SMART TASK 3

OF
PROJECT FINANCE
By
(VARDHAN CONSULTING ENGINEERS)

SUBMITTED BY-
DEVESH BHATT
EMAIL ID- deveshbhatt100@gmail.com
(SCHOOL OF MANAGEMENT STUDIES)
PUNJABI UNIVERSITY, PATIALA
(2019-21)
1-How a new venture is assessed to qualify as project finance. What are the factors Thai
needed to be considered?
In the project finance business, deal origination happens through the direct relationship that
relationship managers across different sectors enjoy in the industry. Proposals are presented in
the form of appraisal notes put up to either the credit committee or a committee of senior
management, whichever is the appropriate sanctioning authority. Due diligence in project
finance involves thoroughly reviewing all proposals involved in a deal.
An appraisal note ideally contains a write up on the company background, its management and
shareholding pattern, its physical and financial performance, purpose of the project being funded,
details of costs involved and means of financing, the market for company’s products, future
prospects and profitability projections, risk analysis, and the terms and conditions of sanction.
Steps which are to be followed:
 Assessment of promoter history and background
 Evaluation of the company and project business model
 Legal due diligence
 Analysis of financial statements and capital structure
 Determine major risks associated with the project
 Analysis of tax effects
 Credit analysis and evaluation of loan terms
 Project valuation
An assessment of the promoters’ history is conducted to ensure the commitment of promoters to
the project. The main motive is to identify the background and track record of the promoters
sponsoring the project. The following terms are assessed:
Assessment of group companies – Involves in-depth study of various companies promoted by the
sponsor. Assessment of group companies is necessary even in cases where no direct support
from companies to the project company exist. In case the group is facing a severe financial
crunch, the possibility of diversion of funds from the project company cannot be ruled out. In
such circumstances, the lenders need to take adequate steps to ring-fence the project revenues.
Track record of sponsors – In case of any subsisting relationship with the sponsor, the track
record of the sponsors should be studied in light of its relationship. The lender should identify
any incidences of default and analyze the causes for the same.
Management profile of sponsor companies – Helps in assessing the quality of management.
Lenders are typically more comfortable taking exposure with professionally managed
companies.
Study of shareholders agreement – Study of the shareholders agreement should be done in order
to get clarity on issues such as voting rights of shareholders, representation on the board of
directors, veto rights (if any) of shareholders, clauses for protection of minority interest,
procedure for issuing shares of the company to the public and the method of resolution of
shareholders disputes.
Management structure of project company – Study of shareholders agreement helps in
determining the management structure of a project
Evaluation of the Company and Project Business Model
An extensive evaluation of the business model assists the lenders in assessing the financial
viability of the project. Typically, a business model is developed in consultation with financial
and technical consultants. The lenders need to undertake the following steps while accessing a
business model:
Understanding the assumptions – Major assumptions are involved regarding revenues, operating
expenses, capital expenditures, and other general assumptions like working capital and foreign
exchange
Assessment of assumptions – Involves evaluating the various assumptions and benchmarking the
same with respect to industry estimates and various studies. Sometimes the lenders appoint an
independent business advisor to validate the assumptions made in the business model.
Analysis of project cost – One of the most important stages in due diligence, as a substantial
amount of capital expenditure is to be incurred. The project cost is benchmarked to other similar
projects implemented in the industry. Also, there needs to be the assurance that appropriate
contingency measures and foreign exchange fluctuation measures have been incorporated into
the estimated project cost.
Sensitivity analysis – A business model involves many estimates and assumptions. Some of these
assumptions do not materialize in view of changing business scenarios. Hence, it is important to
sensitize the business model to certain key parameters. The lenders need to assess the financial
viability of the project in light of sensitivity analysis coupled with ratio analysis.
Benchmarking with the industry – An analysis of the key ratios in light of available industry
benchmarks is useful in an overall assessment of the business plan.

2. Explain in detail the revenue model for solar PV project, residential building,
manufacturing units and other ppp projects?
Before we delve into the different types of revenue models, we should spend a little time
differentiating between the terms "business model", "revenue model", and "revenue stream", as
they are very often used interchangeably. In the Glowing Start article, "What Is The Difference
Between A Revenue Model, Revenue Stream And A Business Model", Alex Genadinik does a
great job explaining the difference between those terms. They are summarized below:
  A revenue stream is a company’s single source of revenue. A company can have zero or
many revenue streams, depending on its size.
 A revenue model is the strategy of managing a company’s revenue streams and the
resources required for each revenue stream.
 A business model is the structure comprised of all aspects of a company, including
revenue model and revenue streams, and describes how they all work together.
There are numerous types of revenue models, so this list in no way attempts to list them all,
especially since so many of them go by other names in the startup community. However, below
are ten of the most popular and effective revenue models employed by companies, both big and
small.
Genadinik’s article, “Different Revenue Models”, covers some of the more common revenue
models that countless recently-launched startups use to generate their first sales. Here are the
revenue models he covers below:
1. Ad-Based Revenue Model
Ad-based revenue models entail creating ads for a specific website, service, app, or other
product, and placing them on strategic, high-traffic channels. If your company has a website or
you have a web-based company, Google’s AdSense is one of the most common tools get ads. For
most websites, AdSense will earn about $5-10 per 1,000 page views.
Advantages: Making money from ads is one of the simplest and easiest ways to implement
revenue models, which is why so many companies utilize ads as a source of revenue.
Disadvantages: In order to generate sufficient revenue to withhold a business, you will need to
attract millions of users. In addition, most people find ads annoying, which can lead to low click
through rates, and therefore, lower revenue.
2. Affiliate Revenue Model
Another popular web-based revenue model is the affiliate revenue model, which works by
promoting links to relevant products and collecting commission on the sales of those products,
and can even work in conjunction with ads or separately.
Advantages: One of the most obvious benefits of employing an affiliate revenue model is that it
generally makes more money than ad-based revenue models.
Disadvantages: If you use an affiliate revenue model for your startup, remember that the amount
of money you make is limited to the size of your industry, the types of products you sell, and
your audience.
3. Transactional Revenue Model
Countless companies, both tech-oriented and otherwise, strive to rely on the transactional
revenue model, and for good reason too. This method is one of the most direct ways of
generating revenue, as it entails a company providing a service or product and customers paying
them for it.
Advantages: Consumers are more attracted to this experience because of its simplicity and the
wider set of options.
Disadvantages: Because of the directness of the transactional revenue model, many companies
employ it themselves, which means more competition and price deterioration, and therefore, less
money to made for everyone who uses this model.
4. Subscription Revenue Model
The subscription revenue model entails offering your customers a product or service that
customers can pay for over a longer period of time, usually month to month, or even year to year.
Advantages: If your company is far enough along in its development, this model can generate
recurring revenue, and can even benefit from customers who are simply too lazy to cancel their
subscription to your company (which is the dirty little secret of a subscription-based model).
Disadvantages: Because this model depends so much on having a large consumer base, it’s
critical to maintain a higher subscribe rate than an unsubscribe rate.

3. What should be the additional points that needed to be included in a financial

model, if the financing bank is from abroad and the debt is in US$ but revenue is in
INR.
Financial modeling is an iterative process. You have to chip away at different sections until
you’re finally able to tie it all together.
Below is a step-by-step breakdown of where you should start and how to eventually connect all
the dots. For much more detailed instruction, and to work through your own Excel model, check
out our financial modeling courses.
 
1. Historical results and assumptions
Every financial model starts with a company’s historical results.  You begin building the
financial model by pulling three years of financial statements and inputting them into Excel.
Next, you reverse engineer the assumptions for the historical period by calculating things like
revenue growth rate, gross margins, variable costs, fixed costs, AP days, inventory days, and AP
days, to name a few.  From there you can fill in the assumptions for the forecast period as hard-
codes.
 
2. Start the income statement
With the forecast assumptions in place, you can calculate the top of the income statement with
revenue, COGS, gross profit, and operating expenses down to EBITDA.  You will have to wait
to calculate depreciation, amortization, interest, and taxes.
 
Start the balance sheet
With the top of the income statement in place, you can start to fill in the balance sheet.  Begin by
calculating accounts receivable and inventory, which are both functions of revenue and COGS,
as well as the AR days and inventory days assumptions.  Next, fill in accounts payable, which is
a function of COGS and AP days.
 
4. Build the supporting schedules
Before completing the income statement and balance sheet, you have to create a schedule for
capital assets like Property, Plant & Equipment (PP&E), as well as for debt and interest. The
PP&E schedule will pull from the historical period and add capital expenditures and subtract
depreciation. The debt schedule will also pull from the historical period and add increases in debt
and subtract repayments. Interest will be based on the average debt balance.
 
5. Complete the income statement and balance sheet
The information from the supporting schedules completes the income statement and balance
sheet. On the income statement, link depreciation to the PP&E schedule and interest to the debt
schedule. From there, you can calculate earnings before tax, taxes, and net income. On the
balance sheet, link the closing PP&E balance and closing debt balance from the
schedules. Shareholder’s equity can be completed by pulling forward last year’s closing balance,
adding net income and capital raised, and subtracting dividends or shares repurchased.
 
6. Build the cash flow statement
With the income statement and balance sheet complete, you can build the cash flow
statement with the reconciliation method. Start with net income, add back depreciation, and
adjust for changes in non-cash working capital, which results in cash from operations. Cash used
in investing is a function of capital expenditures in the PP&E schedule, and cash from financing
is a function of the assumptions that were laid out about raising debt and equity.
 
7. Perform the DCF analysis
When the 3 statement model is completed, it’s time to calculate free cash flow and perform the
business valuation. The free cash flow of the business is discounted back to today at the firm’s
cost of capital (its opportunity cost or required rate of return). We offer a full suite of
courses that teach all of the above steps with examples, templates, and step-by-step instruction.
Read more about how to build a DCF model.
 
8. Add sensitivity analysis and scenarios
Once the DCF analysis and valuation sections are complete, it’s time to incorporate sensitivity
analysis and scenarios into the model. The point of this analysis is to determine how much the
value of the company (or some other metric) will be impacted by changes in underlying
assumptions. This is very useful for assessing the risk of an investment or for business planning
purposes (e.g., does the company need to raise money if sales volume drops by x percent?).