Defense Market: An Important Growing Market For Quality Products

CAPITAL BUDGETING
Emerging Dairy Markets:
 Food service institutional market: it is growing at double the rate

of consumer market.
 Defense market: An important growing market for quality products

at reasonable prices.
 Ingredients market: A boom is forecast in the market of dairy

products used as raw material in pharmaceutical and allied industries.
 Parlor market: The increasing away - from - home consumption

trend opens new vistas for ready - to - serve dairy products which
would ride piggyback on the fast food revolution sweeping the urban
India.
India, with her sizable dairy industry growing rapidly and on the path of
modernization, would have a place in the sun of prosperity for many decades to come.
The one index to the statement is the fact that the projected total milk output over the
next 15 years (1995 - 2010) would exceed 1457.6 million tones which is twice the
total production of the past 15 years!
Penetration of milk products:
Western table spreads such as butter, margarine and jams are not very popular in
India. All India penetration of butter / margarine is only 4%.This is also largely
represented by urban area, where penetration is higher at 9%. In rural areas, butter /
margarine have penetrated in 2.1% of households only. The use of these products in
the large metros is higher, with penetration at 15%.
Penetration of cheese is almost nil in rural areas and negligible in the urban areas. Per
capita consumption even among the cheese - consuming households is a poor 2.4kg
pa as compared to over 20kg expensive products and also non - availability in many
parts of the country Butter, margarine and cheese products are mainly manufactured
by organized sector.
A.K.R.G. P.G. College 49

CAPITAL BUDGETING
Similarly, penetration of ghee is highest in medium sized towns at 37.2% compared to

31.7% in all urban areas and 21.3% in all rural areas. The all India penetration of ghee
is 24 1%. In relative terms, penetration of ghee is significantly higher in North
accounts for 57% of ghee consumption and west for 23%. A large part of ghee is
made at home and by small / cottage industry form milk. The relative share of
branded products in this category is very low at around 1-2%.
Milk powder and condensed milk have not been able to garner any significant
consumer acceptance in India as indicated by a very low 4.7% penetration. The
penetration is higher at 8.1% in urban areas and lower at 3.5% in rural areas. Within
urban areas, it is relatively higher in medium sized towns at 8.5% compared to 7.7%
in large metros.
Market Size And Growth:
Market size for milk (sold in loose / packaged form) is estimated to be 36mnMT
valued at Rs 470bn. The market is currently growing at round 4%pa in volume terms.
The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan,
Gujarat, Maharasthra, Andhra Pradesh, Karnataka and TamilNadu, the manufacturing
of milk products is concentrated in these milk surplus States. The top 6 states viz.
Uttar Pradesh, Punjab, Rajasthan, Gujarat, Tamil Nadu, and Madhya Pradesh together
account for 58% of national production.
Milk production grew by a mere 1% pa between 1947 and 1970. Since the early 70’s,
under Operation Flood, production growth increased significantly averaging over 5%
pa.
About 75% of milk is consumed at the household level which is not a part of
commercial dairy industry Loose milk has a larger market in India as it is perceived to
be fresh by most consumers. In reality however, it poses a higher risk of adulteration
and contamination.

CAPITAL BUDGETING
The production of milk products, i.e. milk products including infant milk food, malted
food, condensed milk & cheese stood at 3.07 lakh MT in 2009, whereas that of malted
food is at 65000MT. Cheese and condensed milk production stands at 5000 and 11000
MT respectively in the same year.
(Source: Annual Report 2009-2010, DEPI)
Major Players:
The packaged milk segment is dominated by the dairy cooperatives. Gujarat Co-
operative Milk Marketing Federation (GCMMF) is the largest player. All other local
dairy cooperatives have their local brands (For e.g. Gokul, Warana in Maharashtra,
Saras in Rajasthan, Verka in Punjab, vijaya in Andhra Pradesh, Aavin in Tamil Nadu,
etc). Other private players include J K Dairy, Heritage Foods, Indiana Dairy, Dairy
Specialties, etc Amrut Industries, once a leading player in the sector has turned
bankrupt and is facing liquidation.
3. EXPORT POTENTIAL:
India has the potential to become one of the leading players in milk and milk product
exports. Locational advantage: India is associated amidst major milk deficit countries
in Asia Africa. Major importers of milk and milk products are Bangladesh, China,
Hong Kong, Singapore. Thailand, Malaysia, Philippines, Japan, UAE, Oman and
other gulf countries, all located close to India.
Low Cost of Production:
Milk production in scale insensitive and labour intensive. Due to low labor cost, cost of
production of milk is significantly lower in India. Concerns in export competitiveness are
Quality:
Significant investment has to be made in milk procurement, equipments, chilling and

refrigeration facilities. Also, training has to be imparted to improve the quality to bring it up to
international standards.

CAPITAL BUDGETING
Productivity:
To have an exportable surplus in the long-term and also to maintain cost competitiveness, it is
imperative to improve productivity of Indian cattle.
There is a vast market for the export of traditional milk products such as ghee, paneer,
shrikhand, rasgolas and other ethnic sweets to the large number of Indians scattered all over the
world.
India's exports of milk products:
Description (Quantity,
M.T: Value, 2005-06 2006-07 2007-08
Rs. Million) Quantity Value Quantity Value Quantity Value
Skimmed milk powder 4,638.620 335 320 282.700 19.640 5.000 0.375
Milk and milk food for 8.270 2.019 111.370 4,270 11.000 2.020
babies
Milk cream 332.230 28 040 1.000 0.084 -

-
Sweetened condensed 41.730 2.840 9.220 0.970 60.390 7.220
milk
Whey 78.460 3.750 11.500 1.010 6.000 0.342
Ghee / Butter / Butter 7,895.080 431.10 299.970 19.20 452.080 238950

oil

CAPITAL BUDGETING
Cheese
(a) Fresh 0.100 0.0130 - - - -
(b) Processed 5.670 1.200 2.10 0.375 22.100 2.190
(c) Other 66.640 8.350 36.780 0.690 24.840 4.550
Total - 872.70 - 52.40 - 255 .

600
What does the Indian Dairy Industry has to Offer to Foreign Investors?
India is a land of opportunity for investors looking for new and expanding markets.
Dairy food processing holds immense potential for high returns Growth prospects in
the dairy food sector are termed healthy, according to various studies on the subject
The basic infrastructural elements for a successful enterprise are in place.
• Key elements of free market system

• Raw material (Milk) availability
• An established infrastructure of technology
• Supporting manpower
An entrepreneur's participation is likely to provide attractive returns on the investment

in a fast growing market such as India, along with an export potential in the Middle
East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and other
countries in the region.
Among several areas of potential' participation by NRI's and foreign investors. The
following list outlines a few promising opportunities:
Biotechnology:
 Dairy cattle breeding of the finest buffaloes and hybrid cows

CAPITAL BUDGETING
 Milk yield increase with recombinant somatotropin

 Recombinant chymosin, acceptable to vegetarian consumers
 Dairy cultures, probiotics, dairy biologies, enzymes and coloring materials

for food processing
 Fermentation derived foods and industrial products alcohol, citric acid, lysine,
flavor preparations, etc.
 Biopreservative ingredients based on dairy fermentation, viz., Nisin,
Pedicoccin, Acidophilin, Bulgarican contained in dairy powders.
Dairy / food processing equipment:
Potential exists for manufacturing and marketing of cost competitive food processing
machinery of world - class quality.
Food packaging equipment:
Opportunities lie in the manufacturing of both machinery and packaging materials

that help develop brand loyalty and a clear edge in the marketing of dairy foods.
Distribution channels:
For refrigerated and frozen food distribution, a world class cold chain would help in
providing quality assurance to the consumers around the region.
Retailing:
There is scope for standardizing and upgrading food retailing in major metropolitan
cities to meet the shopping needs of a vast middle class. This area includes grocery
stores of European and North American quality, warehousing and distribution.
4. PRODUCT DEVELOPMENT:

CAPITAL BUDGETING
Dairy foods can be manufactured and packaged for export to countries where Indian
food enjoys basic acceptance. The manufacturing may be carried out in contract
plants in India. An option to market the products in collaboration with local
establishments or entrepreneurs can also be explored, products exhibiting potential
include typical indigenous dairy foods either not available in foreign countries or
products whose authenticity may be questionable. Gulabjamuns, Burfi, Peda,
Rasagollas, and a host of other Indian sweets have good business prospects.
Products typically foreign to India but indigenous to other countries could also be developed for
export. Such products can be manufactured in retail package sizes and could be produced from
milk of sheep, goats and camel. Certain products are characteristically produced from milk of a
particular species. For example, Feta cheese is used in significant tonnage, in Iran. Sheep milk is
traditionally used for authentic Feta cheese. Accordingly, India's goat and sheep herds can be
utilized for the manufacture of such authentic products.
Ingredient manufacture:
Export markets for commodities like dry milk, condensed milk, ghee and certain cheese
varieties are well established. These items are utilized as ingredients in foreign countries. These
markets can be expanded to include value - added ingredients like aseptically packaged cheese
sauce and dehydrated cheese powers
• Cheese sauce:
Canned cheese sauce is made from real cheese to which milk, whey, modified food starch,
vegetable oil, colorings and spices may be added. Cheese sauce is useful in kitchens for the
preparation omelet, sandwiches, entrees, and soups. In addition, cheese sauce is used as a
topping on dishes.
• Cheese powders:
cheese powders are formulated for dusting or smearing of popular snacks like potato
chips, crackers, etc. they impart flavor and may be blended with spices.With the

CAPITAL BUDGETING
globalization of food items, an opportunity should open up for food service and
institutional markets
Indian (traditional) Milk Products:
There are a large variety of traditional Indian milk products such as
MAKKHAN - UNSALTED BUTTER GHEE - BUTTER OIL PREPARED BY
HEAT CLARIFICATION, FOR LONGER SHELF LIFE

KHEER - A SWEET MIX OF BOILED MILK, SUGAR AND RICE
BASUNDI - MILK AND SUGAR BOILED DOWN TILL IT THICKENS
RABRI - SWEETENED CREAM
DAHI - A TYPE OF CURD
LASSI - CURD MIXED WITH WATER AND SUGAR / SALT
CHANNA - MILK MIXED WITH LACTIC ACID TO COAGULATE.
(PANEER)
KHOA - EVAPORATED MILK. USED AS A BASE TO PRODUCE
SWEET MEATS
The market for indigenous based milk food products is difficult to estimate as most of
these products are manufactured at home or in small cottage industries catering to
local areas.
Consumers while purchasing dairy products look for freshness, quality, taste and
texture, variety and convenience. Products like Dahi and sweets like Kheer, Basundi,
Rabri are perishable products with a shelf life of less than a day. These products are
therefore manufactured and sold by local milk and sweet shops. There are several
such small shops within the vicinity of residential areas Consumer loyalty is built by
consistent quality, taste and freshness. There are several sweetmeat shops, which have
built a strong brand franchise, and have several branches located in various parts of a
city.

CAPITAL BUDGETING
Branding of Traditional Milk Products:
Among the traditional milk products, ghee is the only product which is currently
marketed, in branded form. Main ghee brands are Sagar, MilkMan (Britania), Amul
(GCMMF), Aarey (Mafco Ltd), Vijaya (AP Dairy Development Cooperative
Federation), Verka (Punjab Dairy Cooperative). Everyday (Nestle) and Farm Fresh
(Wockhardt).
With increasing urbanization and changing consumer preferences, there is possibility

of large scale manufacture of indigenous milk products also The equipments in milk
manufacturing have versatility and ca be adapted for several products for instance,
equipments used to manufacture yogurt also can be adapted for large scale production
of Indian curd products (dhai and lassi). Significant research work has been done on
dairy equipments under the aegis of NDDB.
Mafco Limited sells Lassi under the Aarey brand and flavored milk under the Energee
franchise (in the western region, mainly in Mumbai). Britannia has launched flavored
milk in various flavors in tetra packs.
GCMMF has also made a beginning in branding of other traditional milk products
with the launch of packaged Paneer under the Amul brand. It has also created a new
umbrella brand “Amul Mithaee'', for a first new product Amul Mithaee Gulabjamun
has already been launched in major Indian markets.
Western Milk Products:

CAPITAL BUDGETING
Western milk products such as butter, cheese, and yogurt have gained popularly in the
Indian market only during the last few years. However consumption has been
expanding with increasing urbanization.
Butter:
Most Indians prefer to use home made white butter (Makkhan) for reasons of
taste and affordability.Most of the banded butter is sold in the towns and cities. The
major brands are Amul is the leading national brand while theother players have
greater shares in their local markets. The latest entrantin the butter market has been
Britannia. Britannia has the advantages of a widedistribution reach and a strong brand
recall. Priced at par with the Amulbrand, it is expected to give stiff competition to the
existing players. In 2009-2010 the butter production is estimated at 4 purposes rest all
is in theyellow form.
Cheese:
The present market for cheese in India is estimated at about 9.000 tonnes and is growing at the
rate of about 15% per annum. Cheese is mainly consumed in the urban areas. The four metro
cities alone account for more than 50% of the consumption. Mumbai is the largest market
(accounting for 30% of cheese sold in the country), followed by Delhi (20%), Calcutta (7%)
and Chennai (6%). Mumbai has a larger number of domestic consumers, compared to Delhi
where the bulk institutional segment (Mainly hotels) is larger.
Demand for various types of cheese in the Indian market:
Type of Cheese % of total

consumption
Processed 50
Cheese spread 30
Mozzarella 10
Flavored / Spiced 5
Others 5

CAPITAL BUDGETING
The major players are Amul, Britannia, and Dabon international dominating the market. Other
major brands were Vijaya, Verka and Nandini (all brands or various regional dairy
cooperatives) and Vadilal. The heavy advertising and promotions being undertaken by these
new entrants is expected to lead to strong 20% growth in the segment. Amul has also become
more aggressive with launch of new variants such as Mozzarella cheese (used in Pizza), cheese
powder, etd.
The entry of new players and increased marketing activity is expected to expand the
market. All the major players are expanding their capacities.
Milk powder:
Milk powder is mainly of 2 types
• Whole milk powder
• Skimmed milk powder
Whole milk powder contains fat, as distinguished from skimmed milk powder,
which is produced by removing fat from milk solids. Skimmed milk powder is
preferred by diet conscious consumers. Dairy whiteners contain more fat than
skimmed milk powder but less compared to whole milk powder. Dairy whiteners
are popular milk substitute for making tea coffee etc. The penetration of these
products in milk abundant regions is driven by convenience and non perishable
nature (longer shelf life) of the product.
Dairy sector of advanced nations export milk products with a subsidy of $1000 per
tonne with a level of subsidy more than 60% of the price of milk powder produced
in India, this has led to large scale imports of milk powder both in whole and
skimmed form. To protect the domestic sector from these subsidized imports the
central government has recently increased the basic import duty on all imports of
milk powder more than 10000MT the basic customs duty has been left unchanged at
15%.

CAPITAL BUDGETING
In 2009-2010 India is estimated to have imported about 18,000 tonnes of milk

powder against a total estimated production of 2.40 Lakh MTs. In 2010-11 India is
expected to export 10000 MT of skimmed milk powder due to rise in international
prices to $2300 per MT from last year's levels of $1400per Mt. These expectations
are based on the strong demand from Russia, East Asia and Latin America, and also
on tightening of supply in EU, which accounts for 75% of the annual global
skimmed milk powder exports.
Major players:
Milk powder / Dairy Whiteners: major skimmed milk brands are sagar (GCMMF)
and Nandini (Karnataka Milk Federation), Amul Full Cream milk powder is a
whole milk powder brand.
Leading brands in the dairy whitener segment are Nestele's Everyday, GCMMF's
Amulya, Dalmia industry's Sapan, Kwality Dairy India's KreamKountry,
Wockhardt's Farm Fresh and Britannia's Milkman Dairy Whitener.
Condensed Milk:
The condensed milk market has grown from 9000 MT in 2008 to 11000 MT in
2009. condensed milk is a popular ingredient used in home - made sweets and
cakes. Nestle:s Milkmaid is the leading brand with more than 55% market share.
The only other competitor is GCMMF's Amul.
Value addition in milk powder - infant foods:
Nestle is the market leader in the segment. This is a category where brand loyalties
are very strong as mothers want the best for their babies Heinz is the only other
significant competitor to Nestle in this segment. Nestles Cerelac and Nestum
together have around 80% market share and Heinz's Farex has close to 18% share.
Wockhardt is a relatively new entrant with its First Food Brand. Wockhardt also

CAPITAL BUDGETING
proposes to launch a new baby food Easum containing moong (moong is one of the
easily digestible pulses) The Easum brand will directly compete with Nestles
Nestum (made from rice). In infant formula also Nestle’s Lactogen formula and
Lactogen standard formula are the leading brands with around 75% market share.
Other brands are Heinz's Lactodex Farex, Wockhardt's Raptakos, and Arnul's
Amulspray
5. REGULATORY FRAME WORK:
The dairy industry was de - licensed in 1991 with a view to encourage private
investment and flow of capital and new technology in the segment. Although de-
licensing attracted a large number of players, concerns on issues like excess
capacity, sale of contaminated / substandard quality of milk etc induced the
government to promulgate the MMPO (Milk and Milk Products Order) in 1992.
Milk and Milk Products Order (MMPO) regulates milk and milk products in the
country. The order requires no permission for units handling less than 10,000 liters
of liquid milk per day or manufacturing milk products containing between 500 to
3,750 tonnes of milk solids per year. Plants producing over 75,000 liters of milk per
day or more than 3,750 tonnes per year of milk solids have to be registered with the
Central Government. The stringent regulations, government controls and licensing
requirements for new capacities have restricted large Indian and MNC players from
making significant investments in this product category. Most of the private sector
players have restricted large Indian and MNC Players from making significant
investments in this product category. Most of the private sector players have
restricted themselves to manufacture of value added milk products like baby food,
dairy whiteners, condensed milk etc.
All the milk products except malted foods are covered in the category of industries
for which foreign equity participation up to 51% is automatically allowed. Ice
cream, which was earlier reserved for manufacturing in the small - scale sector, has

CAPITAL BUDGETING
now been de - reserved. As such, no license is required for setting up of large - scale
production facilities for manufacture of ice cream. Subsequent to de - canalization,
exports of some milk based products are freely allowed provided these units comply with the
compulsory inspection requirements of concerned agencies like: National Dairy
Development Board. Export Inspection Council etc, Bureau of Indian standards has
prescribed the necessary standards for almost all milk - based products, which are to be
adhered to by the industry
Amul's secret of success:
The system succeeded mainly because it provides an assured market at remunerative prices
for producers' milk besides acting as a channel to market the production enhancement
package. What's more, it does not disturb the agro - system of the farmers. It also enables the
consumer an access to high quality milk and milk products. Contrary to the traditional
system, when the profit of the business was cornered by the middlemen, the system ensured
that the profit goes to the participants for their socio -economic upliftment and common good.
Looking back on the path traversed by Amul, the following features make it a pattern and
model for emulation elsewhere. Amul has been able to:
 Produce an appropriate blend of the policy makers farmers board of

management and the professionals: each group appreciation its roles and limitations.
 Bring at the command of the rural milk producers the best to the technology and
harness its fruit for betterment.
 Provide a support system to the milk producers without disturbing their agro -
economic systems
 Plough back the profits, by prudent use of men, material and machines in the
rural sector for the common good and betterment of the member producers and

CAPITAL BUDGETING
 Even though, growing with time and on scale, it has remained with the smallest
producer members. In that sense, Amul is an example par excellence, of an intervention for
rural change.
The Union looks after policy formulation, processing and marketing of milk, provision of
technical inputs to enhance milk yield of animals, the artificial insemination service,
veterinary care, better feeds and the like - all through the village societies
The village society also facilitates the implementation of various production enhancement
and member education programs undertaken by the union. The staff of the village societies
have been trained to undertake the veterinary first - aid and the artificial insemination
activities on their own.
Amul's success: A model for other districts to follow.
Amul's success led to the creation of similar structures of milk producers in other districts of
Gujarat. They drew on Amul's experience in project planning and execution. Thus the Anand
Pattern' was followed not just in Kaira district but in Mehsana, Sabarkantha, Banaskantha,
Baroda and surat districts also.
Even before the Dairy Borad of India was born, farmers and their leaders carried out
empirical tests of the hypotheses that explained Amul's success. In these districts, milk
producers and their leaders experienced significatnt commonalities and found easy and
effortless ways to adapt Amul's gameplan to their respective areas.
This led to the Creation of the National Dairy Development Board with the clear mandate of
replicating the Anand pattern' in other parts of the country. Initially the pattern was followed
for the dairy sector but at a later stage oilseeds, fruit and vegetables, salt, and tree sector also
benefited from it's success.

CAPITAL BUDGETING
GCMMF: An overview
Gujarat Cooperative Milk Marketing Federation (GCMMF) is India's largest food

products marketing organization It is a state level apex body of milk cooperatives in Gujarat
which aims to provide remunerative returns to the farmers and also serve the interest of
consumers by providing quality products which are good value for money
Members: 12 district cooperative milk producers' union.
No. of Producer Members: 2.12 Mill
No. of Village Societies: 10,411
Total Milk Handling Capacity: 6.1 Million liters per day
Milk Collection (Total 2009-2010): 1.59 billion liters
Milk Collection (Dairy Average 2009-10): 4.47 million liters
Milk Drying Capacity: 450 Metric Tons Per Day
Cattle Feed Manufacturing Capacity: 1450 MTs Per Day
Sales Turnover Rs (Million) US $ (million)
2003-04 11140 355
2004-05 13790 400
2005-06 15540 450
2006-2007 18840 455
2007-08 22192 493
2008-09 22185 493

CAPITAL BUDGETING
Major dairy products manufactures:
Some of the major dairy products manufacturers in the country:

Company Brands Major Products
Nestle India Limited Milkmaid, Cerelac, Sweetened condensed milk,

Lactogen, Milo, malted foods, milk powder
Everyday and Dairy whithner
Milkfood Limited Milkfood Ghee, ice cream, and other milk

products
Smith Kline Beecham Horlicks, Maltova, Viva Malted Milkfood, ghee, butter,
Limited powdered milk, milk fluid and
other milk based baby foods.
Indodan Industries Limited Indana Condensed milk, skimmed

milk powder, dairy milk
whitener, chilled and processed
milk
Gujarat Co-operative Milk Amul Butter, cheese and other milk

Marketing Federation products
Limited
H.J. Heinz Limited Farex, Compan, Infant Milkfood, Malted

Glactose, Bonniemix, Milkfood
Vitamilk
Britannia Milkman Flavored milk, cheese, Milk

Powder, Ghee
Cadbury Bournvita Malted Food

CAPITAL BUDGETING
6. FUTURE PROSPECTS:
India is the world's highest milk producer and all set to become the world's largest
food factory. In celebration, Indian Dairy sector is now ready to invite NRIs and
Foreign investors to find this country a place for the mammoth investment projects.
Be it investors, researchers, entrepreneurs, or the merely curious - Indian Dairy
sector has something for everyone.
Milk production is relatively efficient way of converting vegetable material into

animal food. Dairy cow's buffalo's goats and sheep can eat fodder and crop by
products which are not eaten by humans. Yet the loss of nutrients energy and
equipment required in milk handling inventory make milk comparatively expensive
food. Also if dairying is to play its part in rural development policies, the price to
milk producers has to be remunerative. In a situation of increased international
prices low availabilities of food aid and foreign exchange constraints, large scale
subsidization of milk conception will be difficult in the majority of developing
countries.
Hence in the foreseeable future, in most of developing countries milk and milk
products will not play the same roll in nutrition as in the affluent societies of
developed countries. Effective demand will come mainly from middle and high
income consumers in urban areas.
There are ways to mitigate the effects of unequal distribution of incomes. In Cuba
where the Government attaches high priority to milk in its food and nutrition policy,
all pre - school children receive a daily ration of almost a liter of milk fat the
reduced price. Cheap milk and milk products are made available to certain other
vulnerable groups, by milk products outside the rationing system are sold price
which is well above the cost level. Until recently, most fresh milk in the big cities of
China was a reserved for infants and hospitals, but with the increase in supply,
rationing has been relaxed.

CAPITAL BUDGETING
CHAPTER-IV

CAPITAL BUDGETING
NON DCF CRITERIA

Table 3.1;
(a) PAY BACK PERIOD (PBP):- (Rs in lakhs_)
The pay back period (PB) is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Pay back is the number of
years required to recover the original cash outlay invested in a project.
If the project generates constant annual cash inflows, the pay back period can
be computed by dividing cash outlay by the annual cash in flow.
Pay Back Period: Initial Investment

Annual Cash Inflow
C0 : Initial Investment
C : Annual Cash in flow
In case of un equal cash inflows, the pay back period can be found out by adding up
the cash inflows until the total is equal to the initial cash outlay.

CAPITAL BUDGETING
PAY BACK PERIOD
YEAR INCOME DEPRECIATIO CASH IN CUMULATIVE CASH

(PAT) (RS N (RS LAKHS ) FLOW (RS LAKHS IN FLOWS (RS LAKHS)
LAKHS ) )
1 12573363.72 16089603.00 28662966.72 28662966.72
2 12573363.72 19701376.88 32274740.60 60937707.32
3 22733566.67 39089995.71 61823562.38 122761269.70
4 47015367.90 40369063.00 87384430.90 210145700.60
5 98786932.00 52675282.00 151462214.00 361607914.60
Initial outlay = 254955806.95 (lakhs)
254955806.95-210145700.60
Pay back period = 4+

151462214.00
44810106.35
4+
151462214.00
= 4 + 0.296
= 4.30 Months

CAPITAL BUDGETING
Criteria for evaluation:
The pay back period computed for a project is less than the pay back period set by
management of the company, it would be accepted. A project actual pay back
period is more than the determined period by the management, it will be rejected.
Decision:
The standard payback period is set by TIRUMALA MILK PRODUCTS PRIVATE

LTD for considering the expansion project is six years, where as actual payback
period is 4.30 months. Hence we accept the Project.

CAPITAL BUDGETING
Table3.2(b)
AVERAGE RATE OF RETURN (ARR) (OR)ACCOUNTING RATE OF
RETURN (ARR): as in lakhs
The accounting rate of return (ARR) also known as the return on investment
(ROI) uses accounting information, as revealed by financial statements, to measure
the profitability of an investment. The Accounting rate of return is the ratio of the
average after fax profit divided by the average investment. The average investment
would be equal to half of the original

CAPITAL BUDGETING
AVERAGE OR ACCOUNTING RATE OF RETURN

YEAR EBT TAXATION CASH IN FLOWS
1 12573363.72 4266274,00 8307089.72
2 12573363.72 4341000.00 8232363.72
3 22733566.67 8446490.00 14287076.67
4 47015367.90 13794988.00 33220379.90
5 98786932.00 32986706.00 65800226.00
Average profit = 129847136.01 = 25969427.20

5
Average investment = 254955806.95 = 127477903.48

2
ARR = 25969427.20 x 100
2
= 0.20 x 100
= 20.00
ROI = Average profit__ x 100
Initial investment
= 25969427.20 x 100
254955806.95
= 0.10 x 100
= 10.00

CAPITAL BUDGETING
According to this method ARR is lower than minimum rate of return set by the
management are accepted. The project is having dissatisfactory ARR so the
management has to reject the project.
PBP>SPBP-Rejected
PBP<SPBP-Accepted
PBP - Indifferent
Decision:
The standard Average Rate of Return set by TIRUMALA MILK PRODUCTS
PRIVATE LTD management is 21%. The actual ARR is 20.00% is lower than the
standard ARR set by the management, hence we reject the project because the rate
of return of the project is lower than the standard.

CAPITAL BUDGETING
DCF CRITERIA:
Table 3.3
(a) Net Present Value:- Rs in lakhs
The NPV present value (NPV) method is the classic economic method of
evaluating the investment proposals. If is a DCF technique that explicitly recogniges
the time value at different time periods differ in value and are comparable only
when their equipment present values- are found out.
NPV= C1 + C2 + C3 + ……………..+ C -C 0
(n+k) (1+k)2 (1+k)3 (1+k)n
( o r )
n Ci
NPV=  -C0
i=0 (1+k) i
Where
N P V = Net present value
Cfi = Cash flows occurring at time
k = The discount rate
n = life of the project in years
C0 = Cash out lay

CAPITAL BUDGETING
NET PRESENT VALUE
YEAR EAT DEP CASH DCF PRESENT

INFLOWS (12%) VALUE
1 12573363.72 16089603.00 28662966.72 0.893 25596029.28
2 12573363.72 19701376.88 32274740.60 0.797 25722968.26
3 22733566.67 39089995.71 61823562.38 0.712 4401837641
4 47015367.90 40369036.00 87384430.90 0.636 55576498.05
5 98786932.00 52675282.00 151462214.00 0.567 85879075.34
NPV = 236792947.34 - 254955806 95 -18162859.61

CAPITAL BUDGETING
In case of calculated NPV is positive or zero, the project should be accepted. If the
calculated NPV is negative, the project is rejected.
Decision:
The Net Present Value of TIRUMALA MILK PROUDCTS PRIVATE LTD is

Positive. So the project should be acceptedTable 3.4

CAPITAL BUDGETING
(b) INTERNAL RATE OF RETURN: Rs in lakhs
The internal rate of return (IRR) method is another discounted cash flow technique
which takes account of the magnitude and thing of cash flows, other terms used to
describe the IRR method are yield on an investment, marginal efficiency of capital,
rate of return over cost, time- adjusted rate of internal return and soon.
i=0 Cfi SV+WC
NPV=
 (1+k) i (1+k) n
Where
Cfi = Cash flows occurring at different point of time
k = The discount rate
n = life of the project in years
C0 = Cash out lay
SV & WC = Salvage value and Working Capital at the end of the n years.
(or)
IRR = L A + (H-L)
(A-B)
Where
L :Lower discount rate at which NPV is positive
H :Higher discount rate at which NPV is negative
A :NPV at lower discount rate, L
B : NPV at higher discount rate, H

CAPITAL BUDGETING
INTERNAL RATE OF RETURN
YEAR EAT DEP CASH DCF PRESENT

IN FLOWS (12%) VALUE
1 12573363.72 16089603:00 28662966.72 0.893 25596029.28
2 12573363.72 19701376.88 32274740.60 0.797 25722968.26
22733566.67 39089995.71 61823562 38 0.712 44018376.41

3
4 47015367.90 40369036.00 87384430.90 0.636 55576498.05
5 98786932.00 52675282.00 151462214.0 0.567 85879075.34
IRR = 12 + 236792947.34-254955806.95 x (12-14)
236792947.34-222028074.10
18162859.61
= 12 + x2
14764873.24
= 12 + (-1.23* -2)
= 12 + 2.46
= 14.46

CAPITAL BUDGETING
In this method the project is accepted when IRR is higher than its cost of capital or cut
out rate. If the project is not accepted when the IRR is less than cost of capital.
Decision:
The project is accepted because of the calculation IRR is higher than its cost of
capital. The cost of capital fixed by management is 10%; the actual is more than its
standard. Hence, the project is accepted.

CAPITAL BUDGETING
Table 3.5
(C) PROFITABILITY INDEX:
Yet another time- adjusted method of evaluating the investment proposals is the benefit- cost
(B/C.) ratio or profitability index (PI) Profitability Index is the ratio of the present valued of
cash inflows, at the required rate of return, to the initial cash out flow of the investment.
PV of cash inflow
PI =
Initial Cash outlay
Where PV: Present Value

CAPITAL BUDGETING
PROFITABILITY INDEX
YEAR EAT DEPRECIATION CASH IN FLOW (RS

lakhs)
1 12573363.72 16089603.00 286629336.72
2 12573363.72 19701376.88 32274740.60
3 22733566.67 39089995.71 61823562.38
4 47015367.90 40369036.00 87384430.90
5 98786932.00 52675282.00 151462214.00
= 307637088.95
254955806.95
= 1.21

CAPITAL BUDGETING
A project can be accepted if its Profitability Index is greater than one. If the PI is less than one
we should reject the project.
P.I> 1= Accepted
P.I < 1= Rejected
P.I = 1= Indifferent
Decision:
Profitability index of proposed expansion project is found our 1.21 this is more than
the cash outflow. Hence we accept the project

CAPITAL BUDGETING
CHAPTER-V
FINDINGS
1. From the analysis it was observed that the payback period is 4.3 years but
standard pay back period by TIRUMALA MILK PROUDCTS PRIVATE
LTD is 6 years. The actual payback period is lower than the standard set by
the company management because of high yield from the investment as well
as higher cash inflows during the initial years of capital investment period
2. The study results reveals that Average rate of return is fixed by the
TIRUMALA MILK PROUDCTS PRIVATE LTD 21%. But the actual ARR is

CAPITAL BUDGETING
20.00%. The actual ARR is lower than TIRUMALA MILK PROUDCTS
PRIVATE LTD. Because the capital investment required is very low
investment required is very low investment, by TIRUMAL MILK
PRODUCTS PVT LTD.
3. It was observed that the acceptance rule of net present value during the period
of study a project is accepted if the Net Present Value is positive. The project
NPV is -18162859.61 (lakhs) for a capital expenditure of 254955806.95.
4. It was observed that the project investment yields an internal rate of return of
12%. For the period of study, which is more than the it's Cost of capital of
14%
5. It was observed that the profitability index of the proposed expansion project
is more than one. Due to thee positive NPV. Than the project can be accepted.
While P.I is 1.21 lines that is for every One rupee invested is the project yields
1.21 rupees
6. The study needs found that at proposal the company using the
payback period technique for evaluating its capital as budgeting proposal.

CAPITAL BUDGETING
SUGGESTIONS:
1. From the study it has been suggested that the company has to maintain the Pay
back period as though it is prevailing at present ten the actual PBP is less than the
standard PBP. So the project is to be accepted.
2. From the analysis it has been suggested that the company has it maintained the
Average rate of return as it is in the present situation. As the actual ARR is less than
the standard ARR so the project is to be accepted.
3. It has been suggested that the company has to maintained positive NPV value.
As the NPV is positive the project is to be accepted.
4. It has been suggested that the company has to maintained the IRR as it is the
present situation while calculating the IRR the cost of capital is taken in to
consideration on the bases of weighted average cost of capital.
5. It has been suggested that the company has to maintain the PI as it is in the
present situation. As the PI is more than 1 due to the Positive the project can be
accepted.
6. It has been recommended to adopt the DCF based CBDT for the proposal of
evaluating its capital investment proposals alternatives.
7. The calculated payback period is 4.30 years. But standard payback period was 6
years by TIRUMALA MILK PROUDCTS PRIVATE LTD management.

CAPITAL BUDGETING
CONCLUSION
Based on the study in TIRUMALA MILK PROUDCTS PRIVATE LTD there is
forecasting project cash flow involves numerous estimates and many individuals
and departments participate in this exercise. The role of the finance manager in to
coordinate the efforts of various departments and obtain information from them,
ensure that the forecasts are based on a set of consistent economic assumptions,
keep to the exercise focused on relevant variables and minimize the bias is inherent
in cash flow forecasting .
In the study I know that the company is following pay back period. Based on the
data shows that the company can use any criteria to get return on the investment.
The project "A Study on Capital budgeting' in TIRUMALA MILK PROUDCTS
PRIVATE LTD, it is suggested to hold the company is the same situation.

CAPITAL BUDGETING
BIBILOGRAPHY
FINANCIAL MANAGEMENT : I.M PANDEY
FINANCIAL MANAGEMENT : PRASANNA CHANDRA
FINANCIAL MANAGEMENT : M.Y.KHAN&JAIN
FINANCIAL MANAGEMENT : V.K.BHALLA
WEBSITES
WWW.GOOGLE.COM
WWW.ASK.COM
WWW.TIRUMALA MILK PRODUCTS PVTLTD.AC.IN
WWW.TIRUMALA MILK PRODUCTS PVTLTD.COM

Defense Market: An Important Growing Market For Quality Products

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Defense Market: An Important Growing Market For Quality Products

Încărcat de

Drepturi de autor:

Formate disponibile

CAPITAL BUDGETING

Emerging Dairy Markets:

 Food service institutional market: it is growing at double the rate

 Defense market: An important growing market for quality products

 Ingredients market: A boom is forecast in the market of dairy

 Parlor market: The increasing away - from - home consumption

Penetration of milk products:

A.K.R.G. P.G. College 49

Similarly, penetration of ghee is highest in medium sized towns at 37.2% compared to

Market Size And Growth:

A.K.R.G. P.G. College 50

Low Cost of Production:

Significant investment has to be made in milk procurement, equipments, chilling and

A.K.R.G. P.G. College 51

India's exports of milk products:

Milk cream 332.230 28 040 1.000 0.084 -

Whey 78.460 3.750 11.500 1.010 6.000 0.342

Ghee / Butter / Butter 7,895.080 431.10 299.970 19.20 452.080 238950

A.K.R.G. P.G. College 52

(b) Processed 5.670 1.200 2.10 0.375 22.100 2.190

(c) Other 66.640 8.350 36.780 0.690 24.840 4.550

Total - 872.70 - 52.40 - 255 .

The basic infrastructural elements for a successful enterprise are in place.

• Key elements of free market system

An entrepreneur's participation is likely to provide attractive returns on the investment

 Dairy cattle breeding of the finest buffaloes and hybrid cows

A.K.R.G. P.G. College 53

 Milk yield increase with recombinant somatotropin

 Dairy cultures, probiotics, dairy biologies, enzymes and coloring materials

Dairy / food processing equipment:

Food packaging equipment:

Opportunities lie in the manufacturing of both machinery and packaging materials

A.K.R.G. P.G. College 54

A.K.R.G. P.G. College 55

Indian (traditional) Milk Products:

There are a large variety of traditional Indian milk products such as

MAKKHAN - UNSALTED BUTTER GHEE - BUTTER OIL PREPARED BY

HEAT CLARIFICATION, FOR LONGER SHELF LIFE

A.K.R.G. P.G. College 56

Branding of Traditional Milk Products:

With increasing urbanization and changing consumer preferences, there is possibility

Western Milk Products:

A.K.R.G. P.G. College 57

Demand for various types of cheese in the Indian market:

Type of Cheese % of total

A.K.R.G. P.G. College 58

Milk powder is mainly of 2 types

• Whole milk powder

• Skimmed milk powder

A.K.R.G. P.G. College 59

In 2009-2010 India is estimated to have imported about 18,000 tonnes of milk

Value addition in milk powder - infant foods:

A.K.R.G. P.G. College 60

5. REGULATORY FRAME WORK:

A.K.R.G. P.G. College 61

Amul's secret of success:

 Produce an appropriate blend of the policy makers farmers board of

A.K.R.G. P.G. College 62

Amul's success: A model for other districts to follow.

A.K.R.G. P.G. College 63

Gujarat Cooperative Milk Marketing Federation (GCMMF) is India's largest food

Members: 12 district cooperative milk producers' union.

No. of Producer Members: 2.12 Mill