How to successfully buy an SME business!

A second-generation entrepreneur in the construction industry is not inclined to join the family business. He would rather start his own. However, his previous start up venture failed, and this time around he would like to buy a running business.

A seed production company is looking to leverage its expertise in agri-related businesses and is interested in buying companies in the food processing industry.

A Mumbai based waste management company is looking to acquire similar companies in South India to increase its market.

Just three examples, but which show the variety of reasons entrepreneurs may want to buy businesses – gaining access to clients, boosting their current business, and simply, improving their chances of success.

Let’s take a closer look at the reasons for buying a business…


  • The existing business comes with its infrastructure/team and clients, thus saving you the time it would take to build all these. Given that chances of survival and success of a new businesses are less than 10 per cent in India, buying an existing business may be a less risky proposition.
  • In some industries, obtaining regulatory approvals or large contracts may be cumbersome and time-consuming. Here, a new company is better off buying an existing business. For example, for an entrepreneur looking to start an environment testing lab, acquisition of a National Accreditation Board for Testing and Calibration Laboratories (NABL) certified lab1 would be attractive, as such certification takes more than a year to obtain. Similarly, businesses that have long term contracts with large institutions such as Indian Railways or defence organisations would be attractive as the process of empanelment with these organisations can be very cumbersome.
  • You may not have the know-how required run a new line of business and buying a business would give you access to the expertise. For example, you could be interested in renewables such as wind energy, biogas, which require very specialized expertise.
  • The new business complements your existing business and you can sell its products to your existing customers. For example, you could be in the business of selling irrigation equipment to farmers and would like to acquire businesses that sell organic fertilisers.

The process of buying a business can be long and overwhelming, requiring a long search process, followed by legal, financial due diligence and obtaining financing for the acquisition. The following steps may help you to move forward quickly.

  1. Understand your motive for purchasing a new business: The motives for investing in a business can vary from the need to own and operate a business to earning a steady income and appreciation in the value of your investment. The desire to own and operate a business can be very strong, if you come from a business family and are not keen on joining a family business. In such a case, the business must be selected based on your strengths, location, budget etc., as described in the document. If you are looking at purchasing a business as an investment, the task is much simpler because the angel investing eco system is getting organised in India and is facilitated through several angel networks, colleges and incubators.
  1. Select the sectors you are looking to invest in: Knowing what business is right for you is perhaps the most important aspect of investing in a business. Having clarity on the sector as well as your expertise is a good first step in the process of selecting a business, as it would help you narrow down your choices and simplify the process of evaluation.

    The key to identifying right business starts with understanding your expertise, experience, and interest which can add value to the business. For example, say you have experience in selling pharmaceuticals – you may want to look at companies in nutraceutical/pharma sectors, so that you can leverage your familiarity with the sector. Are you are interested in solving problems related to the environment? Does lack of access to drinking water in India seem like an opportunity to you? Then, you may want to explore companies that are in the business of water recycling.

  1. Assess your budget: Buying a business can be the most important financial decision in your life, not only because of considerable expense at the time of buying but also while running and growing the business. Therefore, it is important to assess the total outlay/budget that you can keep aside for the transaction and evaluate your funding options. If you are planning to liquidate your other assets to finance the purchase, you should estimate the time required for liquidation as well as value of the assets.

    Financing by a bank would depend on your credit profile, nature of business being bought and ability of the business to generate enough cash so that it can service the debt. Banks would find it easier to finance the purchase, if the consideration is towards assets whose value can be ascertained easily. For example, if you are purchasing a food product company and the majority of purchase value is towards the brand, banks may not be willing to fund such a transaction.

  1. Find a relevant business: This is the most difficult part, as many businesses that may be looking to sell do not openly talk about it, fearing loss of reputation. However, once you have decided on the sector, you can reach out to various stakeholders including machinery suppliers, technical consultants, bankers etc., who may be aware of businesses that are available for sale.

    You can also directly contact businesses that you are interested in. The database of such businesses can be found from the local industry associations. Additionally, there are a number of online market places for local businesses that are on sale.

  1. Evaluate the business: It is important to evaluate the reason for the owner to sell the business. Is it because they are unable to mobilise additional capital to meet their growth needs, or because market prospects for their products/services are declining? Sometimes founders want to focus their energies on other ventures or retire from the business. The key questions that you need to get addressed should include:
    1. Is the product/service relevant to the market in the short-medium and long run?
    2. What is the cost of manufacturing and sale of goods as compared to its selling price?
    3. What skills does it need to run the business; are those exclusively with the owner, and will you be able to get those skills in the market?
    4. What will you bring that will make the business more profitable?
    5. Does the business come with land and are you interested in buying the land?
    6. What are the liabilities of the business – sometimes the liabilities may not reflect on the company’s books as the owner may have taken unsecured loans (from friends/family) and promised them a share in the business.
    7. Do you want to buy a business or just its assets? Typically, if a business has huge liabilities and is being sued by its creditors, its assets would be sold separately. For example, many banks sell the assets of their borrowers that have turned into non-performing assets.

      Additionally, you can develop your own filters for evaluating a business – for example you can consider businesses that have been existing for at least three years, sell their products to other businesses (and not in the retail market) and do not have more than 50 employees.

  1. Value the business: Valuation of a business would depend on a number of factors, but most important would be its ability to generate cash flows in the future and the amount of capital it needs to grow the business to the next level. The value would also be a function of its customer base and share of revenue from repeat orders. For example, a cold storage company with regular rental income from its existing projects is less risky than a recycled plastic pallet manufacturing facility that sells its pallets to only one large customer.

    The value/price of the opportunity is also a function of who among buyer and seller needs the deal to take place urgently.

  1. Obtain financing and close the deal: Once you have informally agreed to buying a business, a letter of intent specifying your desire to buy the business, subject to completion of due diligence is typically provided. This covers several aspects such as compliance to various laws and verification of financial statements.

    In the meanwhile, financing for the sale must be arranged through a bank loan or your own resources. Even if bank financing is available, you would still need to contribute at least 25-35% of the purchase consideration.

    On completion of due diligence, a sale deed is signed indicating transfer of the business to the buyer and sale consideration. You may also want to insist on a non-compete agreement and minimum handholding for a year by the existing owner.

Buying a business is very different from buying real estate, where negotiation is largely restricted to property value. The process of purchase of a business requires wide-ranging skills including understanding seller motivation/expectations, business valuation, negotiation and obtaining financing. We suggest that you hire professional services to successfully close the deal.

How can we help?

We are an advisory firm for small and medium enterprises in green industries. We can help you evaluate the viability of your proposed green venture and assist you in raising funds for growing your business. If you are looking to purchase or sell your business, we can help you identify the right buyer/seller and hand hold you throughout the transaction.If interested, please get in touch with us at admin@finetrain.com We look forward to helping you negotiate your path to a successful SME business!

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Loans to MSME in 59 minutes — A radical reform or just an eyewash?

One of the biggest announcements for MSME sector in 2018, was the 59 minute loan scheme, which promises loans of up to INR 1 crore to MSMEs from public sector banks (PSBs) through a seamless online lending market place called PSBLOANIN59MINUTES. This web portal approves a loan in 59 minutes and connects the borrower to the bank branch for sanction and disbursal.

The process is as follows: on submission of the information online, the portal does an analysis of the data and approves or rejects a loan. For loans that are approved in-principle, the portal provides information on banks that offer required product, loan amount, rate of Interest etc. The applicant has to choose the branch of the bank through which the loan shall be processed and disbursed and make payment of a convenience fee of INR 1000. The “in-principle” approval is valid for a period of 15 days from the date of approval. The Bank receives a preliminary report from the portal, where a set of 22 parameters are checked along with profile of the promoters, business activity, analysis of past financial statements, risk scoring, assessment of limits, fraud analysis and verification from GSTIN and MCA. Then, the applicant has to approach the bank branch along with the system generated approval letter and list of indicative documents. The bank would do required due diligence and sanction/disburse the loan.

As per MSME PULSE , the size of loans to MSME (under INR 25 crore) is estimated to be around INR 25 lakh crore, of which the share of public sector banks is large (around 48%). While the share of PSBs in MSME lending has been declining, they still retain a dominant share of over 75% for loans under Rs. 10 lakh, highlighting their critical role in financial inclusion. The biggest advantage of a PSB loan is its low cost, which could be 5-7 % lower than that of NBFCs and fintech portals. For a small borrower looking to borrow a collateral free loan under INR 1 crore, PSB loans are the most accessible loans, as both private banks and NBFCs mostly lend against a security. PSB loans are also an important source of funding for the manufacturing sectors such as food processing, textile, chemicals, and auto components.

As such, this policy measure may be a sincere attempt to reduce the time and effort required to secure credit from PSBs, thus easing the life of an entrepreneur. The demand for such a portal is validated by both the large number of applications (around 1.31 lakh) received within 2 months of its launch, and their total loan value. To substantiate, assuming an average loan size of INR 30 lakhs, these applications translate into loan requirement of INR 40,000 crore, which is almost 5% of the total MSME credit for loans below INR 1 crore . However, unless these applications translate into loan disbursals, the portal would remain just another channel for the PSBs to generate qualified leads

Advantages of the portal

The difficulties in getting a loan from PSBs stems from unwillingness of the ground level staff to even acknowledge/accept the loan application. Even after a loan is approved, the high turnaround around time for the disbursal of the loan remains a challenge. Therefore, the portal is a good first step to ateast reduce the number of branches to be visited. In addition, the MIS behind the portal would make it easier for the banks to closely monitor reasons for rejection of a loan.

Performance

While the intent of the scheme is good, its success depends on the ability of PSBs to quickly disburse the loans that have been approved by the portal. According to official data, the portal received 1.31 lakh applications during the first 50 days of its launch, of which around 1.12 lakh applications were approved, with a strike rate of 85%. However of these 1.12 lakh applications, sanctions were accorded for just 40,669 cases, which translates into a loan sanction ratio of around 36%. This loan sanction ratio could actually be overstated as the applications through the portal may include those for loan renewals from existing clients of banks, which are likely to have higher approval to disbursal ratio vis-a-vis that of a new client. Even if we assume that these applications are all new, the conversion ratio does seem low, as just over a third of the approved loans seem to have been sanctioned. The above performance indicates the following gaps:
1) High approval ratio of the portal suggests one of two things: either most of SMEs that are applying through the portal have good credit quality or the portal’s credit sanction norms are relaxed. Low loan sanction ratio suggests that there are differences in the credit assessment methods of banks vis-a-vis that of the portal;
2) Takeover of loans among banks is not easy, and banks are finding it difficult to extend loans under multiple banking arrangements
3) Lack of resources at bank branches to follow up with the SME and carry out due diligence
4) Unwillingness at branch level staff to lend under CGTMSE

Suggestions

To address the above issues, some of the following steps may be needed to improve the credit evaluation process of the portal along with related policy measures to facilitate loans by banks and improve their loan disbursals:

Process improvements that may be needed to improve loan disbursal

systems to increase the likelihood of the sanction of approved loans. Specific areas that require attention are:

  • The portal should be able to capture the existing liabilities of the borrower correctly so that rejection from the banker does not take place on account of inaccurate information on the existing debt levels. Moreover, the risk rating parameters of the portal have to be similar to that of the banks so that there are no disputes in the quantum of credit sanction.
  • For borrowers seeking term loans for a new asset, the portal needs to assess viability of new projects and the availability of other resources such as required land/technology with the entrepreneur.
Policy measures to support easy lending
  • Relaxation of takeover norms would be required to facilitate easy takeover of loans among lenders. For example, for borrowers who already have a secured loan, a new lender may not be willing to provide a collateral free loan and may want to take over the existing loans as well. Similarly obtaining any enhancement on working capital loan from a different lender would be difficult, as banks would not be inclined to share security on pari passu basis for such small exposures.
  • Since MSME sector credit seekers also require assistance in filing the application, consultants enrolled with SIDBI could be incentivised to take up the work related to filling application forms
  • Many small enterprises do not have GST registration and may not want to obtain the same as the threshold turnover for GST registration has been revised. The portal may want to waive GST registration as a mandatory requirement for companies with turnover of INR 40 lakhs. The credit assessment parameter for such companies could be based on bank account statements and alternate data points such as profile of their customers, industry profitability, and track record of the utility bill payments.

In the absence of the above measures, this web portal would just be a superfluous channel for generating qualified leads for the PSBs alongside their websites and tie ups with online e-commerce platforms; what would be really enterprising is converting these leads into qualified loans for disbursal.

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Business Opportunity – Amla Processing

Amla or Aonla commonly known as Indian gooseberry, is known for its medicinal properties. It is used across a number of industries including Aurvedic medicines, Cosmetics and Food products.

The production of Amla was 9.89 lakh tonnes in FY 17, with majority of it coming from Uttar Pradesh (UP) and Madhya Pradesh (M.P).

Figure 1: Amla production and top producing states[1]

What are the key Amla based products and its manufacturing process?

Amla Candy: Amla candies are made by cutting the fruit and coating it with sugar syrup at different brix values. The fruit pieces are then dried to bring down the moisture content and coated with sugar powder, to prevent them from sticking to each other.

Amla Supari: The process is similar to that of the candy. Natural colouring agents, flavours such as mint & dry fruits are added for taste and appearance.

Amla Juice: Washed Amla fruits are transferred to shredder, Amla juice thus extracted, sterilized and packed in bottles.

Amla Powder: Amla powder is used in herbal & cosmetic industry. The fruit as a whole is dried, pulverised and packaged as per the requirements.

What is the machinery and capital required for Amla processing?

Amla processing doesn’t require large investment in machinery and infrastructure. The machinery and capital requirements are presented in Table.1

Table 1: Budget for Amla processing plant
ProductUsage/MarketMachineryTotal Budget
Amla CandyRetailAmla breaking machine, steam jacketed kettle, tray dryer and packaging machine.The budget including machinery for a capacity of 1 tonne per day and working capital would be ₹40 lakhs
Amla Supari
Amla JuiceRetail & CommercialAmla shredding machine, hydraulic press, storage tank with steam jacket and packaging machine.The budget including machinery for a capacity of 2 tonne per day and working capital would be ₹20 lakhs.
Amla PowderRetail & CommercialDryer, pulveriser and packaging machineryAmla powder making plant can be established within ₹ 10 lakhs

Why Amla Processing is an attractive opportunity?

Growing popularity of alternate medicines, health foods and herbal products are driving the demand for Amla based products. The potential for Amla extract as a food ingredient is increasing significantly, owing to the growing global nutraceuticals and functional food market.

As per a report by consumer data analytics firm Nielsen India, sales of personal care products made of natural, herbal and Ayurveda ingredients are growing 1.7 times as fast as the overall market. Given the shift towards natural products, large consumer goods companies such as Colgate, Hindustan Lever are also introducing natural variants of their products. Since Amla is a rich source of vitamin C, a very powerful antioxidant and anti-ageing vitamin, usage of Amla in cosmetics and food products will continue to grow, thus making Amla processing an attractive opportunity.

What are the challenges?

Amla is a highly perishable fruit with a short shelf life of 5-6 days. Hence, the plant runs only during the harvesting period i.e. from October to February. The plant can be used to process other products such as Fruit based bars (Guava, Mango, Pineapple, etc). One may need to invest in addional machinery such as peeler/ pulper/mixer depending on the fruit.

Other challenges for the new entrants is to create a market for their brand, which will have to compete with the well established players. Based on the product portfolio, retail network has to be established.

How can we help?

We can help you start an “Amla Processing Unit” through a number of services including viability assessment, market landscaping, technical consultation and project execution support.

[1] Horticultural Statistics at a Glance 2017 – National Horticulture Board

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Write to us: bchhatre@finetrain.com , admin@finetrain.com
Call us: 800 888 4932

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Business Opportunity in Turmeric Processing

Business Opportunity in Turmeric Processing

Turmeric (botanical name-Curcuma Longa), one of the most important spice crops in India, is used to colour and flavour the food products.The yellow pigmented fraction of Turmeric (Curcumin,)is used as a colourant in food products and also as an anti-inflammatory agent in medicinal formulations.

India is the largest Turmeric producer in the world, with an annual production of nearly 10 lakh tonnes, accounting for nearly 80 per cent of world’s production. In India, Telangana is one of the largest producers of Turmeric, followed by Andhra Pradesh, Tamilnadu and Maharashtra (see picture 1).

In FY 17, India produced 10.51 Lakh tonnes[1] of Turmeric, of which nearly 1.1 lakh tonnes valued at Rs. 1200 crores was exported. Additionally, India exported Turmeric based oleo resins and Turmeric oil, valued at around Rs. 400 crores.

 

 

Turmeric processing technology

Turmeric can be processed into two products Turmeric powder and Turmeric extracts including oleo resins and Turmeric oils.Turmeric oleo resins/oils are extracted through solvent extraction of turmeric powder. The solvent extraction plant can process a variety of spices including Capsicum, Pepper, Amla, Marigold etc. A plant of a capacity of 500 kg per day requires land of 20,000 square ft. and power load of 60 HP.

Since the extracts (oleo resins) are used in food preparation/pharmaceuticals and largely cater to exports, the oleo resin extraction operations have to be compliant with the USFDA, and European food safety guidelines. The companies that manufacture extracts usually obtain certifications such as HCAAP, Kosher, and Halal.

Key Players

Turmeric powder

The Turmeric power manufacturing is mostly done by micro enterprises and there are a number of players in each region. Additionally, most large spice powder manufacturers such as MDH spices, Everest Spices, Aachi Masala also sell turmeric powder.

Turmeric oleoresins and oils

This segment has a number of large players as well as SMEs.  The large companies extract oils from a number of spices and their products are targeted at export market. (See table 1). These are mostly based in Kerala, due to easy availability of spices. In addition to these large players, there are a number of SMEs that are spread across spice growing states such as Tamilnadu, Andhra Pradesh, Karnataka, Gujarat etc.

Table 1: Spice Extract manufacturers in Kerala
S. No.Company NameProduct RangeLocation
1.SynthiteValue added spice extracts and natural spice powderKolenchery, Kerala
2.Universal OleoresinsSpice Oils, Spice Oleoresins, natural coloursKochi, Kerala
3.Arjuna Natural ExtractsFormulations based on spice extractsAluva, Kerala
4.VD flavoursEssential oils from spicesKochi, Kerala
5.Plant LipidsSpice oils and oleoresinsKochi, Kerala
6.Kancor IngredientsOleo Resins, Essential Oils & Isolates, Mint, Menthol & Isolates, Floral Extracts, Speciality Ingredients, Organic Ingredients.Ernakulam, Kerala,
7.Plant Lipids.Spices and other Essential Oils.Kochi, Kerala
Source : FineTrain research

Key consumers of oleoresins in the domestic market include FMCG companies such as Hindustan Lever, Godrej, Colgate Pamolive, herbal products manufacturers such as Ayur Herbals, Dabur, Himalayan Drug Company, cosmetics product manufacturers such as Garnier Laboratories and pharmaceutical companies such as Dr. Reddys, Cipla etc.

Profitability and return on investment

The capital investment required for a Turmeric powder unit would be under Rs. 50 lakhs for a capacity of up to 2 tonnes per day. Since there is limited value addition in the powder manufacturing process and the manufacturer has to pay large commissions to distributors and retailers, the operating margins of such manufacturers would be thin and profitability would depend on their ability to sell large volumes.

Capital investment in Turmeric extraction capacity of 500 kg per day could be up to Rs. 2 crores. The profitability would depend on the spread between the oleo resin and Turmeric price and the yield of the extraction process.  A tonne of turmeric can yield anywhere 4-5% of extracts. Assuming that a tonne of turmeric yields 40 kgs of Curcumin (95%) and 30 litres of oil, the gross margin calculation is as under

Table 2. Turmeric Oleoresin Processing: Profitability
kgsPrice (Rs/kg)Value (Rs.)
Turmeric10009393,000
Solvents46,500
Total Raw material cost1,39,500
Oleo Resin4044981,79,920
Oil301003,000
Total revenue1,82,920
Spread (Oleoresin-Turmeric)43,420
Spread (%)24

Note: The prices of Turmeric and its Oleo resin are based on export data of 2017 provided by DGFT

The overall profitability and return on investment would depend on the producer’s ability to secure regular orders. Further, any value addition to the products by developing formulations based on the extracts can improve revenues as well as profitability.

Why Turmeric processing may be an attractive opportunity

Demand for Turmeric extracts is growing rapidly in foreign and domestic market. For example, India’s Turmeric extract exports have tripled over the past three years from Rs. 150 crores in FY 15 to Rs. 500 crores[2] in FY 18.

The infrastructure availability (cold storage, common infrastructure for grading and sorting of agri products) for food processing industry is improving as government is providing incentives for development of food parks/spice parks etc.  Further, food processing units are also being given incentives in the form of capital subsidies to set up and expand their businesses.

[1] Source: report on state wise/spice wise production by Spice Board Of India

[2]  DGFT data base: http://commerce-app.gov.in/eidb/ecomq.asp

How we can help

We can help you start a “Turmeric Processing Unit” through a number services including business viability assessment, market landscaping, technical consultation and project execution support.

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Write to us:bchhatre@finetrain.com, admin@finetrain.com

Call us: 800 888 4932

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Business opportunity : Natural gums and Resins

Introduction

Natural gums are plant products, formed by the disintegration of plant cellulose. These are typically extracted from seeds of plants like Guar, Tamarind, Cassia tora, etc. These are polysaccharides that increase the viscosity of solutions even when added in very small quantities. Natural gums are preferred over synthetic gums in food applications.

The natural resins, gums, gum-resins (NRG) and balsam’s global market are estimated to be about 1358.44 million USD. India is the second largest supplier of natural resins & gums in international market, with a share of 16.8%, next to France, which has a market share of 26%[1]. In India, the Guar gum has a lion’s share in total NRG production as well as in exports. Therefore, the focus of this blog is on guar gum.

Guar gum-Industry at a Glance

India enjoys monopoly in the Guar gum industry with a market share of over 80%, as it has the most suitable climate for Guar gum cultivation. The Guar industry is driven by the export market, as more than 70% of domestic production is exported. The major export destinations are USA, China, Canada, Germany & Russia. Rajasthan is the largest guar producing state followed by Gujarat, Haryana and Punjab. Rajasthan alone accounts for 70% of the total production in India.

Guar Seed Cross – section and Process flow

The guar seed has 3 parts – Germ (40-45% of the weight), Endosperm (38-45%) and Husk (14-16%), as shown in figure – 1. The gum powder is produced from endosperm in a two stage process. In the first stage, the guar splits are produced and the by-product is Guar Meal (67%) (Korma – 37% & Churi – 30%). The splits are then pulverized into gum powder, and the powder is further processed into various derivatives.

Figure 1: Guar gum seed break up

Derivatives of Guar Gum & Industry specific application

Guar gum has wide range of applications in Food Industry, Textiles, Oil well drilling, Cosmetics & Pharmaceuticals, Paper, Mining, Construction and Explosives. The derivatives of guar gum powder are grouped into Non-ionic, Anionic and Cationic.

Figure 2: Derivatives of Guar gum

The applications in various industries are listed in Table1.

Table 1: Applications of Guar Gum
IndustryUses
FoodThickening, gelling, emulsifying agent and stabilizer
TextileSizing & Finishing agent
Oil well drillingFluid loss controlling agent, additives in fracturing fluids. Fast Hydration Grade is used
Pharmaceuticalstablet binders, disintegrants, emulsifier, suspending agent, gelling agent, stabilizing agent, thickening agent, film forming agent, sustaining agent and coating agent
CosmeticsConditioner and viscosifier, thickener in toothpastes & shampoos
PaperTo get better finish, improved sheet formation, increased bursting & fold strength and denser surface for printing

Demand & Supply

Guar consumption was been around 22.7 lakh tonnes in the year 2016-17. The consumption is volatile and varies depending on the export market, which accounts for more than 70% of the domestic production. The graph depicts the trends in consumption of guar seed in the past decade.

Chart 1: Consumption of Guar seed in export and domestic markets from India

Globally, oil and gas industry is the biggest user and domestically food industry is the largest consumer of Guar gum. (See chart 2&3). The sector wise demand of guar gum powder in international & domestic market is shown below in Chart 2 & 3.

Chart 2 & 3: % application across industries in Domestic & International markets

On the supply side, there are more than 600 guar processing units in India with an installed capacity of around 10 lakh tonnes. The present capacity utilization of the industry is less than 50%, due to weak demand from the export markets. However, the demand is expected to increase due to increasing oil prices, which result in higher capital expenditure on oil exploration related activities.

Price Volatility of Guar Gum

The prices of guar gum powder is highly volatile (see chart 4) and are a function of factors such as crop cultivation, shale oil and gas exploration, availability and price of substitutes, etc. The users shift to the substitutes based on price competitiveness. But guar gum has its own advantages, for example: Guar gum is soluble in both hot and cold water as against Tamarind Kernel Powder (TKP), which is soluble only in hot water. The various substitutes to guar gum are discussed in Table 2,

Table 2: Substitutes to Guar gum
IndustryUses
TextileCMS (Carboxy Methyl Starch), CMTKP (Carboxy Methyl Tamarind Kernel Powder) and Sodium Alginate
PaperTKP, Potato Starch, etc
FoodXanthan Gum, Agar , CMC (Carboxy Methyl Cellouse)
CosmeticsTKP
Shale Oil& Gas ExplorationSynthetic Polymers

Chart No.4: Per kg [2] variation of Guar gum prices over a period of years

 

Guar Gum v/s TKP

Among natural gum, Guar gum faces competition from TKP. TKP is derived from the tamarind seed. It has excellent water absorption property and high viscosity as well. The application includes, thickening agent in sizing process of textile & printing industry and binding agent in pharmaceutical industry. The detailed comparison of Guar Gum & TKP is shown in Table No.3,

Investment

The minimum viable capacity is 6TPD (6 tonne per day) and the investment required to setup guar gum powder from Guar splits is INR 4 Cr, including the civil structure, machinery and working capital. The capital cost would increase by INR 2-3 Cr, if one is manufacturing the powder directly from the seed due to the additional investment in plant & machinery and working capital. The Breakeven period is more than 5 years.

Profitability & Governing factors

The profitability depends on the conversion margins, or the spread[3] between the guar gum and guar seed price. The spread has been volatile and has ranged between 1.4 times to 3 times over the past decade.  The profit margin can be increased by having control over the seed price, by engaging with farmers in contract farming. The profits/high returns can also be improved by making value added products for specific industry such as dairy/oil.

Why Guar Gum is an interesting opportunity?

The international demand for Guar Gum from oil and gas sector is likely to increase following higher oil prices.  The demand from food sector from both domestic and international markets is likely to remain strong.

Given the availability of idle domestic capacity, one could look at purchasing or leasing existing units, thereby reducing the initial capital investment. Instead, the investment could be made towards research and development to develop new derivatives for food and other applications.

How Can We Help?

If you are interested in starting up natural gum manufacturing unit, we can assist you in the following:

  • Identifying potential markets including domestic as well as international.
  • Detailed project report preparation – Financial analysis, Profit & Loss statements for a period of 7 years, calculation of ROI, etc.
  • Identifying existing units that are available for sale and in valuation of such units

[1]As per ICAR – Indian Institute of Natural Resins & Gums report

[2] In the year 2012-13, the price of guar gum hit all time high, this is due to the huge demand from the oil exploration companies.

[3] Spread is the ratio of guar gum to guar seed prices

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Write to us: bchhatre@finetrain.comadmin@finetrain.com

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BUSINESS OPPORTUNITY – FLAVOURING ADDITIVES

Flavouring additives are used in Ready-to-eat, Ready-to-cook products and beverages to enhance or modify their taste. Broadly, there are two types of flavouring agents:

Powdered flavouring additives that are extracted from vegetables, fruits and meat. These are used across a number of products such as instant noodles, pizza, snacks, etc. They are low in moisture and thus are more stable and have greater shelf life. The common process of manufacturing these additives involves roasting, extracting, blending, drying, pulverizing, and sieving followed by packaging. Some of the examples of powdered flavours include noodle masala mix, dried vegetable powder, chicken extract powder.

Liquid flavouring additives that are typically extracted from plants and herbs. The process of extraction involves solvent extraction, distillation, filtration, sterilization, and concentration followed by packaging. Oleoresins, Aloe Vera extract etc. come under this category.

Products that typically use flavouring additives include bakery, dairy, fruit juices & other fruit based beverages, soups, salads and dressings (see Figure 1).

Industry

The Indian food flavour market is estimated at around INR 15.5 billion and has been growing at around 10 per cent per annum . The market has about 100 players , including large international and domestic players as well as many small and medium enterprises. Top international players and large domestic players account for around 70 % of the market share – these comprise Givaudan (Switzerland), International Flavours & Fragrances (IFF, US), Firmenich (Switzerland), Symrise (Germany), Takasago International Corporation (Japan) and MANE (France) and SH Kelkar (Pune), Sachee Aromatics (New Delhi), Oriental Flavours & Fragrances (Valsad, Gujarat). The main customers of these are large FMCG companies, tobacco manufacturers, ice cream manufacturers and pharmaceutical companies.

Why is flavour manufacturing an attractive opportunity?

The expenditure on food accounts for 43 per cent of house hold expenditure and is growing at an annual rate of 12-13 per cent . A steady rise in consumer spend on eating out and groceries is helping packaged food (ready to eat products, biscuits, and beverages) and the food service market (quick service restaurants, home delivery of food) , which are also experiencing growth in double digits . All these factors point to a growing demand for flavour additives.

Also, flavour manufacturing is a niche business, with entry barriers such as sustained R&D efforts, long customer acquisition time and access to raw materials.

Such businesses are likely to enjoy higher profitability vis-à-vis typical food processing businesses (juice extraction, snacks manufacturing etc), where bulk volumes are needed to generate profits.

Where are the domestic flavour manufacturers located?

Most of the flavour manufacturing units are located in Maharashtra, Gujarat and Kerala as these states offer proximity to end users and easy access to raw materials such as aroma chemicals and spices/herbs.

Down south, Post bifurcation, both Andhra Pradesh and Telangana have been focussing on developing food processing sector by offering financial incentives to food processing industry and developing industrial infrastructure. Although, these two states together account for almost 20 per cent of food processing factories in the country, they don’t have many flavour manufacturing units (see Table 1), thus making it an attractive opportunity to set up a flavour manufacturing units here.

Table 1: Flavour Manufacturers from South India
S. No.Company NameProduct RangeLocation
1Aromatic Chemical & Oil CompanyFlavours, Powder & Liquid Colours, Fragrances, Emulsions, Essential Oils.Visakhapatnam, A.P
2BOS Natural Flavours.Crystals, Dehydrated Products, Essential Oils, Floral Extracts, Fruit Extracts, Spice extracts.Kochi, Kerala
3Flavours IndiaFlavours for Beverages, Dairy & Tea, Ice Creams, PharmaceuticalsPondicherry
4Florale (India)Food Flavours & Additives, FragrancesBangalore, Karnataka
5Food Ingredient SpecialitiesFlavouring essences & essential oils for biscuits & other bakery products, Ice Creams, Aerated Water, Liquors & Beverages, Flavours for pharmaceutical Products.Chennai, Tamilnadu
6Kancor IngredientsOleo Resins, Essential Oils & Isolates, Mint, Menthol & Isolates, Floral Extracts, Speciality Ingredients, Organic Ingredients.Ernakulam, Kerala
7Lux FlavoursFlavours for Dairy & Bakery products, Essential Oils, Beverages and Flavoured Water, Confectionery, Savoury, Pharmaceuticals, Alcohol, Animal Feed and Meat Industry.Chennai, Tamilnadu
8Oror Flavours & ChemicalsFlavours & Seasonings in Bakery, Confectionery, Pharma, Milk & Milk products, Beverages & Snack Foods.Madurai, Tamilnadu
9Symega Flavours IndiaFlavours for Dairy and Bakery, Beverages, Confectionery, Pharmaceuticals & Savoury.Cochin, Kerala
10Plant Lipids.Spices and other Essential Oils.Cochin, Kerala
Source: From Fragrance and Flavour Association of India

Typical operating requirements

The cost of machinery and working capital needs for an entry level capacity of around 1 tonne per day would be around INR 2 crore. The machinery depends on whether the extract is in powder or liquid form. For extracting a powder, solvent extraction method is used, whereas for extracting a liquid (oil), apart from solvent extraction, distillation or super critical fluid extraction methods are also used. Table 2 shows the typical machinery required for an entry level plant.

Key success factors

Critical success factors for this business include:

  • Nimbleness in identifying new segments such as ready-to-eat foods, branded snacks, fruit-based/energy drinks for growth
  • Good relationships with exiting suppliers and customers
  • Building up a niche segment
  • A strong R&D team that can develop new products
  • Compliance with any changing regulatory requirements
Table 2: Typical machinery needs for a Flavour Manufacturing Plant
S. No.MachineryCapacityValue (Lakh INR)
1Solvent extractor / distillation unit/super critical fluid extraction unit5 ton/ day30
2Extract mixing tank2 ton3.5
3Automatic filling and packaging machine for powder3.2
4Pulveriser1 ton per hour1.5
5Liquid extractor10
6Recovery Unit5 ton per day5
7Spray drier50
8Shaking sieve1 ton per day0.8
9Powder mixer2 ton per day5
10Automatic filling & packaging machine for liquids5.5
TOTAL114.5

How we can help you

If you are interested in setting up a flavour manufacturing unit, we can assist you in the following:

  • Competitive landscape
  • Financial viability
  • Location analysis
  • Market entry strategy
  • Regulatory issues and government incentives
  • Detailed project report preparation
  • Support in project execution

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Plastic Pipes– Business Opportunity

Indian plastic pipes industry size is estimated at around 2.5 million tonnes per annum. There are around 600 manufacturers of pipes, with the top 20 players accounting for 60 per cent of the market, and small players for the remaining 40 per cent[1].

While large manufacturers make the pipes needed for all domestic, agricultural and industrial applications (such as casing pipes, bore well column pipes, electrical & telecom ducts, agricultural pipes), smaller one’s manufacture pipes needed for last mile connectivity. These include plumbing systems, irrigation systems, electrical conduits and conduit fittings, mostly made of HDPE, LLDPE and PPR as explained in the table below.

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The Government spend on agriculture sector and irrigation schemes continues to be the main driver of pipes. For instance, Mission Bhagiratha, Telangana government’s initiative to provide piped water supply to every household in the state has given impetus to the pipe industry here. Apart from the main trunk pipelines for about a length of 5,000 km, the mission requires secondary pipelines, stretching over 50,000 km. These secondary pipelines will carry water to tanks in villages from where a village-level pipeline network extending 75,000 km will supply water to households in the state. The village level pipelines specifically require HDPE pipes[2].

Market:

In value terms, the Indian plastic pipes market stands at INR 22,000 Crores[3] and is forecast to grow at a CAGR of 10%. The market is dominated by PVC pipes that account for more than 70% (see figure 1)

Figure 1: The figure below depicts the polymer share of plastic pipes and fittings industry

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Apart from national level players such as Astral Poly Technik Limited, Supreme group of companies, Finolex industries, there are a large number of local companies, as shown in the Table 2. The local companies have strong dealer network in their region.

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Process &Technology:

Manufacturing process can broadly be divided into: mixing, extrusion, pipe sizing and down streaming. The extrusion line is customised to users’ needs, and the most important parameter is pipes’ diameter and wall thickness. 

  1. Formulation & mixing: This is required for PVC but not for any of the above-mentioned material.
  2. Extrusion: Single screw (compulsory for HDPE and LLDPE) and Twin-screw extrusion (TSE). According to the experts, if quality is imperative, one must use TSE, as it can work even without the impact modifiers and flow promoters.
  3. Pipe sizing: This can be in two ways; a) Pressure sizing, which is suitable for higher diameter pipes and b) Vacuum sizing, which is suitable for lower diameter pipes.
  4. Down streaming: This includes a number of functions such as cooling the pipes, cutting the pipes, Socketing and printing. 

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Budget:

The entry level plant (One extrusion line for manufacturing pipes for construction and irrigation industry of capacity about 100 Kg per hour) can be set up in INR 3 Crores including land, building, and working capital. Requirements for working capital would be large due to large raw material inventory and dealer credit.

Table 3 gives typical cost of machinery, which may change according to the specifications such as wall thickness and diameter of the pipes.

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How Can We Help You?

If you are interested in setting up a pipe extrusion unit, we can assist you. Our services include

  1. Market & Financial viability assessment
  2. Technical consultancy
  3. Detailed project report preparation
  4. Support in project execution 

Reach Us

Call us @ 800 888 4932

Write to us- bchhatre@finetrain.com

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[1] Source: Finolex’s MD, Saurabh Dhanorkar interview with DNA – May, 2016

[2]Source; Livemint news article – August, 2016.

[3]Source: HDFC securities – initiative coverage –  May, 2017

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Business Opportunity: Pre-Stressed Concrete Sleepers

PSC sleeper refers to steel reinforced concrete sleeper, commonly used on railway tracks. Besides Indian Railways, power plants, refineries and cement plants also use sleepers for their rail tracks. Demand driver

Indian Railways has a network of over 65,000 kilometers encompassing length and breadth of the country.  The growing population and increasing economic activity has resulted in over-utilization of its existing network.  So much so that the trunk routes of the railways comprising merely 16% of the network carry about 50 percent of the work load. The Indian railways has been routinely upgrading its network (see Table 1), however the capacity upgradation has been far below the actual requirements and the network continues to remain congested.

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The pace of railway infrastructure upgradation has picked up over the past one year, driven by the government’s initiatives to improve quality and safety of Indian railways. The Railways has committed to building 7 kms of infrastructure per day in 2016-17, which will increase to 13 Kms per day in 2017-18 and 19 kms per day in 2018-19.  Railways have identified following priority projects (See table 2) to be taken up in the medium term.

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In addition to these, Indian Railways has also proposed to create a high speed corridor network of around 10,000 kilometers. In light of the above mentioned plans, the railways are likely to develop at least 5000-8000 kilometers of rail network per year, almost 30-40% more than in the past. Assuming that per kilomer of rail would need 1600 sleepers, these plans are likely to result in an annual demand of about 1.3 crore of sleepers.

Key suppliers

The sleeper industry is dominated by a few players who are present across the country. The current capacity of the industry is around 1 crore sleepers per annum. More details on the players are provided below.

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Given the expected increase in demand by 30% to 40%, there seems to be enough room for new capacities to come up. However, one needs to analyze the regional demand and supply balance carefully.

Govt approvals and Budget

Setting up a railway sleeper unit would require approvals from Railway RDSO (Research Design and Standards Organization) as well as the Zonal Railway office.

The process of manufacturing the PSC entails strengthening of concrete, casting it into pre-defined mould and curing it. There are two popular technologies: Long line and Short bench manufacturing, with short bench manufacturing being more popular in India.

The budget requirements for a capacity of 3-4 lakh sleepers per annum could be upwards of Rs. 15 crore. Further, one needs to consider the cost of the land, the sleeper plant would need to be located in the vicinity of a railway station for the ease of transport of sleepers.

How can we Help You?

We can help you assess techno economic feasibility of a sleeper manufacturing plant including the market assessment, regulatory compliance framework, capital requirements, machinery evaluation and profitability and return on investment.

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Business Opportunity: Organic Fertilizers

Organic fertilizer is a mixture of decayed organic matter. It is usually made by gathering plant material such as leaves, grass clippings, and vegetable peels and animal waste into a pile or bin and letting it decompose with the help of earthworms, fungi or bacteria. Organic compost contains essential macro and micro nutrients for plants, often absent in synthetic fertilizers. Compost releases nutrients slowly over the cultivation period, which helps plants soak those nutrients better and make a healthy food in our plates.

The demand for organic fertilizers is rising in India as well as internationally due to increasing awareness of organic farming and sustainable agricultural practices. The market size for organic fertilizers in India stands at 2547 lakh metric tonnes as of FY 2015-16.[1]

The major consumers of organic fertilizers are horticulture farmers, farmers of export oriented crops, farmers of crops such as ginger and turmeric and urban households that use compost for their home gardens.

What are different types of organic Fertilizers?

As per the Fertiliser Control order, 1985, the organic fertilisers can be divided into three categories:

Vermin compost: Most popular form of organic fertiliser, made by decomposing the organic material with the help of Vermi, FCO has specified guideline in terms of nutrient percentage, moisture levels etc

City compost: The compost made from city waste, including household waste, municipal waste etc.

Organic manure: Compost made from animal and plant waste (including the vermi and city compost). Manure typically has higher organic content vis a vis other organic fertilisers.

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What is the market?

The market has two segments:

Horticulture farmers: Farmers growing fruits and vegetable crops use compost to reduce chemicals residue from their crops. Further, these crops are relatively more profitable vis a vis traditional field crops such as paddy, cotton and hence can afford to purchase organic compost. This segment is dominated by large fertiliser companies who have the dealer network and sales force required to reach the farmers. Below are the large players in Andhra Pradesh and Telangana.

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Nurseries: This segment has a lot of small and medium enterprises. Here the product packaging is important. Some of the players in this segment also sell only through online network.

How to get started with manufacturing of organic compost?

One needs to have a detailed understanding of the processes involved in manufacturing, marketing and selling the compost.

It’s not a very capital intensive business and hence capital requirements are not very large. One does not need many plants and equipment’s except for pits /wilgrows to dump the waste, shredder and a palletising machine. The main cost of establishing will be land and labour. A unit of capacity to process 20-30 tonnes of waste per day can be set up within a budget of INR 50 Lakhs.

The compost is also made as a by-product of a biogas plant. The biogas plant converts the organic waste into bio gas through anaerobic digestion and produces a slurry, which can be dried and used as compost.

Government incentives

There are a number of incentives available to manufacturers and farmers. It can broadly be categorized as incentives for farmers and incentives for entrepreneurs as given below.

Farmers are offered organic fertilizers at a subsidized cost

Entrepreneurs are offered incentives to set up compost manufacturing facility. For example, under National Program for organic farming, manufacturers of compost from vegetable waste are offered a subsidy of 33% of the cost of project.

Challenges
  • The market is still in its formative stage and awareness of the benefits of organic compost has just begun to spread across farmers and farmer groups.
  • Reliable Data on organic input market is not present.
  • Organic system of farming is far more expensive than doing farming using chemical fertilisers
  • The economics depend on the waste procurement cost, so those have to be tightly controlled

How can we help?

We can help you set up a compost manufacturing unit through a number of services including

  • Market viability assessment
  • Technical consultation and
  • Project execution support.

[1] Source: National Centre for Organic Farming

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Business Opportunity: Injection Moulded Products

The injection moulding technology is used for mass production of plastic products. Plastic material, in the form of granules, is melted and injected under pressure to fill a mould to create different types of rigid shapes.

Injection moulding is a popular way of manufacturing both industrial as well as household products. The most common examples of injection moulded products include PET bottle caps, plastic containers, parts of washing machine, cooler and agricultural pipe fittings.

The table below enlists a number of products that can be made through injection moulding.

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Markets

The PET preforms and bottles/container segment is more crowded as compared to industrial/agri components. The quality specifications of industrial components are more stringent vis-a-vis household segment and therefore require more investment in machinery and experience in plastic technology.

The players in the injection moulding market can be divided into the following categories –
  1. Manufacturers who also market their products: For example, Plast-O-Pack India, Mumbai manufactures and markets various designer house hold products such as microwave containers, pencil boxes, fridge bottles, containers and corporate gift items.  Bangaru Irrigation systems, Telangana manufactures and markets the sprinklers and drips and other irrigation system components.
  2. Contract manufacturers: These players manufacture goods or rigid packaging material for others. In contract manufacturing, there are two models: A) complete job work price model, and B) conversion only price model.

Under the conversion price model, the clients provide the raw material (resins/pellets) and they are billed only for conversions of resins to products, thus protecting injection/blow moulding companies from price fluctuations of the raw material. The clients in such cases usually demand stringent quality standards. However, this consumer segment is difficult to enter for a new injection moulding company as the clients specifically look for imported machinery, in house testing facility and large operational capacity.

Some of the Hyderabad based contract manufacturers include Baba Group of companies (clientele includes Asian paints, Berger paints).  Innocorp Ltd. (clientele includes furniture brands such as Neelkamal and Polyset). Nano polymers (clientele includes Neelkamal, Wipro, HBL, Acme, Asian paints).

PROCESS & TECHNOLOGY

Figure 1: Process flowchart

injection molding process
Injection machine is the heart of the whole process, as it is responsible for turning resins into melted free-flowing liquid and injecting the same into mould cavities.  The capacity of the machine is measured in terms of the pressure it exerts to inject the melted material into the mould and it is measured in either Tonnes or KiloNewton. The capacity of the machine may also be referred to as “shot weight”. Basically, Shot weight/ Injection rate of any machine is the grams of the melted raw material injected to the mould at one shot of pressure. The popular injection moulding machinery suppliers in India include Windsor Machines Ltd., Ferromatik Milacron India Pvt. Ltd., Haitian Huayuan Machinery (India) Pvt Ltd, etc.

Moulds are the most critical part of the process, apart from the injection machine. Mould designs are critical for the shape and texture of the output and also for ascertaining the required injection rate and consequently the capacity of the machine.  Mould designs are typically mentioned in terms of cavities. As such, higher the cavity, higher the production speeds.

BUDGET

While   minimum budget to start an injection moulding unit would be more than Rs 3 Crores, including land, building, and working capital, the overall cost of plant would depend on the quality standards and complexity of the final product. The cost of an injection moulding unit has four components: injection moulding machine, blow moulding machine, auxiliary equipment and working capital. Moulds are the costliest part of the plant, more so because for each different shape, a different mould will be required and the moulds are priced based on the number and complexity in design of the cavities.

The table below depicts a sample plant cost for making containers, the process involves injection moulding as well as blow moulding.

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How Can We Help You?

If you are interested in setting up an injection moulding unit, we can assist you in starting one. Our services include

  1. Market & Financial viability assessment
  2. Technical consultancy
  3. Detailed project report preparation
  4. Support in project execution

Reach Us

Call us @ 800 888 4932,

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