Pre-Feasibility Study

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() 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: (042) 111-111-456 Fax: (042) 36304926-7 helpdesk.punjab@smeda.org.pk REGIONAL OFFICE Sindh 5 th Floor, Bahria Complex II, M.T. Khan Road, Karachi.

1 () Small and Medium Enterprises Development Authority Ministry of Industries & Production Government of Pakistan HEAD OFFICE 4th Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road, Lahore Tel: (92 42) , Fax: (92 42) REGIONAL OFFICE Punjab 3 rd Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road Lahore, Tel: (042) Fax: (042) helpdesk.punjab@smeda.org.pk REGIONAL OFFICE Sindh 5 th Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) Fax: (021) helpdesk-khi@smeda.org.pk REGIONAL OFFICE Khyber Pakhtunkhwa Ground Floor State Life Building The Mall, Peshawar. Tel: (091) Fax: (091) helpdesk-pew@smeda.org.pk REGIONAL OFFICE Balochistan Bungalow No. 15-A Chaman Housing Scheme Airport Road, Quetta. Tel: (081) , Fax: (081) helpdesk-qta@smeda.org.pk Note: All SMEDA Services / information related to PM's Youth Business Loan are Free of Cost December, 2013

2 TABLE OF CONTENTS 1 DISCLAIMER PURPOSE OF THE DOCUMENT INTRODUCTION TO SMEDA INTRODUCTION TO SCHEME EXECUTIVE SUMMARY BRIEF DESCRIPTION OF THE PROJECT CRITICAL FACTORS INSTALLED & OPERATIONAL CAPACITIES POTENTIAL TARGET MARKET / CITIES PROJECT COST SUMMARY PROJECT ECONOMICS PROJECT FINANCING PROJECT COST MACHINERY REQUIREMENT RAW MATERIAL REQUIREMENTS HUMAN RESOURCE REQUIREMENT REVENUE GENERATION CONTACT DETAILS OF GOVT. INSTITUTIONS / EXPERTS ANNEXURE INCOME STATEMENT CASH FLOW STATEMENT BALANCE SHEET USEFUL MANAGEMENT TIPS USEFUL LINKS KEY ASSUMPTIONS... 14

3 1 DISCLAIMER This information memorandum is to introduce the subject matter and provide a general idea and information on the subject. 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 exercised 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: SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 2

4 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, production, marketing, finance and business management. The purpose of this document is to facilitate potential investors in 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 it s successful management. Apart from carefully studying the whole document, one must consider critical aspects provided later on, which form basis of any investment decision. 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, institutional collaboration and networking initiatives. Preparation and dissemination of prefeasibility studies in key areas of investment has been a hallmark of SME facilitation by SMEDA. Concurrent to the prefeasibility studies, a broad spectrum of business development services is also offered to 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. SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 3

5 4 INTRODUCTION TO SCHEME Prime Minister s Youth Business Loans Programme, for young entrepreneurs, with an allocated budget of Rs. 5.0 Billion for the year , is designed to provide subsidised financing at 8% mark-up per annum for one hundred thousand (100,000) beneficiaries, through designated financial institutions, initially by the National Bank of Pakistan (NBP) and the First Women Bank Ltd. (FWBL). Youth Business Loans from Rs. 0.1 million to Rs. 2.0 million with tenure up to 8 years inclusive of 01 year grace period, and a debt : equity of 90 : 10 will be disbursed to SME beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwa, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA). 5 EXECUTIVE SUMMARY This particular pre-feasibility is for starting of Light Transport Vehicle (LTV). Driving is a skilful task that needs proper training and knowledge of traffic laws and regulations. There is a tremendous increase in the number of vehicles particularly in the urban cities of Pakistan. Moreover, the government has been taking steps towards effective implementation of traffic regulations. This has created a demand for formalized driver training and provision of road safety information, thereby creating an opportunity for establishing a Driving School for a prospective entrepreneur. The project is proposed to be set-up in a suitable locality of any urban city such as Lahore, Karachi, Sukkur, Hyderabad, Faisalabad, Sargodha, Multan, Quetta, DI Khan, Nowshera and Peshawar. Keeping in view the nature of services, there is a minimal requirement of establishing a formal office. The facility will comprise of 3 vehicles and employ 4 individuals including the owner / manager. The total capacity of the training service center will be to train 720 drivers annually. During the sessions, trainees shall be familiarized with the basic rules of driving along with traffic signal system, awareness about traffic rules and dealing with emergencies and accidents. Total investment in the project is Rs. 1.8 million with Rs. 1.6 million as capital investment and Rs. 0.2 million as working capital. NPV and IRR of the project is Rs million and 47% respectively with a payback period of 2.58 years. 6 BRIEF DESCRIPTION OF THE PROJECT The proposed can be started as a home based business without having any formal office set-up, with the legal status of Sole Proprietorship. The SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 4

6 facility will acquire three second hand vehicles for practical training and hire three trainers / instructors for imparting training. The instructors will also brief trainees on traffic regulations and road safety information. The driving school will train 396 individuals in the first 55% of its capacity. 7 CRITICAL FACTORS The following significant factors may be taken into account while making investment decision: Hiring of quality trainers / instructors with a special focus on engaging female drivers. Effective marketing / awareness of the service particularly with traffic police & drivers licensing section. Competitive fee structure offering value for money. Efficient utilization of idle capacity by offering Pick & Drop facilities to office executives on need basis, as an additional business opportunity. Timely and cost effective repair and maintenance of vehicles due to major / minor accidents during the training. 8 INSTALLED & OPERATIONAL CAPACITIES The facility will consist of 3 vehicles out of which two are 800 cc and one 1000 cc vehicle. The will offer a 10 day training program. The total capacity of the driving school will be to train 720 students annually. The capacity of the facility is calculated on the basis of available vehicles, and drive time of 40 minutes per trainee per day. In the first year, the training service will operate at 55% capacity and will provide training services to 396 individuals. 9 POTENTIAL TARGET MARKET / CITIES Due to development and expansion of roads and increase in the number of vehicles, the can be started in any suitable area of a big city such as Lahore, Karachi, Sukkur, Hyderabad, Faisalabad, Sargodha, Multan, Quetta, DI Khan, Nowshera, Peshawar, Abbotabad and Khuzdar etc. 10 PROJECT COST SUMMARY A detailed financial model has been developed to analyze the commercial viability of a under the Prime Minister s Youth Business Loan scheme. Various cost and revenue related assumptions along with results of the analysis are outlined in this section. SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 5

7 The projected Income Statement, Cash Flow Statement and Balance Sheet are attached as annexures Project Economics The will train 396 drivers at 55% capacity in year one with three vehicles and three trainers. The following table shows internal rate of return, payback period and net present value. Table 1: Project Economics Description Details Internal Rate of Return (IRR) 47% Payback Period (yrs) 2.58 Net Present Value (NPV) Rs. 6,308,128 Returns on the investment and its profitability are highly dependent on trained staff, marketing, and competitive fee structure. In case the is not managed efficiently, it will not be able to capitalize on the potential market and recover payments; hence cost of operating the business will increase Project Financing Following table provides details of the equity required and variables related to bank loan: Table 2: Project Financing Description Details Total Equity (10%) Rs.180,000 Bank Loan (90%.) Rs.1,620,000 Markup to the Borrower (%age/annum) 8% Tenure of the Loan (Years) 8 Grace Period (Year) Project Cost Following requirements have been identified for operations of the proposed business. Table 3: Total Project Cost Capital Investment Amount (Rs.) Vehicles 1,600,000 Total 1,600,000 Working Capital Cash in hand 200,000 SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 6

8 Total 200,000 Total Project Cost 1,800, Machinery Requirement Main equipment required for a are vehicle(s) for providing practical training to the drivers. Keeping in view the project investment size, used vehicles are proposed. Therefore, due attention and care should to be exercised while procuring these vehicles. Table 4: List of Vehicles Description Quantity Cost Rs/unit Total Rs. 800 CC 2 500,000 1,000, CC 1 600, ,000 Total , Raw Material Requirements Fuel for vehicle(s) will be the only commodity required as a raw material in this project. Table 5: Cost of Fuel No. of Fuel Unit vehicles Consumption Sr. No Petrol Rate / ltr Total Km / day / vehicle Km/ltr CC 2 12 Rs CC 1 10 Rs Average fuel cost per Kilometer is estimated to be Rs Considering total mileage of 180 KM / student (for 10 days training session), fuel cost for 396 students (55% of total capacity) is worked out to be Rs. 715, Human Resource Requirement The below table provides details of human resource required to run the Driving School. Salaries of all employees are estimated to increase at 10% annually. Table 6: Human Resource Requirement Description No. of Employees Salary per month Annual Salary Owner 1 20, ,000 SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 7

9 Driving Instructors 3 15, ,000 Total Salaries 4 780, Revenue Generation Table 7: Revenue Details Product Unit Fee (Rs./Student) Rs. 6,000 Expected no. of Students First Year No. 396 Revenue 1 st Year (Rs.) Rs. 2,376, CONTACT DETAILS OF GOVT. INSTITUTIONS / EXPERTS Principal National Logistics Cell (NLC) Driving School G. T. Road, Dina Ph: National Highways and Motorway Police (NH&MP) Training College P.O. Box #16 General Post Office, Sheikhupura Ph: SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 8

10 12 ANNEXURE 12.1 Income Statement Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Revenue 2,376,000 2,851,200 3,397,680 4,024,944 4,743,684 5,565,923 6,122,515 6,734,766 7,408,243 8,149,067 Cost of sales Cost of goods sold (Fuel Cost) 715, ,162 1,023,834 1,212,850 1,429,430 1,677,198 1,844,918 2,029,410 2,232,351 2,455,586 Operation costs 1 (direct labor) 540, , , , , , ,643 1,052,307 1,157,538 1,273,292 Vehicles Maintaince Cost 178, , , , , , , , , ,180 Total cost of sales 1,434,168 1,667,002 1,932,060 2,233,461 2,575,820 2,964,318 3,260,749 3,586,824 3,945,507 4,340,057 Gross Profit 941,832 1,184,198 1,465,620 1,791,483 2,167,864 2,601,605 2,861,765 3,147,942 3,462,736 3,809,010 General administration & selling expenses Administration expense 240, , , , , , , , , ,907 Communications expense (phone, fax, mail, internet, 47,520 57,024 67,954 80,499 94, , , , , ,981 Promotional expense 118, , , , , , , , , ,453 Depreciation expense 320, , , , , , , , , ,363 Subtotal 726, , , ,186 1,003,442 1,291,500 1,369,114 1,454,489 1,548,402 1,651,705 Operating Income 215, , , ,297 1,164,422 1,310,105 1,492,652 1,693,453 1,914,335 2,157,304 Gain / (loss) on sale of office vehicles , Earnings Before Interest & Taxes 215, , , ,297 2,124,422 1,310,105 1,492,652 1,693,453 1,914,335 2,157,304 Interest expense on long term debt (Project Loan) 134, , ,167 91,997 74,484 55,517 34,977 12, Subtotal 134, , ,167 91,997 74,484 55,517 34,977 12, Earnings Before Tax 81, , , ,301 2,049,938 1,254,587 1,457,675 1,680,722 1,914,335 2,157,304 Tax ,921 39, , , , , , ,961 NET PROFIT/(LOSS) AFTER TAX 81, , , ,056 1,792,451 1,143,899 1,316,524 1,497,078 1,683,968 1,878,344 SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 9

11 12.2 Cash Flow Statement Cash Flow Statement 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 81, , , ,056 1,792,451 1,143,899 1,316,524 1,497,078 1,683,968 1,878,344 Add: depreciation expense 320, , , , , , , , , ,363 Deferred income tax ,921 39, , , , , , ,961 Cash provided by operations - 401, , ,215 1,098,301 2,369,938 1,769,951 1,973,038 2,196,085 2,429,698 2,672,668 Financing activities Project Loan - principal repayment - (179,897) (194,829) (210,999) (228,512) (247,479) (268,019) (290,265) - - Additions to Project Loan 1,620, Issuance of shares 180, ,576, Purchase of (treasury) shares Cash provided by / (used for) financing activities 1,800,000 - (179,897) (194,829) (210,999) 2,348,304 (247,479) (268,019) (290,265) - - Investing activities Capital expenditure (1,600,000) (2,576,816) Acquisitions Cash (used for) / provided by investing activities (1,600,000) (2,576,816) NET CASH 200, , , , ,301 2,141,426 1,522,472 1,705,019 1,905,820 2,429,698 2,672,668 SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 10

12 Driving Training service 12.3 Balance Sheet Balance Sheet Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Assets Current assets Cash & Bank 200, ,053 1,018,671 1,653,057 2,540,359 4,681,784 6,204,256 7,909,275 9,815,095 12,244,793 14,917,461 Total Current Assets 200, ,053 1,018,671 1,653,057 2,540,359 4,681,784 6,204,256 7,909,275 9,815,095 12,244,793 14,917,461 Fixed assets Office vehicles 1,600,000 1,280, , , ,000 2,576,816 2,061,453 1,546,090 1,030, ,363 - Total Fixed Assets 1,600,000 1,280, , , ,000 2,576,816 2,061,453 1,546,090 1,030, ,363 - Intangible assets Total Intangible Assets TOTAL ASSETS 1,800,000 1,881,053 1,978,671 2,293,057 2,860,359 7,258,600 8,265,709 9,455,365 10,845,822 12,760,156 14,917,461 Liabilities & Shareholders' Equity Current liabilities Total Current Liabilities Other liabilities Deferred tax ,921 50, , , , , ,504 1,252,464 Long term debt (Project Loan) 1,620,000 1,620,000 1,440,103 1,245,274 1,034, , , , Total Long Term Liabilities 1,620,000 1,620,000 1,440,103 1,256,196 1,084,441 1,113, , , , ,504 1,252,464 Shareholders' equity Paid-up capital 180, , , , ,000 2,756,816 2,756,816 2,756,816 2,756,816 2,756,816 2,756,816 Retained earnings 81, , ,862 1,595,918 3,388,368 4,532,268 5,848,791 7,345,869 9,029,837 10,908,181 Total Equity 180, , ,568 1,036,862 1,775,918 6,145,184 7,289,084 8,605,607 10,102,685 11,786,653 13,664,997 TOTAL CAPITAL AND LIABILITIES 1,800,000 1,881,053 1,978,671 2,293,057 2,860,359 7,258,600 8,265,709 9,455,365 10,845,822 12,760,156 14,917,461 SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 11

13 12.4 Useful Management Tips Marketing Ads & Point of Sales Promotion: Business promotion and dissemination through banners and launch events is highly recommended. Product brochures from good quality service providers Price - Bulk Discounts, Cost plus Introductory Discounts: Price should never be allowed to compromise on service quality. Price during introductory phase may be lower and used as promotional tool. Human Resources Adequacy & Competencies: Skilled and experienced instructors should be considered an investment even to the extent of offering share in business profit. Training & Skill Development: Encouraging training and skill of self & instructors through experts 12.5 Useful Links Prime Minister s Office, Small and Medium Enterprise Development Authority, National Bank of Pakistan (NBP), First Women Bank Limited (FWBL), National Highway Authority (NHA) Government of Pakistan, Ministry of Industries & Production, Ministry of Education, Training & Standards in Higher Education, Government of Punjab, Government of Sindh, Government of Khyber Pakhtoonkhwa, Government of Balochistan, Government of Gilgit Baltistan, SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 12

14 Government of Azad Jammu & Kashmir, Trade Development Authority of Pakistan (TDAP), Securities & Exchange Commission of Pakistan (SECP), Federation of Pakistan Chambers of Commerce and Industry (FPCCI), State Bank of Pakistan (SBP), SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 13

15 13 KEY ASSUMPTIONS Table 8: Project Assumptions Projected Life of the Project in Years 10 Owner' Equity 10% Debt Financing 90% Annual Mark Up Rate (Short Term & Long Term) 8% Debt Tenure (Years) 8 Grace Period (Years) 1 General Inflation Rate Per Annum 10% Table 9: Operating Assumptions No of Working Days in One Year 300 Table 10: Revenue Assumptions Fee income per Student Rs 6,000 Course Duration 10 days Expected Number of Students per year at 55% Capacity 396 Sale price growth rate 10% Production capacity growth rate 5% Table 11: Depreciation Assumptions Vehicles 20% Life of Vehicle 05 Years Table 12: Expenditure Assumptions Communication expense 2% Of Sales Promotional Expense 5% Of revenue SMEDA Services / Information related to PM s Youth Business Loan are FREE OF COST - 14

Pre-Feasibility Study

Pre-Feasibility Study () 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