Biodiesel manufacturing –Very risky proposition for small businesses

Why are small businesses interested in Biodiesel?

Improving profitability and deregulation of diesel prices (the subsidy on diesel prices was removed in 2015 and diesel price has been linked to its international price) is fuelling the interest of small businesses in biodiesel. Currently, the small manufacturers of biodiesel are able to make profit margins of over 10%, provided they are able to source raw materials efficiently. Their profitability has somewhat improved due to a reduction in input palm oil imported prices following GOI’s directive to waive import duty on crude palm stearin.

The biodiesel industry has two type of players, large refineries with a capacity of 50-500 tpd (tonnes per day) or more and small players with lower economies of scale who manufacture 5-10 tonnes per day.The large corporations supply bio diesel to Oil Marketing Companies (such as HPCL,BPCL) and bulk customers such as Indian Railways. Smaller players sell their biodiesel to farmers (as fuel for their tractors), and local industries where inherent customer credit risk is high. Their product typically gets sold at a discount of Rs. 3-4 from the retail price of diesel.

Given the policy incentives and government push to promote greener fuels, lot of small businesses have started manufacturing biodiesel. But the moot question is- is this sustainable? We believe that these businesses are not equipped to manage the risks inherent in biodiesel manufacturing, arising out of lack of any linkage between biodiesel prices and its feedstock palm oil prices.

What is the risk?

Selling price of biodiesel is not linked to its raw material price

The selling price of biodiesel is linked to the retail price of diesel, and it varies depending on international prices of crude oil and duty structure. However cost of manufacturing biodiesel is linked to palm oil, a vegetable oil, prices of which is not dependent on crude oil. Thus biodiesel manufacturers inadvertently take on input commodity price risk, which they neither understand nor have capability to manage.. Also, unlike large corporates who can diversify their risks across different businesses/products, small businesses often only have only one revenue stream, thus have limited risk appetite and are impacted by concentrated business risk profile.

Biodiesel price movement is difficult to predict

For someone in the .business of manufacturing biodiesel, understanding drivers of diesel including international price movement of diesel and government policy on excise duty is critical. As can be seen in the table, excise duties, taxes contribute up to almost 50 per cent of diesel price.

Build-up of diesel prices

table

What else can go wrong?

Further, one needs to be able to anticipate the trend in palm oil price also, as a fall in diesel prices coupled with increase in palm oil prices can erode the profitability of biodiesel operations.

Given so many domestic and international variables that impact the biodiesel business, it would be difficult for a small business to manage the inherent risk, and therefore it may be advisable for them to not enter biodiesel manufacturing.

About FineTrain

FineTrain (www.finetrain.com), an advisory firm for small businesses. FineTrain provides independent, comprehensive and real time information on new business opportunities.

Reach us at admin@finetrain.com, bchhatre@finetrain.com

Call us-800 888 4932

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Business Opportunities in Medical Textiles (Meditech)

Meditech products are textile products such as bandages, wound dressings, hospital linen, surgery material etc that are used in medical services. The market is estimated to be around Rs. 4000 crores1, growing at 8-9 percent annually. Meditech is a very attractive opportunity in both Telangana and Andhra Pradesh (AP) as they have flourishing health care industries and access to cotton (AP-Telangana combined are third largest in the country). AP already has a Textile policy and Telangana is in the process of launching its new Textile policy.

Meditech Products

Meditech products can be broadly divided into four categories (see picture 1), the first two categories account for more than 70 per cent in value. Key products include surgical dressings, medical sutures, sanitary napkins and baby diapers.
Picture 1: Meditech products

These products can be woven or non-woven. Woven products such as bandages, dressing material are made of natural cotton and other fibres. Non-woven fabrics are made mostly from poly propylene, which is bound together through chemicals process. The examples of non-woven products include sanitary napkin, diapers, and surgical masks. The market for non-woven disposable products is growing faster as compared to woven products due to their higher resistance towards infection (as they are single use items) and ease of use.

Business opportunities

There are two categories of players: integrated manufacturers and convertors. Integrated manufacturers weave the fabric and then convert it into medical product, whereas convertors buy the fabric and make medical textile products from the same. Most small businesses operate as convertors. Below table shows some of the opportunities for small businesses in the Meditech area.
Table 1: Business opportunity-Medical disposables

Surgical gownFace MaskSanitary napkinDiapers
Machine (Price Rs. Lakhs)1025150175
Capacity (Pieces per day)50030001500010000
Manufacturing cost per piece (Rs.)50-700.501.55
Investment required25-30 lakhs35-40 lakhs3-4 croresmore than 5 crores

Source: A presentation by South India Textile Research Association (SITRA)

Challenges

Marketing the product remains the biggest challenge, as most of these products have to be marketed directly to the hospitals. Each hospital has its own set of standards in terms of the colour, shape, size of medical disposable. Further, the working capital cycle can be fairly long with hospital taking as much as 3 to 6 months to make payments. For some of the products such as diapers, sanitary napkins that are sold in retail market, one has to compete with established multinationals such as Procter and Gamble, (P&G), Kimberly Clark.

The Road ahead

The rising number of hospitals, awareness for health and hygiene, increasing disposable incomes and favourable government policies are key drivers for the industry. The existing level of penetration for medical disposables remains very low, (for example only 12%2 of Indian women use sanitary napkins) offering immense opportunities for new entrants. Also heavy advertising by large companies has increased awareness of such products among rural area as well. The key would be in making the products affordable to large number of people. The success would depend on understanding the market, product innovation and differentiation and ability to tide over long working capital cycle.

How can we help you

FineTrain assists entrepreneurs in converting local opportunities into viable businesses. We provide independent, comprehensive and real time information that helps entrepreneurs

  • Understand locally available business opportunities
  • Assess viability of new business ventures
  • Smoothen project execution
  • Reach us at: bchhatre@finetrain.com, admin@finetrain.com, 800 888 4932

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    Startup India: Action plan

    Startup India Action Plan was launched on 16th January, 2016 at Vigyan Bhavan, New Delhi by the Government of India (GOI), with a mission to unleash the startups from administrative obstructions and to foster innovation and entrepreneurship.

    What is a startup?

    What is StartupFor availing incentives available under startup action plan, government has defined startup as an entity that is not more than 5 years old, is registered and focused on innovation.

     

     

     

                                                Startup definition
    ParametersEligibility criteriaRemarks
    Company typeEither a LLP, registered partnership firm, private limited companyProprietorship firms are not eligible
    Years in businessThe company should be less than 5 years old.The company’s age is measured from date of incorporation
    TurnoverLess  than Rs. 25 crores
    ProductNew product, service or process(Or)a significantly improved product, service or process

     

    (This  is difficult to ascertain, therefore, the government has defined the eligibility parameters, explained in the adjoining column)

    The startup should:

    1. Be endorsed by an incubator established in a post graduate college or by an incubator that is funded/recognized by government
    2. Be funded by a Venture Capital fund/angel fund/PE fund that endorses the innovative nature of its business.
    3. Have a  patent from Indian Patent and Trademark office

     

    Key measures:  The Startup India Action Plan can be broadly divided into three parts as shown below.

    Startup Indian Action Plan

    Ease of doing business

    1. Easy registration: Company registration through an app
    2. Self-certification:
    • Startups will be allowed to self-certify compliance with nine labor laws; no inspection will be conducted for three years
    • White startups (i.e., software startups) will be allowed to self-certify compliances with environment laws
    • Startups do not have to pay income tax for first 3 years
    1. Easy exit:
    • Startups allowed to close within 90 days of submitting the application for closure

    Funding

    1. The government plans to set up a INR 10,000 crore fund to invest in startups, of which INR 500 crore corpus is towards a Credit Guarantee Fund, which will make it easier for startups to obtain a bank loan
    2. Exemption on long term capital gains, if capital gains are deployed in a fund that invests in startups, or if these gains are used to purchase assets in a startup
    3. The GOI plans to set up a specific fund for investing in bio-technology startups

     Fostering Innovation

    1. Industry-Academia Partnership
    • Incubators at engineering and management colleges to support technology driven innovation
    • Research parks in IITs, so that research based companies could be housed there and benefit from their research expertise
    • Funding support for setting up new incubators by both government as well as private institutions
    • Incubators for bio-technology startups
    1. Government to hold startup fest to facilitate exchange of ideas between incubators, investors and entrepreneurs
    2. Innovation focused programs for school and college students

    How Finetrain Can Help:

    The startup mission couldn’t have come at a better time: The business environment in India is becoming more entrepreneur friendly, as also reflected in the World Bank’s recent report on ease of doing business across countries.

    If you are thinking about a new venture, now is the time to start. Finetrain can assist you in identifying locally available opportunities that can be converted into viable businesses. We can help you with:

    • Comprehensive, real-time information on local opportunities
    • Assessing viability of specific opportunity
    • Facilitating connections to sector experts and/or professionals who can help you in implementing your plans

    Contact:

    Write to us: bchhatre@finetrain.com

    Call us: 800 888 4932

    Visit us: www.finetrain.com

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    Neem coating of Urea : Attractive business opportunity for small and medium enterprises

    Neem oil production a big opportunity for small businesses?

    Neem oil production – attractive opportunity for small businesses?

    The recent GOI (Government of India) directive to urea manufacturers to compulsorily coat 75 per cent of their urea with neem is likely to result in huge incremental business opportunity worth ~INR 5000 Crores for small businesses…

    http://www.thesmetimes.com/index.php/extras/latest-news/2297-neem-coating-of-urea%E2%80%93attractive-business-opportunity-for-small-scale-industries-ssi-and-small-and-medium-enterprises-smes.html

     

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    Introducing FineTrain

    FineTrain is launching a blog today. We are passionate about issues that surround small businesses and this space is focused on spreading awareness about various tools that can benefit entrepreneurs. Read on to know more….

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