, so he spends $175 every day buying commercial LPG cylinder of 19.8 kg.Bharat, a pellet Manufacturer, suggested Somesh to use Bio Mass Pellets for a month. Somesh needs 250 Kilos of pellets every day to meet the same customer demand.But he now spends only $50 a day on energy. His daily savings are $100 (~72%) and monthly are $3,000

Source

Calorific Value

(Kcal/Kg)Market rate

(Rs/Kg)Equivalent

Pellet weight Equivalent Pellet Rate

LPG 11,000 Rs 63 2.34 Rs21Fuel Oil 10,200 Rs 35 2.17 Rs 20

Coal 5,000 Rs 35 1.07 Rs 10Diesel 10,700 Rs 47 2.28 Rs 20

Kerosene 8,400 Rs 50 1.79 Rs 16Wood 4,000 0.85 Rs 8

Pellet fuel 4,700 Rs9 1.00 Rs 9

Energy Cost Savings

Raw Materials

Existence of Market

Government Benefit


Rationale

•70% of India’s Land is under agriculture•Land under Forest: 20.6% of total geographical area

Energy Cost Savings

Raw Materials

Existence of Market

Government Benefit


Rationale

• Market for the final productIndustrial - Boilers , FurnacesCommercial - Restaurant, Canteen, HotelsResidential - Urban & Rural

• Untapped market, Very few market playersIndia’s annual requirement of fuel wood is estimated as 256 million m3, which is 16% of the world

Huge opportunity for alternate fuel in India in replacement for fossil fuels (F.O., f D.O., Coal, kerosene etc.)

•India’s Population 1.3B•Growth rate 3% annually•Annual Energy Need: 546 MTOE (million tons of oil equivalent)•35% commercial energy needs met through imports

Energy Cost Savings

Raw Materials

Existence of Market

Government Benefit


Rationale

•Indian Government aggressively investing in biomass based power plants, aims to set up 100 plants by X, thereby ensuring systems for collection of raw material

•Plant subsidy of 15% on plants set up by 2012

•Tax rebate for 5 years in selected states

Energy Cost Savings

Raw Materials

Existence of Market

Government Benefit


Rationale

•New technology in pellet burners & smokeless stoves makes it easy to make the transition from current system to pellet operated systems•Same burner can be used with liquid or solid fuel•No rebuilding of boilers

Pelltech, Eco Hornel, China etc.Video: How to replace the oil burner with pellet burner

Energy Cost Savings

Raw Materials

Existence of Market

Government Benefit


04/10/2023

Existing Agro Waste Division

• We already have already installed 6 plants with a capacity of producing 30/60 ton/day TMR

• We have an existing semi-automatic pelletizing system for 2-3 ton/hr• We did project with Sumul, NDDB, Karnataka government ( 3 projects

under manufacture)

Business ModelOrganizational Structure

• Advance Energy Systems to be staffed with personnel from both HVA and Advance Hydrau-Tech

• A team of technically competent personnel for sourcing pellet burners & smokeless cooking stoves with desired specifications

• A competent sales force to establish a strong distributor network and ensure timely supply of pellets to markets for use in Pellet Burner & Cook Stoves

• Quality control personnel to be posted at each manufacturing location• R&D team to research on any new technologies that can be leveraged for

more efficient stoves and pellets• Business Development team to research any additional markets we can

venture in, along with export opportunities• Setting up a carbon foot point:a) By use of Pellets in Boilers/Furnacesb) Setting subsidized cook stoves & supply pellets

Business ModelManufacturing Setup

• First plant with a daily capacity of 100MT, setup in Uttaranchal/Madhya Pradesh, to be up and running in 6 months

• Plant and Machinery to be leased by Advance Energy and the land to be leased by third party

• The plant will be operated by the third party, with Advance Energy having strict quality control measures in place

• Government offering subsidy to all the plants being setup till 2012• Income tax rebate for 5 years

Business ModelSourcing

• Raw Materials– Agricultural and Forest Lands of Uttaranchal are a source of abundant raw materials– Uttaranchal is popularly known as the Forest Rich State of India with ~65% of the land being under forest

cover– About 71% of the total population of the state engages in agriculture– Organized collection of agricultural wastes makes it easy to source the raw material– Agriculture Sector : Paddy, Wheat, Maize, Sugarcane, Sawan, Mandua– Forest Sector: Poplar, Euclyptus, Pine Needles, Forest Leaves, Forest Weeds

• Stoves – Stoves to be bought from European Union– Jenfire Jet and Echohornet identified as possible suppliers

• Plant and machinery – Advance Hydrau-Tech has significant expertise in Agro waste recycling technology– HVA has extensive experience in organic waste processing– Capitalizing on these synergies we can modify our existing plant and machinery to suit specific needs– We have already sourced quality manufacturers for P.L.C. controlled fully automatic pelletizing lives upto

5 ton/hr capacity

• Labor– The human population of state is 84,79,562, with a density of 159 person per sq km– Cost of semi-skilled/skilled labor is $150-$200/month– This provides cheap and ready labor for the manufacturing plant, thereby keeping costs low

Business ModelTarget Market

• Industrial boilers A leading boiler manufacturer, Thermax, has ~30% market share in Industrial boilers,

131 Industrial boilers in Uttaranchal A boiler of 8 ton capacity will consume 18MT of pellets a day, so only 5 boilers are

needed to consume the whole production

• Melting Furnaces With the availability of latest technology in pellet based burners, oil fired furnaces can

be easily converted to pellet furnaces This will translate into a saving of ~50% on energy expenses for the customers

•Commercial Cookery Stoves In Urban Cities The availability of quality cook stoves which can easily replace the existing LPG stores Ensuring the availability of Pellets from our plants

Future Expansion plans

• Establish minimum 6 plants this year• Double the number of plants by next year

• Location for later plants identified: – Madhya Pradesh , Uttaranchal, Haryana, Uttar Pradesh, & Maharashtra in India– Sakhu, Chitwan, & Birganj in Nepal – Comilla in Bangladesh– Lower manufacturing cost, due to relatively drier raw material– All the above are hubs for Industries

80% of the population is involved in agricultureAgriculture constitutes 41% of GDP• Fuel is even more expensive than India• No government subsidies, LPG cylinder

cost as compared to $35 in India• No coal or petroleum reserve• Government laying stress on preserving

wood fuel and harnessing renewable sources of Energy

Nepal, Immediate next destination

• Identified Regions: Sakhu, Birgang & Chitwan• Sakhu about 18 Km from Kathmandu, Ghorahi- Dang (Mid Western Region) about 600

Km from Kathmandu, Nepalgunj/ Surkhet (plain area- Mid Western Region) area, Nawalparasi plain area ( Western Region) close to UP and Bihar Boarder, Morang/ Sunsari ( Biratnagar- Estern Region) 500Km from Kathmandu, close to the Bihar boarder

• Raw Material bamboo, leafs, branches etc• Requires agro waste cut/ chopped before sending to the machine for final shape. • Storage facility easily manageable.


• Expanding in other markets – Commercial kitchens– The market for cheap fuel in this segment is virtually unlimited– There are a huge number of local restaurants, Halwai’s canteens, hotels which consume large quantities of LPG– There is a demand of 33,000 commercial stoves in Delhi (NCR) alone 1 stove consumes ~50 kilo of pellet furl a

day. – By taping 1% of that, we would exhaust our daily production. – Replacing LPG by Bio Mass Pellets constitutes a saving of ~60% for these small businesses

• Urban – Water boilers

• Rural household kitchen– A large number of rural households in India use traditional chulas which burn all sorts of organic waste– Needless to say these are inefficient and pose a health hazard to the communities– There are initiatives by several international organizations to equip these households with latest smokeless stoves– With an efficient distribution network in place, this market could provide ample opportunity for building a strong brand for our

products– 67% of the rural sector in this region uses fuel wood/coal/kerosene

• Exports- explore areas around coasts, Gujrat, Calcutta, the entire Indian penninsula


Sales and Marketing

• Geographic region of sales – in the vicinity of the manufacturing plants

Low Ash content

PelletsMedium Ash content

PelletsHigh Ash content

Pellets

Ash Content <1.5% <4% <8%

Calorific Value (Kcal) 4200 – 4,500 ~4,000 <4,000

User Industrial, Urban Urban, Commercial Rural

Packaging 1 ton 50-100 kilo 5-10 kilo

Distribution Direct SalesDealer ->End

CustomerDealer -> Retailer ->

End customer

Distribution Channel Gas delivery agents

Agriculture University, LIC agents, NGOs

Selling Price Rs 8 ~Rs 8 Rs9

Sales and Marketing

• USP – Green fuel, cost saving , not inflammable • Positioning and brand building – cater high end Industries like

pharmaceuticals, food manufacturers, chocolate manufacturers• After Sales service, 24 hours customer care centre• Providing forward integration service

– Running a plant end to end on contract– Smooth installation of burner, running of furnace and ash handling– Price negotiated with the customer upfront

Financials – Manufacturing Lease Model (Model A)

PROJECTED ANNUAL INCOME (1st year)

Particulars Rs/Units Tons Amount

Oerating Revenues (@ 5,000 INR/ton) 5,500 30000 16,50,00,000.00

Less: Power 600 30000 1,80,00,000.00

Less: Manufacturing (incl labor) 200 30000 60,00,000.00

Less: Packing 300 30000 90,00,000.00

Less: Raw Material (@ 2500 INR/ton) 2500 36000 9,00,00,000.00

Less: Wear & tear 135 30000 40,50,000.00

Less:Depreciation (10%) 100 30000 30,00,000.00

Gross Profit 1,665 30000 3,49,50,000.00

Less: Administration Cost 150 30000 45,00,000.00

Less: Interest 37,50,000.00

Less: Lease Finance (12.5%) 37,50,000.00

Less: Rent Paid 18,00,000.00

Less: Tax NULL NULL NULL

Net Profit 2,11,50,000.00

Financials – Manufacturing Plant & Land as Equity Model (Model B)

PROJECTED ANNUAL INCOME (1st year)

Particulars Rs/Units Tons Amount

Oerating Revenues (@ 5,000 INR/ton) 5,500 30000 16,50,00,000.00

Less: Power 600 30000 1,80,00,000.00

Less: Manufacturing (incl labor) 200 30000 60,00,000.00

Less: Packing 300 30000 90,00,000.00

Less: Raw Material (@ 2500 INR/ton) 2500 36000 9,00,00,000.00

Less: Wear & tear 135 30000 40,50,000.00

Less:Depreciation (10%) 100 30000 30,00,000.00

Gross Profit 1,665 30000 3,49,50,000.00

Less: Administration Cost 150 30000 45,00,000.00

Less: Interest 37,50,000.00

Less: Lease Finance (12.5% in model A) 0.00

Less: Rent Paid 0.00

Less: Tax NULL NULL NULL

Net Profit 2,67,00,000.00

• Projected Balance SheetThe excel includes the balance sheet for both the models

• Projected Working Capital

Financials - Manufacturing

Microsoft Office Excel Worksheet


Financials - ManufacturingRatios of Interest to lendors Model A Model B AnalysisDebt/Equity 0.43 0.05 The average debt equity ratio for a capital intensive company is 2,

which is far from this company in both the models. Therefore, the concerned company is under leveraged and there is a scope for increasing debt. However, in Model A, the company can offer land & building or Plants as collateral for increasing loan, while in Model A it has no collateral for seeking loan.

Interest Coverage Ratio (EBIT/Interest) 6.64 8.12

The interest coverage ratio is both models is sufficient. However, greater profit is available for paying interest in case of shareholding model since no rent/lease needs to be paid

Financial Ratios Model A Model B Analysis

Return on capital 63% 8%

The return on capital for the shareholder is not very attractive in case he chooses to provide equity stake to the marketing JV. Since, without equity interest the Return on investment is 63%. If he adds the equity of the manufacturing JV, then the return on capital would fall very steeply (from 63% to 8%). However, the additional equity in Model B adds stability to the balance sheet in terms of additional assets. These assets would prove very valuable to take any debt from banks in later years. While for Model A, any additional investments would have to be equity since the manufacturer would have no collateral to back a loan

Operating Ratios Model A Model B AnalysisGross Profit Ratio 21% 21% The operating margin is same for both models

Net Ratio 13% 16%

The net profit margin is better for model B since the firm pays no rent or lease fee in this model

Financials - MarketingPROJECTED ANNUAL INCOME (1st year)Particulars Rs/Units Tons Subtotatls Amount(INR)Oerating Revenues 81,21,25,000.00Pellet Sales: I Industrial Sales 7,500 78750 59,06,25,000.00

Commercial Sales 8,000 15750 12,60,00,000.00Retail Sales 9,000 10500 9,45,00,000.00

Sales from Stoves & Boilers 1,000 1,000 10,00,000.00 Less: PurchasesPellets from Subsidiary 5500 105000 57,75,00,000.00 57,75,00,000.00Stoves & Boilers 800 1,000 8,00,000.00 8,00,000.00Less: Freight forwarding 500 105000 5,25,00,000.00 5,25,00,000.00Less: 0.00 Gross Profit 18,13,25,000.00Add: Lease Income 37,50,000.00Less: Workforce Salaries (Technicians/sales engineers etc) 32,45,000.00Less: R & D 13,20,000.00Less: Depreciation on Plant & Machinery (10%) 1,50,00,000.00Less: Depreciation on Burners (10%) 10,00,000.00Less: office overheads - Rent, Telephone, vehicles 1,20,00,000.00Less: Managers' salary 96,00,000.00Less: Interest @ 4% 35,00,000.00 Profit before tax 12,44,10,000.00Less Tax @ 30% 3,73,23,000.00 Net Profit 8,70,87,000.00

• Projected Balance Sheet

Financials - Marketing


Financials - MarketingRatios of Interest to lendors Ratios AnalysisDebt/Equity 1.47 The average debt equity ratio for a capital

intensive company is 2, which is close to this company. The company is perfectly leveraged. It can take some more debt if It needs

Interest Coverage Ratio (EBIT/Interest) 36.55

The interest coverage ratio is 36, which indicates that the company has more sufficient profits before interest and tax to pay out the interest. It also indicates that the company has a reasonable low cost of loan.

Financial Ratios Ratios Analysis

Return on capital 85%

The return on capital for the shareholder is 85%, which iindicates that the profit which is available to an investor post interest and tax recovers almost the entire capital in the first year

Operating Ratios Ratios Analysis

Gross Profit Ratio 22%22% is decent operating margin with such a purchase price

Net Ratio 11%

Comparing the net profit and the gross profit ratio, the company's indirect expenses are pretty high

Alliances

• For Sourcing Stoves and Burners– Business contract for sole distributorship in India– Explored Ecohornet and Jenfirejet– Explore option of producing in-house– Dedicated Technical staff for Quality assurance

• For Manufacturing of Pellets– Manufacturing firm will be responsible for running the plant– Share holding/profit sharing or leasing plant and machinery against land & building as

the collateral

• Selling of Pellets, Burners and Stoves– Association with distributor on commission basis, no partnership involved

Why we need HVA?

• Lower cost of financing in EU• Expansion plan • Their technological expertise and Blend• Liasing for Carbon Credits on stoves/burner/pellets – they are passed

from EU, taking the data and then getting it approved

What’s in it for HVA?

• Equal sharing of profits• Interest on the shared Loan• Entry in a new and lucrative market , which is otherwise closed to foreign

investors• Cost effective. It costs $4.3M in Europe to set up a plant of 100MT, where

as in India it costs < $1M• Substantial growth potential• Due to small plant size and geographic spread of their placement, the

investment risk is largely mitigated

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