Entorno Cycles

We are passionate about kids & environment

25th July, 2012

Executive Summary
Indian Bicycle Industry is very large with India producing almost 10% of total Bicycle production of the world and exporting around $200 million of it. Out of the complete sales of bicycle, around 13% is constituted by the kids segment with CAGR (Compounded Annual Growth Rate) of around 20%. With many brands present in the bicycle industry, a new approach towards marketing is needed and also to penetrate competitive market cost competitiveness is required. The kids segment of bicycle is mostly unorganized with very few companies focussing on this quickly growing and lucrative section. Most of the parents who have higher purchasing power and less time to spend with their kids are mostly looking towards buying things online. This provides a good opportunity to provide various designs of hi quality kids bicycles online for the parents to buy and free them off of going to the market themselves as free home delivery is provided by the company. Also since many of the kids are very choosy and would like to customize the cycle with various models, designs and also different accessories, the online portal will provide a platform for the various people to come and select their unique cycle in terms of colour and accessories. Currently in the marketplace, a prospective customer usually goes out on their own to hunt for a bicycle either for themselves or for the kids. This usually involves dedicating some time and energy along with the money spent in transportation to and from the market and home respectively. Also transportation of the cycle to home is also a major problem. But with home delivery of the cycle along with customization of accessories and an option of Cash On Delivery with almost the same price as that with the retailer, this service provides an additional value that customer can drive out of the company. Although the online e-portal is a good way to enter the marketplace, the bulk sales in the beginning will have to be made by the retailers dealer network where both a discount and a credit period will have to be provided to the retailer to promote the sales. But in the long run it not only creates a valuable dealer network but also a loyal direct sales network with benefit of both the models.

Contents
BICYCLE INDUSTRY .................................................................................................................................. 5 Indian Bicycle Industry ........................................................................................................................ 5 Global Bicycle Industry........................................................................................................................ 6 Segments within the Indian Bicycle Industry ...................................................................................... 8 Kids Segment................................................................................................................................... 9 Indian Bicycle Industry - Manufacturing .......................................................................................... 10 Government policies ......................................................................................................................... 11 PORTERS ANALYSIS FOR BICYCLE INDUSTRY.................................................................................... 12 COMPANY DETAILS ............................................................................................................................... 14 Mission .............................................................................................................................................. 14 Vision................................................................................................................................................. 14 Keys to Success ................................................................................................................................. 14 Legal Status ....................................................................................................................................... 14 About Promoters .............................................................................................................................. 15 MARKET ANALYSIS ................................................................................................................................ 15 SWOT ANALYSIS ................................................................................................................................ 15 Competitor Analysis .......................................................................................................................... 19 Market Share of Major players ........................................................................................................ 20 Sales over the years .......................................................................................................................... 21 Survey Analysis.................................................................................................................................. 21 Purpose of visit to Kid's Bicycle Store ............................................................................................... 22 USPs Determining Purchase Decision ............................................................................................... 22 Preferred Amount to be spend on Kids Bicycle ............................................................................... 23 Customization in Bicycles.................................................................................................................. 23 Online Purchase of Bicycles .............................................................................................................. 24 OPERATIONS ......................................................................................................................................... 25 Technical Requirements.................................................................................................................... 25 The Fixed costs for manufacturing and operations would include: .............................................. 25 The Variable costs for manufacturing and operations include:..................................................... 26 Operations Strategy ........................................................................................................................... 26 Through retailers ........................................................................................................................... 26 E-Portal ......................................................................................................................................... 26 The model describes the process of billing the customer online................................................... 27 3

Flow of supply chain:........................................................................................................................ 27 MARKETING STRATEGY ......................................................................................................................... 28 Our Marketing Strategy: ................................................................................................................... 28 Branding: ........................................................................................................................................... 29 Logo ............................................................................................................................................... 29 Marketing Mix: .................................................................................................................................. 29 Product:......................................................................................................................................... 29 Price: ............................................................................................................................................. 30 Place: ............................................................................................................................................. 30 Promotion: .................................................................................................................................... 30 FINANCIAL PROJECTIONS ...................................................................................................................... 34 Assumptions & Facts Used in Financial Projections: ........................................................................ 34 Analysis of Balance Sheet (Normal Scenario) ................................................................................... 35 Application of Funds: ................................................................................................................... 35 Sources of Funds: .......................................................................................................................... 36 Analysis of Income Statement (Normal Scenario)............................................................................ 37 Cash Flow Statement ........................................................................................................................ 39 BREAKEVEN ANALYSIS....................................................................................................................... 40 SCENARIO ANALYSIS ......................................................................................................................... 41 Scenario 1...................................................................................................................................... 41 Scenario 2...................................................................................................................................... 42 Scenario 3...................................................................................................................................... 42 FINANCIAL RATIO ANALYSIS .............................................................................................................. 43 Liquidity Ratios .............................................................................................................................. 43 Profitability Ratios ......................................................................................................................... 45 WORKING CAPITAL FINANCING ........................................................................................................ 46 ANNEXURES .......................................................................................................................................... 47

BICYCLE INDUSTRY
Indian Bicycle Industry
The size of the Indian bicycle industry stands at US $1.2 billion. The number of units (finished bicycles including all segments) produced is around 12 million, according to an industry source. Of this, the number of units exported annually is about two to three million, which points to a huge demand in the domestic market. According to figures from the Engineering Exports Promotion Council, in 2007-08 India exported bicycles and components worth US $185.42 million.

The market for the premium or the lifestyle bikes targeted towards the lifestyle consumer is just about emerging. The definition of high end bikes itself is changing. Earlier the high-end bikes were considered as those selling between Rs. 5000 to 8000. However now with global brands moving into the country this definition is also changing with price-points starting from Rs.15000 to as high as a few lakhs!

The country today is on the threshold of globalisation and teaming million are looking for higher level of growth together with equitable distribution of income to improve their lots. Generally the economic signs appear to be favorable for the country to improve its performance and in turn improve the lot of its people. Obviously; this improvement is going to reflect upon the Bicycle Industry in particular and transport segment in general. With customers of the country aspiring for higher and higher the current Bicycles users will be graduating to auto two-wheelers, but there will be a new population looking to the bicycle as means of transport. Similarly a new generation of buyer will look to bicycle as a mean of leisure recreation and good way to keep fit. We, therefore, see a healthy sustained growth of cycle industry. Presuming that growth of last 3-4 years is sustained for next 10 years i.e. the time we reach the year 2010, the Indian bicycle industry would need to produce about 1.75 crore bicycles to plug the demand and supply gap. However, there will be a change in the demand pattern linked with consumer changing aspiration and choice giving way to latest technology and newer marketing concepts. Industry is already witnessing this to some extent.

The new millennium has brought new challenge of opening up of import of Cycles. The

manufacturers in India agree to the point that Indian Bicycle Industry does not foresee any problem as the product offered today by Indian manufacturers in the market are best suited to Indian conditions and are most economical and value for money products.

On the whole the future for Indian industry including Bicycle will be challenging. The domestic market will be open to good and services from global companies with low tariffs. Protection will be a thing of the past. The companies that will survive will be those which successfully restructure and modernise to achieve global competitiveness in terms of both quality, cost and distribution system.

Global Bicycle Industry

The bicycle is an important means of transportation in most developing and under-developed countries like China, India and Vietnam. In the developed world, especially in the European and North American countries, however, bicycles encompass multiple functions from basic transportation to sports. Consequently, the bicycles utility varies depending on the region, nationality and level of economic development. Global economic prosperity and seasonal factors heavily influence the bicycle industry. Economic downturns affect bicycle demand as well. Moreover, traditionally, spring and autumn are peak seasons for bicycle sales worldwide. Therefore, manufacturers adjust their output accordingly in order to avoid excess inventory. China, with a population of around 1.2 billion, consumes 25-30 million bicycles a year and in addition, exports around 15 million units. USA and Japan, with an estimated population of 250 million and 125 million respectively, consume around 20 million and 7 million bicycles a year respectively. In contrast, India, with a population of 1 billion only consumes around 12 million bicycles a year, which indicates its low penetration levels. Global bicycle production, which is today estimated at approximately 100 million units per annum, has grown at a CAGR of 0.94% between 1990 and 2000. China, which is known as the kingdom of bicycles, is the worlds largest producer of bicycles and accounted for 52% of the worlds bicycle production in 2000, followed by India (11%), Taiwan (7%) and Japan (5%).

China's bicycle industry comprises 1081 plants (including component makers) with a total capacity of around 70 million units. As a result of the prosperity in the home market in the late 1980s, production grew rapidly in the 1990s and a multitude of small assembly plants were set up. For the most part of the 1990s, however, production in China was volatile due to the changing domestic demand. China witnessed a spurt in production towards the end of the last decade as over 100 Taiwanese manufacturers shifted base to different Chinese cities because of the availability of cheap labour. USA, which was once among the top five global producers, has gradually lost market share as Chinese and Taiwanese products have flooded the US market. Of the approximately 19 million bicycles sold in the US market in 2001 (compared to 21 million in 2000), imports accounted for over 90% of the pie. USA, in fact, is the largest importer of bicycles and imports from China and Taiwan accounted for 75% and 15% of its total imports in 2001. The unit price of Chinese bicycles was lower at around US$ 41, however, compared to US$ 94 per unit for Taiwanese bicycles since the former are mainly traditional light bikes. The global trade in bicycles is estimated at around 30 million units, with Europe, North America and Japan accounting for around 70% of it. These markets are characterized by
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their large and steady demand and high retail prices. China exports around 25-30% of its bicycle production to Europe and USA. Chinese bicycle makers have secured a foothold in the high-end export markets due to their superior products, which use high-tech raw materials like titanium alloy, chrome-molybdenum alloy and carbon fibre. Europe is the largest destination for Taiwanese bicycles followed by USA. Overall, bicycle exports from China amounted to around US$ 1 billion in 2001 compared to around US$ 0.8 billion of exports by Taiwan and US$ 0.03 billion by India. Indias exports are mainly to the African and South Asian nations. Also, a major portion of Indias bicycle exports comprises standards due to the similar consumer demographics. Hero plans to increase Indias presence in the high-end segment through its recent tie-up with Japan's National Bicycle Industries whereby it will produce high-end bicycles.

Segments within the Indian Bicycle Industry

The Indian bicycle market comprises two segments: standards and specials. Standards are the workhorses of the rural economy. These cheap and rugged bicycles have remained unchanged for decades. The specials or fancy segment comprises new generation bicycles, which are more expensive. Differentiation is the name of the game here. Specials Out-pacing Standards: Standards, which accounted for over 90% of the market in the early1990s today account for only 66% of cycle sales in the country. This is mainly because: A new class of bicycles called juveniles, which are categorized in the specials segment, have over-taken the standards. The juvenile is, in effect, a standard bicycle with a more urban look, which is targetted at the rural and semi-urban youth. Its popularity can be gauged from the fact that while standard bicycles registered a compound annual growth rate (CAGR) of 2.7% between 1996-97 and 2001-02, juveniles raced ahead at 12.6% in the same period. Manufacturers have also increasingly attempted to wean away consumers to the specials segment through greater marketing push and by attractively pricing specials. This has, to an extent, hurt standard sales in semi-urban areas. Higher disposable income levels of the middle and lower middle class in urban and semiurban areas have led to higher specials sales.

To some extent, standards sales have also been affected by the irregular monsoons in recent years since rural incomes are dependent on the monsoons and standards are predominantly sold in the semi-urban and rural areas. In the last six years, standards achieved double digit growth (12%) in just one year, 1999-2000, due to unusually large purchases by the state governments of Gujarat and Andhra Pradesh for free distribution.

Kids Segment

The kids segment constitutes 6.4% of the total market share of bicycles. As per estimates, the proportion of those going in for standardised bicycles has come down from 90-95 per cent to 50-55 per cent in the last five-10 years. The consumer segment that is speedily getting bigger comprises kids. This brings relief to cycle-makers as the affordability range is higher and there is more scope for innovations.

The available bikes from China are mostly for kids, in sizes up to 18 inches. These bikes come with attractive designs as well as features. For instance, Indian companies have just recently launched battery-operated cycles but Chinese companies had offered them much earlier. Local markets still have battery-operated bikes from China for children.

Even as their designs and colourful appearance remain a plus point, a quick survey by The Tribune revealed that many local manufacturers or dealers import bikes from China and sell these under their own label.

Since people do not have much faith in Chinese cycles using our Indian labels, we are able to sell them. They look quite attractive a factor that attracts kids.The pricing too came in the way of China capturing this market. Owing to heavy duties, the difference in the pricing of Indian and Chinese bikes remained small.

Indian Bicycle Industry - Manufacturing

Ludhiana is the hub for bicycle manufacturing in India. More than 25,000 cycles per day are manufactured in Ludhiana alone. The city is home to over 1,500 factories making bicycles and components, providing employment to 0.25 million people and today it is a jewel in the crown of Indias industrial cities, according to the All India Cycle Manufacturers Association. At present. there are five major units in organized sector. accounting for 80% of the total production of bicycles. The total production of bicycles was of the tune of 15.018 million units in 2000-01 as compared to 37.000 units produced just after Independence Annual production of bicycles since 1991- small units in the non-organized sector are also accounting for a limited production of bicycles

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Government policies
Budget 2012 -13 The Budget has proposed an increase in basic excise duty from 10% to 12% and one to two% on bicycles. Service tax has also been increased from 10-12%.

It has also raised import duty on bicycle and bicycle parts from 10% to 30% and 10% to 20% respectively to save the local industry from the "dumping" of cheap bicycle and parts from China.

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PORTERS ANALYSIS FOR BICYCLE INDUSTRY

Rivalry among Existing Competitors Main competitors include Hero Cycles, Firefox, Atlas Cycles It has long history and established significant market size Increasing rivalry expected as more firms enter the attractive market (both domestic and foreign import)

Threat of New Entrants Expectation of long term demand for bicycles for kids segment remain strong However, increased competition into the market from imports from the China makes it less profitable for new entrants

Threat of Substitutes Kids Bicycles are common and range in prices Different styles and makes are widely available through many outlets Alternative recreational equipment widely available
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Bargaining Power of Buyers Buyers demand depends on discretionary income for recreational equipment Variety of distribution channels Higher income households comprises a major portion of the market Buyers demand depends on level of real disposable income and health of household

Bargaining Power of Suppliers Primary Assembly unit is located in Ludhiana so the supplies of raw materials in assembling the cycles take less time.

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COMPANY DETAILS

Mission
To provide the eco friendly mode of transport that is based on the needs of customers Our mission is to build the best service model that is based on the needs of the customers which aim at providing best services to customers with accountability and achieves maximum customer satisfaction.

Vision
To be the largest retail service provider in northern India in next 10 years. To provide holistic solutions to customers needs. To incorporate a technology to create best services experience for the customers. To bring consolidation and standardization in the Bicycle industry

Keys to Success
We believe our keys to success will be: Knowledge, Understanding and Expertise of the sector. Price Competitiveness, Quick Decision Making and Understanding Customer requirements to the last detail. Educating the customers and being holistic centre for fulfillment of their needs. Assigning the non-core work to an experienced and qualified third-party contractors and sub-contractors.

Legal Status
Eterno Cycle will be registered as separate legal entity by registering as private limited company.

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About Promoters

MARKET ANALYSIS
SWOT ANALYSIS
Strengths The Indian bicycle industry is almost entirely self-sufficient, with more than 95% of bicycle components supplied from domestic sources. It also obtains most of its raw materials, such as steel tubes, from within the country.

It concentrates on producing a simple, cheap, and rather old-fashioned roadster model. The could be seen as a deliberate attempt to satisfy the basic transportation needs of the less affluent segment of the population. The industry is capable of producing roadster model at highly competitive Price.

It has made minimal use of foreign technology, creating or adapting most of the technology it employs and emphasizing labour-intensive production techniques.

Although it procures a substantial volume of its components from a large number of small producers, final production is strongly concentrated.

More than 90% of its exports are directed towards other developing countries where the basic transportation needs of large numbers of less affluent people are far from being satisfied.

India has been eminently successful in entering into joint venture and licensing agreements for the production of bicycles and components in many developing countries. This breakthrough might be attributed to the fact that India offers a technology appropriate to the needs of many developing countries.

The domestic market is far from saturated. The replacement market alone is likely to generate annual sales of 3 million bicycles in the near future, The leisure market is just
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beginning to be tapped.

Highly skilled entrepreneurial community capable of adapting to any environment with remarkable resilience.

Low labour cost and reasonable quality/price mix, This becomes crucial as in low end segment buyer looking for reliable quality at affordable price, cost accounts for 80% to 90% of competitiveness.

Concentration of industry in Ludhiana makes it possible to benefit from collective efficiency arising out of pool of skills availability, specialized suppliers and attracting buyers besides possibilities of joint action to undertake collective facility like customs clearance.

Large numbers of supplier at same place have been instrumental in low cost infrastructure and jus-in time deliveries.

The small/tiny units in bicycle parts industry have mastered the art of manufacturing a comprehensive range components which are sturdy, reliable for both OEM and replacement market.

Industry has evolved a system of using efficient and simple technologies. The close integration of manufacturers of degeral parts has ensured that each and every portion of the basic raw material e.g., steel is used-waste generated in one activity becomes input for some other part. Besides minimizing the waste, this has resulted in better price utilization.

Indian bicycle industry has achieved a certain level of product quality standard under competitive price parameters, which makes imports of comparable Chinese, or other foreign made products uneconomical at present. An elaborate system of dealers/sub dealers has been set up over the years. These dealers assemble the bicycles making it possible for companies to dispatch cycle units in CKD form and save on cost. Such an arrangement is difficult to duplicate and given the popularity of Indian brands and lack of any well-known international brand of bicycle in that price category acts as a significant entry barrier for imports from other low cost countries like China. With the availability of spare parts all over the country at very reasonable prices, it will be difficult for any foreign player to match that advantage.
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 Some of the units have developed technological, capabilities and quality reputation to be a global sourcing center. For instance, Continental AG of Germany will source its tyre requirements for global market from Metro Tyres in Ludhiana.

Many of the Cycle entrepreneurs are aware of the emerging global challenges and are in the process of leveraging and upgrading their units by undertaking value addition, instituting cost cutting measures and setting up websites.

The United Cycles & Parts Manufacturing Association (UCPMA) is organizing a virtual exhibition on Internet as a part of its upgradation mission. The online exhibition will also feature a virtual buyer-seller meet.

Weaknesses

The Indian share in the global bicycle business is around one percent, this too is in the low cost and low quality products. For producing higher end bicycle for global and domestic market, there is need for overall improvement in vendor base as well as in the basic infrastructure and resolution of logistic issues.

The Indian Industry, however, recognizes that the quality of its bicycles has to be improved in order to increase its competitiveness in foreign markets. Upgradation of technology and quality has to b3 built in every part, every dimension of bicycle within this context, opportunities for foreign collaboration exists, although mainly for the production of certain types of components.

The basic mechanical skill of entrepreneurs is better suited to copy/adapt rather than develop new technologies. There is a need to provide technological support in the form of developing and making available superior technologies through innovative R&D efforts.

Due to lack of development of new models and use of better and lightweight material such as Aluminium alloy, India is left behind in developed markets, which are largest importers of bicycle and components.

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 There are too many tiny units, most of them nut and bolt shops operating with low-end obsolete machinery resulting in deterioration of the components.

Inelegant design and unattractive retailing

Lack of expert mechanics with dealers to assemble CKD kits following all quality norms.

Lack of technical, design and financial support from larger units for upgrading vendors especially at the lower end.

Shortage of working capital and lack of funds to meet just in time norms of assemblers.

Except for about 150 units excluding larger units, other small/tiny units do not have computer facilities and this digital divide can further exclude them from emerging possibilities of e-commerce

It is unlikely that SMEs will collaborate in product development since each firm will see this as a specific competitive advantage. This explains the secretive nature of small units and lackluster performance of various e-commerce initiatives.

Opportunities

Enormous potential to operate in a global market, though challenges of quality, cost delivery are equally large.

Germany will source its tyre requirements for global market from Metro Tyres in Ludhiana. Many of the Cycle entrepreneurs are aware or the emerging global challenges and are in the process of leveraging and upgrading their units by undertaking value addition, instituting cost cutting measures and setting up websites.

The United Cycle & Parts Manufacturing Association (UCPMA) is organizing a virtual exhibition on Internet as a part of its upgradation mission. The online exhibition will also feather a virtual buyer-seller meet.
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Threats Increased competition from foreign producers especially China, which competes on the basis of lower costs of production. Fluctuating demands as a result of economical changes. The specials would be majorly affected , as they are priced higher.

Competitor Analysis
The domestic bicycle industry is oligopolistic in nature, dominated as it is by three organized players: Hero Cycles Limited (Hero), Tube Investments of India Limited (TI) and Atlas Cycles (Haryana) Limited (Atlas). These players account for over 90% of the countrys total bicycle sales. Fringe players include Avon Cycles and Hamilton. While TI is the clear market leader in the specials segment, Hero, which is also the largest bicycle producer in the world, is a clear leader in the standards and in the overall domestic market. As TI has the largest presence in specials, and as this segment has registered the fastest growth in recent years, TIs volumes have recorded the highest growth. Although Hero has a large base of standard bicycles, it has achieved moderate, albeit, consistent growth through its strong focus on increasing its specials volumes. Of the three majors, Atlas is the most dependent on standards. Hence, its volumes have faced the greatest pressure in the current environment. The ongoing dispute in the promoter family over the division of the companys assets has further added to Atlass woes

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Market Share of Major players

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Sales over the years

According to industry estimates, the bicycle market in India is 14 million units a year, of which 5-7% belongs to the premium segment, growing at 25-30% annually. Firefox is one of them,which has a manufacturing facility in Sri Lanka from where the bicycles are imported. The Trek products are imported from China and the US. While the Firefox range is priced between Rs 4,000 and Rs 18,000, the Trek's bicycles are priced at Rs 20,000-85,000. Firefox Bikes claim that they plan to capture 2.5-5% of the total bicycle market in India by growing at the rate of 40% per year.

Survey Analysis
A questionnaire was prepared and asked to the parents & students. The objective of the questionnaire was to understand the consumers purchasing behaviour in bicycles. A total of 160 respondents were recorded for initial study. Stratified Random Sampling was used and the survey was conducted in Delhi- NCR region.

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Purpose of visit to Kid's Bicycle Store

Purpose of visit to Kid's Bicycle Store

60 50 40 30 20 10 0 Buying a New Bicycle Checking out the latest models Buying Bicycle Accessories For Services 32 28 45 55

55 out of 160 respondents had stated that they visited the Kids Bicycle Store for some repair or service work. 45 respondents had stated that they used to visit the kids bicycle Outlet to purchase accessories. 32 out of respondents had stated that they used to go to the kids bicycle store to buy a new bicycle.

USPs Determining Purchase Decision

USPs Determining Purchase Behaviour

60 40 20 0 Features Price Safety Colour of After Sales Aspects the Bicycle Service 48 35 25 32 20

The survey results indicated that 48 out of 160 respondents had considered Bicycle Features as one of the key factor in determining the Consumer Purchase. These features included the Rim Size, Chain Wheel, Bike frame, Bike Fork, Crank, Fly wheel etc. 35 out of 160 respondents had considered price as one of the key factors that determines the consumer purchase behaviour. 32 respondents had also considered colour of the bicycle as one of the distinguishing factors that aided in their purchase decisions. Although Safety aspects are

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important, only 25 respondents had considered it as one of the main factor in determining the purchase behaviour. The focus of the consumers was mostly on the features of the bicycle.

Preferred Amount to be spend on Kids Bicycle

Preferred Amount to be spend on Kid's Bicycle

70 60 50 40 30 20 10 0 63 47 28 12 10

Rs 1000-1200 Rs 1200-1500

Rs 1500-1750 Rs 1750-2000 More Than Rs 2000

63 respondents had preferred to spend around Rs 1500 to 1750 on a kids bicycle. 47 out of 160 respondents had preferred to spend around Rs 1200-1500 on a kids bicycle. As it is evident from the survey, majority of the consumers had preferred to spend in the bracket of Rs 1200 to Rs 1750.

Customization in Bicycles

Favours Customisation in Bicycles

Cant Say No Yes 0 20 40 60 80 30 40 90 100

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90 out of 160 respondents were in favour of the customization in their bicycles. These customizations were mostly in the rim size, size of wheel and other basic features of bicycles. However, the consumers also complained that it was very difficult to get the customization from the outlets owners.

Online Purchase of Bicycles

Online Purchase of Bicycles
Cant Say No Yes 0 20 40 60 80 35 40 85 100

85 out of 160 respondents surveyed stated that they favour online purchase of bicycles. The respondents were in favour of the online purchase because they believed that it was easy to get customization in the bicycles through online purchase.

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OPERATIONS
Technical Requirements The business involves the sourcing of bicycle parts from various suppliers and semi assembling them in a plant location in Ludhiana. The then semi assembled bicycle would be packed into boxes there and would be sent to Delhi for supply in various locations. Based on the requirements of the retailers as well as other players, the bicycles will either be sent as a box or would be assembled fully at the location in Delhi before it is sent. Locations have been chosen strategically to reap the benefits of being closer to the suppliers in Ludhiana and close to the customers in Delhi. A facility of 500 sq. yds. In Ludhiana and 200 sq. yds. In Delhi is needed and will be taken up on lease basis with 3 months of the rent provided as security. In Ludhiana the rent would be around Rs. 50000/ month and in Delhi it would be around Rs. 30000/ month. A website will be needed for promoting and selling the bicycles online. The e-portal construction will cost around Rs. 300000 and its maintenance cost would be Rs. 60000/ year. The e-portal will list various bicycles along with their technical features and would also display the MRP price for the bicycle. Also online payment feature would be provided by tying up with the service providers like CCAvenue for collection of the online payment. Another option of Cash on Delivery (COD) will also be provided since many of the users are apprehensive of making payments through debit/credit card. The division of whole cost will be like: 1. Fixed Costs 2. Variable Costs The Fixed costs for manufacturing and operations would include: One time website creation charges. Yearly charges for website maintenance. Stationary expenses related to invoicing of products to retailers / direct customers. Advertising expenses for print ads circulated via local daily newspapers/ comics or magazines for kids/ promotion in schools, etc. Salary and wages: including the Rs. 108000 paid to the two promoters in a quarter, and semi assembling the cycles in Ludhiana plant at a labour cost of Rs. 8000/ month/ worker.
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Rent of Rs. 80000/ month for two locations, one in Delhi and other in Ludhiana. Operating expenses including Rs. 25000/ month for two persons sales and marketing.

The Variable costs for manufacturing and operations include: Cost of the components that would be sourced from the suppliers. Cost of the material used for packing at Rs. 30/ cycle. Cost of transportation including both from Ludhiana Warehouse to Delhi Warehouse and from Delhi Warehouse to the Retailers/ Customers. The amount would beRs. 25 from Ludhiana to Delhi and Rs. 20 from Delhi to retailer / Rs. 200 in direct selling. Cost of assembling the cycle completely at Delhi Warehouse for some of the customers and retailers. Its cost will be around Rs. 30/ cycle. Operations Strategy The operations of the company would be based on two selling models. Through retailers In the first year almost 80-90% of the sales will be done through this model. It involves finding the perspective clients in terms of retailers in a particular locality and pitching to him to buy the cycles from us. A salesman will go out in the market and search for retailers who are selling cycles at their counters and present them with the models and prices of our cycles and would pitch them to buy it. An order for some cycles will be taken from him and a credit period for the goods will be provided after the cycles reach him. As soon as the payment is made fully, the next order if any will be processed. So it will remain on a single bill system policy. The order taken from the retailer will be sent to the company for processing and next customer will be searched for. E-Portal The second model will constitute about 10-20% sales of the company and will include placement of the orders online via an e-portal. The customer will visit the website and see various models which are available. The customer will then choose the model he/ she likes and click on buy button. Then the details including name, address, mobile no. etc will be taken from them and various payment options will be given including COD, CC, DC etc. The details of the order will reach the company and the delivery of the order will be made within 5-7 days. A confirmation of order by telephone in case of COD will be done before the delivery is made.

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The model describes the process of billing the customer online

Flow of supply chain: 1. The supply chain consists of the components provider, who on our need basis will provide the components to us and we will get a credit period of 8 days in the beginning. 2. Then inventory of the parts would be of around 10 days and the cycles will assembled daily at the plant. 3. The packed cycles will be booked to a transporter on contractual basis and would be shipped to Delhi Warehouse. 4. Depending on the orders for cycles, a tempo/ three wheeler goods vehicle will be used to supply the cycles to either retailers or the customers directly. 5. The payment is collected from the Retailers within 45days of the supply of the cycles and directly from the end consumers.

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MARKETING STRATEGY
Our Marketing Strategy:

1. Understand our Customer

As Peter Drucker has said, Marketing is all about knowing your customer. Therefore, understanding their requirements and making them understand the benefits of our product is the heart and soul of our marketing strategy. In order to develop a clear picture of our target customer we will use market research and analysis tools. In our case the consumers are the kids and the customers are the parents. 2. Analyse the Market Some basic market research should allow us to find market data such as total available market, market growth (historical numbers and projections), market trends, etc. 3. Analyse the Competition While designing a marketing strategy we have to ask ourselves what other choices our target customers have to gratify their needs. Researching and assessing the strengths and weaknesses of each is, therefore, must. We face competition from some well established brands like Hero, Atlas and Firefox and thus designing a unique and attention grabbing marketing strategy becomes a vital part for the sustenance of the company.
4. Research Distribution Channels

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What is the best way to deliver our product or service to our target customers? This will impact our sales strategy and our financials, as well as our marketing mix. In addition to exploiting the existing distribution channels, we are looking into the feasibility of an e-portal for direct distribution.
5. Define Your Marketing Mix

Product, Price, Place and Promotion, the 4Ps of marketing are the keys to defining a proper marketing mix. By pricing our cycles to give us a competitive edge and promoting not only in traditional manner but using internet and other mass media techniques, we are aiming at an optimum marketing mix of these 4Ps.
6. Analyse the Financials

Finance is the base of any organisation. Without proper financial analysis, feasibility checks etc. a company cannot run. Thus, putting together our marketing budget and evaluating projected marketing ROI, customer acquisition costs, etc. is important.
7. Review and Revise

Continuously evaluating the effectiveness of our marketing strategy, and revision is necessary to maintain optimum efficiency.

Branding:
Logo

Logo is a graphic mark or emblem commonly to aid and promote instant public recognition. In our case, as our tag line says We are passionate about kids & environment, our logo represents a cycle and green colour has been used the signify the importance of environment.

Marketing Mix:
Product: In the first year of operation we would be launching cycles for kids up to the age of 9 years. We will have special bicycle ranges for boys (superhero series) and girls (bubbles series). Superhero series 29

will have Batman Black, Spiderman Red, Hulk green etc and bubbles series will have bubble red, bubble blue and bubble green etc.

Customization options in terms of colors, seats etc. would be made available. By the third year we plan to extend our offerings to adults as well through our ranges Outdoor fun (Adventure Series), For racers (Pace series) and for city riding (Joy series).

Price: Our strategy is to be cost leaders in the bicycle business but we wont be compromising on quality and our prices would be the best prices available in the market. Place: Initially our target market would be concentrated in northern India especially Ludhiana and Delhi. We would be selling our bicycles through retailers and through our online portal. Amongst the retailers our main targets would be exclusive multi brand cycle stores, sports good stores etc. Promotion: Since our budget is limited we will go for cost effective promotion strategy. Advertise for free by word of mouth Word of mouth is the best way to advertise for free. Word of mouth advertising depends on reliability of the brand and for that quality is must. There are two ways to promote your business by word of mouth: 30

Get others to talk about - The best way to do this is to surpass customers expectations. This may include free gifts with each product, taking feedback from customers using our product etc. Another way to get people talking is to provide extra information like information about the history of our business. Other methods include: o Sending thank-you, birthday and seasonal cards o Offering special sales for loyal customers. o Handling customer complaints quickly and to their satisfaction o Being professional and respectful to all customers o Offer discount coupons in fliers o Offer free evaluations or consultations. o Giving free T-Shirts having companys logo and name with our products. Talk about yourself. (explained in detail)

Press Release A well written press release is an excellent way to make the public aware of our product or company. We can submit a press release to local and national newspapers, radio, television, magazines and trade publications both online and off. Making our press release attention grabbing, truthful and newsworthy to get an editors attention is necessary. For best results focus of the articles should be on a targeted audience instead of a wide readership. Print Media Advertising in local free shopper magazines. Distribution of fliers through newspapers etc.

Sponsor contests Another way to receive free advertising is to offer to sponsor a contest for a community event or large publication Community Involvement can be done in many ways: Having a "happening" -- contests, parties or picnics for our customers. Giving cycles or service donations to a charity auction. Giving free talks to community groups on the health benefits of cycling. Running booths at local fairs. Attend local business groups' meetings and business card exchanges.

Radio Advertising Radio Advertising has many advantages:

Radio is a universal medium enjoyed by people at one time or another during the day, at home, at work, and even in the car. The vast array of radio program formats offers to efficiently target our advertising money to narrowly defined segments of consumers most likely to respond to our offer. Gives our business personality through the creation of campaigns using sounds and voices Free creative help is often available Rates can generally be negotiated During the past ten years, radio rates have seen less inflation than those for other media

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Fig. Pricing of radio advertisements Radio marketing would be used intensively in the initial phase to provide momentum for word of mouth marketing. We would normally go for Super Prime time slot and would aim at advertising continuously for the first week and then monthly.

Local Television: Advantages of Television advertising:

Television permits us to reach large numbers of people on a national or regional level in a short period of time Independent stations and cable offer new opportunities to pinpoint local audiences Television being an image-building and visual medium, it offers the ability to convey our message with sight, sound and motion

Pricing: Day Price

Monday to Saturday Sunday

Rs 1000-1500 per 10 sec Rs 2000-2500 per 10 sec

We would go for local television marketing from 2nd year onwards as budget constraints do not allow us to use it in the first year. We would distribute advertisements in the ratio of 2:1 for weekdays and Sunday respectively. Mailing Lists The internet has hundreds of thousands of mailing list that we can subscribe to and sell your product or service. Even if the list group does not allow you to sell your product, it is common practice to have a 6-8 line "signature line" that is automatically put at the bottom of all outgoing messages, email responses and forwarding e-mails. It is easy to find specific mailing lists like biking groups etc. Mobile Marketing: 32

We would send SMS to retailers to advertise our products and various schemes. Social Media: Social media sites are great for building customer relationship and offer an incredible reach and the opportunity to connect with customers in an entirely new way. They also offer a wide reach, with its potential for viral marketing and traffic generated can be extremely targeted. Moreover, Social media tools are relatively inexpensive. Facebook: With millions of members with most being young and thus our potential customers, Facebook is must to advertise about our products. Easiest way is to create a Facebook page of the company and constantly update it with all the events and new products. Twitter: Twitter is yet another social media tool which can be used for protmotion of our products. Our company can make an account and people can follow it to know about the latest happenings in the company.

Website: E-portal - Our website will host an e-portal for dealing directly with customers and to cater to people who want to buy bicycles online. It will provide customization options and 360 degree view of final selection. Users will have the option to pay online or opt for Cash on Delivery. Blog Another section of the website will incorporate a blog which will provide bicycle enthusiasts to communicate with each other, share their experiences and offer help to newbies.

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FINANCIAL PROJECTIONS
Assumptions & Facts Used in Financial Projections:
We have taken few assumptions & facts for the Financial Projections. These assumptions & facts are based on the current market scenario. 1) The selling price for retailers will be Rs 1200 in the first year increasing to Rs.1600, Rs. 1900 & Rs. 1900 in the next three years respectively. This is because of the increase in the component cost. 2) But the selling price through online portal will be bit higher. The reasons for this are the different customized services provided by us. This will be cheaper as compared with the retailer price to the customers. 3) The Component cost forms around 77% of the total cost whereas the remaining 23% is composed of packing & transportation. 4) The total cost to us in the first year will be Rs. 1000 (925 + 30 +25 + 20).In the second year the cost to us is expected to increase due to surge in the component prices. 5) The other expenses include Advertisements & Stationary which is around 1% of the cost to retailer. 6) The total annual rent expenses at both the places (Ludhiana + Delhi) are summed up to Rs. 9,60,000. 7) The fixed assets are depreciated at the rate of 10% per year. 8) Our online portal needs maintenance which costs us Rs. 60,000 per year. 9) The Interest rate on working capital Loan & Loan from relatives is 15% p.a. 10) The tax is calculated on the rate 38.5%.

Table 1: Assumptions & Facts Used for Financial Projections Unit price for retailers Unit price through online Component cost/ cycle Packing/ cycle Transportation from Ludhiana to Delhi Transportation from Delhi to retailer Direct Selling Final Assembly @ Delhi/ cycle Website Maintenance Charges Stationary Expenses/ cycle Advertising Overheads/ cycle Salary
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1200 1500 925 30 25 20 200 30 60000 2 8

1600 2000 1200 30 25 20 200 30 60000 2 8

1900 2300 1475 30 25 20 200 30 60000 2 8

1900 2300 1475 30 25 20 200 30 60000 2 8

Operation Expenses Rent Expenses at Ludhiana Rent Expenses at Delhi Depreciation (% of gross Block) Interest (%) Tax (%) Financial Statements: 1) Balance Sheet 2) Income Statement 3) Cash Flow Statement

25000 600000 360000 10 15 38.5

25000 600000 360000 10 15 38.5

25000 600000 360000 10 15 38.5

25000 600000 360000 10 15 38.5

Analysis of Balance Sheet (Normal Scenario)

(Refer: annexure) The balance sheet includes Application of Funds & Sources of Funds. Application of Funds: 1) Fixed Assets 2) Current Assets Fixed Assets The fixed Assets comprises of: Sales Tax Security Deposit Website Creation Plant and Machinery Car & Bikes Mobiles Office furniture The fixed assets values Rs. 20, 50, 000 initially. It is 53% of total assets at the inception of the business. But its value remained only 36% at the end of 1st year and 19% in the 2nd year. The reason for the decrease in the fixed assets is the increase in the current assets. Our business is basically dependent more on the working capital as we rely on outsourcing & assembling components. Our credit policy is such that increases our working capital to a large extent. Current Assets The Current Assets includes:
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1) Component 2) Cash in Hand 3) Sundry Debtors Components: The components are outsourced from Ludhiana local suppliers. Initially the inventory in hand is 10 days in the first year. But second year onwards we started to optimize our resources by JIT approach. The inventory days are 8 days & 5 days respectively in the second & third year respectively. Cash in Hand: The cash / bank balances initially are around 9 lakhs. But at the end of first year cash balances will be around Rs. 1 lakh. But it increases after that as we receive the account receivables in the 2nd year onwards. Sundry Debtors: The credit policy for the retailers is 45 days. Because of it the accounts receivable increases by huge amount. It sums up to around Rs. 19 lakhs at the end of 1st year. Total Assets At the inception of the business total assets is Rs. 39 lakhs. It is projected that it will grow up to Rs. 51 lakhs at the end of first year & Rs. 82 lakhs at the end of 2nd year. Sources of Funds: The sources of Fund include: 1) 2) 3) 4) Current Liability Working Capital Loan Loan from relatives Equity

Current Liabilities: The Current Liability includes Sundry Creditors. Initially the credit policy for suppliers is 8 days. But due increase in trust & credit worthiness the credit policy will increase to 20 days. This will help us to decrease the cash conversion cycle. Working Capital Loan: The WC will play the most important role in the carrying out the business. The working capital requirement in the initial two years is very crucial. The working capital margin for each year calculated as:
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Working Capital Margin = 60% of Components & Sundry Debtors. We expect from bankers about 60% of components & Sundry Debtors. In the year 1, WC loan required will be around Rs. 14 lakhs which is just less than the Working Capital Margin. In the year 2, WC loan will increase to Rs. 20 lakhs in the 3rd quarter of the 2nd year. But our cash in hand increases and loan repayment is expected from the 4th quarter of 2nd year. At the end of 2nd year it will be around Rs. 14 lakhs and at the end of 3 rd year all the WC Loan will be repaid. Loan From relatives: In the first year due to cash crunch and more working capital requirement short term loan from relatives will be required. The interest rate on the loan will be 15% p.a. The loan requirement for the first year of operation is expected to rise up to Rs. 6.5 lakhs. The loan will be repaid by the end of the 2nd quarter of the 2nd year of operation. Equity: There are 6 promoters of the business and they will raise Rs. 6.5 lakhs each. The total equity raised amounts to Rs. 39 lakhs. The promoters will benefit from year 3 quarterly. The dividend in the 3rd quarter of 3rd year is expected to rise up to Rs. 5 lakhs. In the 4th year it is expected to pay Rs. 9 lakhs per quarter to the promoters. Analysis of Income Statement (Normal Scenario) (Refer: annexure) Sales Revenues: There are two modes of sales. They are 1) Selling via Retailers 2) E-commerce Initially in the first year the contribution expected from the former mode is 90% of total sales revenue whereas the remaining sales revenue is from E-commerce mode. Here is the Figure 1 showing the projected sales every year. The sales are increasing year by year. Our number of cycles produced per day increases from 25 initially to 50 at the end of first year. The Figure 2 shows the projected number of cycles produced every day on quarterly basis.
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Expected Sales Year Wise

25000000 20000000 15000000

sales in Rs.

10000000 5000000 0

No. of Cycles/Day Sales*

Figure 1: Expected Sales year wise in INR (Normal Scenario) No. of Cycles/Day Assembled
120 No. of Cycles per day 100 80 60 40 20 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 No. of Cycles/Day

Figure 2 : No. of cycles assembled per day every quarter Variable Cost The variable cost includes: 1) 2) 3) 4) Components Cost Packing Transportation Assembling

The average component cost per cycle during the first year is expected to be Rs. 925. This increases to Rs. 1200 in the 2nd year. This is because we will be coming with other models of adults apart from kids segment. This will increase our average cost of components. The average packing cost is Rs. 30 per cycle. Transportation cost: The transportation expenses increases from first year to 2nd year. This is because of cost of home delivery as our share of E-commerce will increase.
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Assembling: It includes final assembling at Delhi. It will cost Rs. 30 per cycle.

Expected Profit The profit expected in the first year is negative. The profit will be on increasing trend. In the second year the expected profit is around Rs. 17 lakhs. But in the 3 rd & 4th year of business it is expected to increase to around Rs. 33 lakhs.
Expected Profit After Taxes
6000000 5000000 4000000 Profit in Rs. 3000000 2000000 1000000 0 -1000000 -2000000 Year 1 Year 2 Year 3 Year 4

Figure 3: Expected Profit after Taxes on yearly basis

Cash Flow Statement (Refer: annexure) Closing Cash Balance: We as an organization would like to keep an optimum level of cash balances i.e. Rs. 2 lakhs.
Closing Balance
3500000 Closing Cash Balance in Rs. 3000000 2500000 2000000 1500000 1000000 500000 0 Quarter 1 Quarter 2 Quarter 3 Quarter 4

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Quarter 1 Quarter 2 Quarter 3 Quarter 4

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Quarter 1 Quarter 2 Quarter 3 Quarter 4

Figure 4 : Closing Cash Balances at each quarter. Initially due to cash crunch & high working capital, the closing balance is low. The optimum cash balance for our organization is Rs. 12 lakhs. Net Operating Cash Flow: The Cash Flow from operations is expected to be negative in the first year. But second year onwards it started increasing.
Net OperatingCash Flow
1000000 Net operating CF in Rs. 500000 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 -500000 -1000000 -1500000 Q16

Figure 5: Expected Net Operating Cash Flow for each quarters.

BREAKEVEN ANALYSIS
(Refer: annexure) According to the projections, our businesses will break-even in the fifth quarter of our business operation. Our fixed cost keeps on increasing but on other hand our E-commerce business is also expected to increase. This will increase the contribution margin in the 2nd & 3rd year. Because of it we will be achieving the break-even in the start of the 2nd year. Contribution Margin = Selling Price Variable price In the first year the contribution margin is equal to Rs. 182 which is about 17% of the variable cost. In the second year the contribution margin is equal to Rs. 361 which is about 26% of the variable cost. The margin is almost double the margin of the 1st year but due to increase in the average cost of components it is only 26%. In the first year, the expected lag in the break even quantity is around 5100 units of bicycles. But in the second year the break even quantity mark is lead by around 13000 units. Our business is expected to grow in the second year of its inception.

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SCENARIO ANALYSIS
Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes. Here we are considering three scenarios based on the market demand.
Scenario 1

(Refer: annexure) During normal market condition we are assuming that we are able to manufacture and sell 100 bicycles by the end of second operating year (2014-15), by gradually increasing the sales from 25 bicycles per day during first quarter of first operating year (2013-14). Detailed Balance Sheet, Profit Loss Statement and Cash Flow statement are given in Annexure. Table 2: Balance Sheet Scenario 1 Year No. of Cycles/Day Application of Funds (la) Fixed Assets (la) Other Fixed Asset Net Block Current Assets Total Assets (la) 7.00 18.45 25.74 51.19 7.00 16.40 60.00 83.40 7.00 14.35 69.20 90.55 7.00 12.30 70.45 89.75 2013-14 50 2014-15 100 2015-16 100 2016-17 100

Sources of Funds (la) Current Liabilities WC Loan Loan from Relatives Owners Fund (Equity +P/L) Total Liabilities (la) 3.70 14.00 6.50 26.99 51.19 45.40 83.40 61.05 90.55 60.25 89.75 24.00 14.00 29.50 29.50

It can be seen from the balance sheet that owners fund has been reduced to close to 27 lakhs by the end of first year due to cash losses during first year of operations, but it starts increasing after first year. We will be start paying dividend to the owners from year 3 onwards to increase our profitability on asset and owners equity. We will be paying INR 8,50,000/ quarter as dividend from third quarter of year three onwards.

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Scenario 2

(Refer: annexure) In this scenario we are expecting higher demand from market than the normal. We are assuming that we are able to manufacture and sell 150 bicycles by the end of second operating year (2014-15), by gradually increasing the sales from 30 bicycles per day during first quarter of first operating year (2013-14). Detailed Balance Sheet, Profit Loss Statement and Cash Flow statement are given in Annexure. Table 3: Balance Sheet Scenario 2 Year No. of Cycles/Day Application of Funds (la) Fixed Assets (la) Other Fixed Assets Net Block Current Assets Total Assets (la) 7.00 18.45 51.43 76.88 7.00 16.40 98.98 122.38 7.00 14.35 103.27 124.62 7.00 12.30 104.53 123.83 2013-14 100 2014-15 150 2015-16 150 2016-17 150

Sources of Funds (la) Current Liabilities WC Loan Loan from Relatives Owners Fund (Equity +P/L) Total Liabilities (la) 7.40 29.00 6.50 33.98 76.88 76.38 122.38 80.37 124.62 79.58 123.83 36.00 10.00 44.25 44.25

In an optimistic scenario we will be reaching 100 bicycles/ day by the end first year and will be expanding to 150 cycles/ day by the end of second year. We will be start paying dividend to the owners from year 3 onwards to increase our profitability on asset and owners equity. We will be paying, INR 10,00,00 in the first quarter of year three and INR 15,00,000/ quarter as dividend from second quarter of year three onwards.
Scenario 3

(Refer: annexure)

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In this scenario we are expecting a lower demand from market than the normal. We are assuming that we are able to manufacture and sell 75 bicycles by the end of second operating year (2014-15), by gradually increasing the sales from 20 bicycles per day during first quarter of first operating year (2013-14). Detailed Balance Sheet, Profit Loss Statement and Cash Flow statement are given in Annexure. Table 4: Balance Sheet Scenario 3 Year No. of Cycles/Day Application of Funds (la) Fixed Assets (la) Other Fixed Assets Net Block Current Assets Total Assets (la) 7.00 18.45 20.48 45.93 7.00 16.40 47.21 70.61 7.00 14.35 52.72 74.07 7.00 12.30 53.41 72.71 2013-14 40 2014-15 75 2015-16 75 2016-17 75

Sources of Funds (la) Current Liabilities WC Loan Loan from Relatives Owners Fund (Equity +P/L) Total Liabilities (la) 2.96 11.00 6.50 25.47 45.93 37.61 70.61 51.95 74.07 50.59 72.71 18.00 15.00 22.13 22.13

In a pessimistic projection we are expecting 75 bicycles /day. We will be paying INR 5,50,000/ quarter as dividend from fourth quarter of year three onwards.

FINANCIAL RATIO ANALYSIS

Financial ratios are useful indicators of a firm's performance and financial situation.
Liquidity Ratios

Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm.
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Current ratio is defined as follows:

Current Assets Current Ratio = Current Liabilities

The quick ratio (acid test ratio) is defined as follows: Current Assets - Inventory Quick Ratio = Current Liabilities

Cash ratio is defined as follows: Cash + Marketable Securities Cash Ratio = Current Liabilities

Liquidity ratios of the company are given below for normal scenario (scenario 1):

Table 5: Liquidity ratios (Normal Scenario) Year No. of Cycles/Day Current Ratio Quick Ratio Cash Ratio 50 6.96 5.40 0.29 100 2.50 2.19 0.09 100 2.35 2.10 0.07 100 2.39 2.14 0.11 2013-14 2014-15 2015-16 2016-17

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Profitability Ratios

Profitability ratios offer several different measures of the success of the firm at generating profits. The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows: Sales - Cost of Goods Sold Gross Profit Margin = Sales Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as: Net Income Return on Assets = Total Assets

Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows:

Net Income Return on Equity = Shareholder Equity Liquidity ratios of the company are given below for normal scenario (scenario 1): Table 6: Profitability Ratios (Scenario 1) Year No. of Cycles/Day Gross Profit Margin Return on Asset Return on Equity 2013-14 50 14% -5% -9%
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2014-15 100 18% 9% 19%

2015-16 100 17% 9% 16%

2016-17 100 17% 9% 16%

WORKING CAPITAL FINANCING

We will be giving 45 days credit period for retailers and we will be expecting to receive raw material from our supplier at a credit period of 8 days during first year and 20 days thereafter. We will be planning to keep inventory for 10 days of operation during first year and will be gradually reduced to 5 days by third year. Since the higher credit period to retailers our cash flow will be limited during first two years of operation. In order to meet our short term liabilities we will be opting for working capital financing from commercial bank at an interest rate of 15% (Base rate +5). We are also expecting bank will be sanctioned working capital loan upto 6o percentage of account receivables and raw materials. By considering this our first years sanctioned working capital limit would be INR 14,79,600 and we will be using INR 14,00,000 during first year . Since the account receivables are increasing due to increase in sales for the following year, we are expecting bank will be raising our working capital financing limit to INR 34.5 lakh in second year and approximately INR 40 lakhs during third and fourth year. But we will be using working capital financing facilities only for the first two years of operations. Summary of working capital utilization schedule is given below, detailed working capital management schedule is given in annexure.

Table 7: Working Capital Financing 2013-14 WC Financing Sanctioned WC Loan Amount 1479600 1400000 3466500 4033500 4033500 1400000 0 0 2014-15 2015-16 2016-17

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ANNEXURES

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