Case 3 Cemex

Assignment

Multinational Financial Management

Case 3

CEMEX ENTERS INDONESIA

Lecturer: Erni Ekawati, Ph.D

By: GROUP 5

Ariefka Sari Dewi 12/341231/PEK/17320

Dwi Wahyu R.S 12/341246/PEK/17335

Hartatiek 12/341257/PEK/17346

Niken Andry 12/341279/PEK/17368

Rifqa 12/341295/PEK/17384

PROGRAM MAGISTER MANAJEMEN

FAKULTAS EKONOMIKA DAN BISNIS

UNIVERSITAS GADJAH MADA

YOGYAKARTA

2013

1

A. FACTS Cementos Mexicanos (Cemex) is a multinational company that produces cement in

Mexico. Cemex is the largest cement manufacturer in the Americas, and third largest in

the world. Cemex began its international expansion in an effort to reduce its reliance on

the Mexican market to capitalize on demand in many countries. Cemex competes in the

global marketplace for both market share and capital. The international cement market,

like markets in other commodities such as oil, is a dollar-based market. For this reason

and for comparisons against its major competitors in both Germany and Switzerland, so

Cemex considers the U.S. dollar its functional currency. Cemex wants to increase its

market capitalization through global expansion and entering in Asia market. In the year

1998, Cemex was considering the construction a cement manufacturing facility on the

Indonesian island of Sumatra. The project, Semen Indonesia, would be a wholly owned

greenfield investment with a total installed capacity of 20 million metric tons per year

(mmt/y). There were three driving reasons for this project:

1. Initiate a productive presence in Southeast Asia. 2. Favorable long-term prospects for Asian infrastructure development and growth. 3. Positive prospects for producing and exporting from Indonesia due to the depreciation

of the Indonesian rupiah (Rp) in 1997.

In analyzing feasibility of this project, Cemex make a road map of the complete

multinational capital budgeting to enter in Indonesia market.

Figure 1: a Road Map of to the Construction of Semen Indonesias Capital Budget

The basic principle is that, the parent company invests US$-denominated capital in

FDI project, project capital budget evaluated, and then project cash flows are remitted to

Cemex in order to make parent viewpoint capital budget. The first step to construct

capital budget, Cemex was analyzing a set of pro forma financial statements for Semen

Indonesia, all in Indonesian rupiah (Rp). The next step is to create two capital budgets

like project viewpoint and parent viewpoint. The following analysis was conducted

assuming that purchasing power parity (PPP) holds for the Rp/US$ exchange rate for

analysis this project. The projected inflation rates for Indonesia was 30% per annum and

3% per annum for United States inflation.

2

B. SITUATION ANALYSIS 1. Financial Assumption

This project would be held in Indonesia so the calculation was in Indonesian

Rupiah. Before the capital budgets (NPV and IRR) were calculated, financial assumptions

must be made. Based on the case, the financial assumption will be explained below.

a. Capital Investment Cemex had production capacity of 20 million metric ton per year (mmt/y) with cost of

installed capacity $110/tonne. Cemex assumed exchange rate of Rp 10,000/US$ in the

year 1 and would be change consistent with inflation rate. Therefore, cost of initial

investment can be calculated by 20 million mmt/y*$110/tonne = $2.2 billion or Rp 22

trillion. The amount cost of plant and equipment were Rp 17,6 trillion and Cemex

assumed an annual depreciation charge of Rp 1.76 million (10 years straight-line

depreciation schedule).

b. Foreign Exchange Rate This project was assuming that PPP holds for the Rp/US$ exchange rate. The spot rate

in year 0 was Rp 10.000/US$. The projected inflation rates for Indonesia were 30%

per annum and 3% per annum for United States. This table below shows that

calculation of spot rate Indonesian Rupiah against U.S. Dollar

Table 1: Spot Rate (Rp/US$)

Project year 0 1 2 3 4 5

Calculation (1.3/1.03)*

10,000

((1.3/1.03)^2)*

10,000

((1.3/1.03)^3)*

10,000

((1.3/1.03)^4)*

10,000

((1.3/1.03)^5)*

10,000

Spot rate

(Rp/US$) 10,000 12,621 15,930 20,106 25,376 32,028

c. Financing Capital structure was used by project viewpoint consists of 50% equity and 50% debt.

All equity form Cemex, 75% debt from Cemex, and 25% from a bank consortium

arranged by the Indonesian government. When, capital structure was used by parent

viewpoint consist of 60% equity and 40% debt. The loan is denominated in U.S.

dollars and Indonesian Rupiah. In U.S. dollars, the loan has 10% of annual interest

with maturity 5 years. In Indonesia Rupiah, the loan has 35% of annual interest with

maturity 8 years. This capital structure makes the difference of weighted average cost

of capital (WACC) between project viewpoint (used in Indonesian Rupiah) and parent

viewpoint (used in U.S. Dollar). This is calculation of WACC from project and parent

viewpoint:

Table 2: Calculation of WACC from Parent Viewpoint

Information Calculation Result

Risk-free rate 6%

Credit spread 2%

Cost of debt 8%

Cost of debt, after-tax 8%*(1 0.35) 5.2% Debt proportion 40%

Cemex Beta 1.5

Equity premium (13% - 6%) 7%

Cost of equity (6% + 7%)*1.5 16.5%

Equity proportion 60%

WACC = (0.4)*(5.2%) + (0.6*16.5%) = 11.98%

3

Table 3: Calculation of WACC from Project Viewpoint

Information Calculation Result

Risk-free rate

33%

Credit Premium

2%

Cost of debt in Rupiah

35%

Cost of debt, after-tax 35%*(1 - 0.3) 24.5%

Cost of debt, after tax to be paid (24.5%*0.25) 6.125%

Cost of US$ debt

38.835%

Cost of US$ debt, after-tax 38.835%*(1 0.3) 27.184% Cost of debt, after tax to be paid (27.184%*0.75) 20.388%

Total Cost of debt 6.125% + 20.388% 26.513%

Debt Proportion

50%

Cemex Indonesia of beta

1

Equity premium (40% - 33%) 7%

Cost of equity (33% + 7%)*1 40%

Equity Proportion

50%

WACC = (0.5*26.513%) + (0.5*40%) = 33.527%

d. Revenues Cemex assumes that the 20 mmt/y facility is expected to operate at only 40% capacity

(producing, 8 million metric tonnes). Sales price of cement was $58/tonne and would

remain constant over the life project. Capacity is expected to be 50% in year 2 and

60% from year 3 on.

e. Costs Costs of this project consist of manufacturing cost, production costs, and loading

costs. Manufacturing costs (labor, materials, power, etc.) were estimated at Rp

115,000 per tonne for 1999 and increasing in accordance with inflation rate of 30%

per year. Production costs are estimated Rp 20,000 per tonne for 1999 and increasing

in accordance with inflation rate of 30% per year.

2. Project Viewpoint Capital Budget Evaluation of a project from local viewpoint serves some useful purposes, but it

should be subordinated to be evaluated from the parents viewpoint. In evaluating a foreign projects performance relative to the potential of a competing project in the same host country, we must pay attention to the projects local return. Almost any project should at least be able to earn cash return equal to the yield available on host government

bonds (with the same maturity as projects economic life). For project viewpoint, net cash flow or free cash flow is calculated by summing

EBITDA, recalculated taxes, and changes in net working capital. Capital budgeting is

estimated by using EBITDA, not EBT, which contains both depreciation and interest

expense. Furthermore, taxes are recalculated on the basis of EBITDA. The firms cost of capital used in discounting also includes the deductibility of debt interest in its

calculation.

The initial investment of Rp 22 trillion is the total capital invested to support these

earnings. Although receivables average 50 to 55 days sales outstanding (DSO) and

inventories 65 to 70 DSO, payable and trade credit are also relative long at 114 DSO in

the Indonesian cement industry. Semen Indonesia expects to add approximately 15 net

DSO to its investment with sales growth.

The terminal value (TV) of project represents the continuing value of the cement

manufacturing facility in the years 5, last year of detailed pro forma financial analysis.

4

TV calculated as perpetual net operating cash flow after year 5. TV from Semen

Indonesia can be estimated by using form below.

The result of the capital budget from the project viewpoint indicate a negative

present value (NPV) of Rp 9,443,460 million or about Rp 9,4 trillion and internal rate of

return (IRR) of only 15.4% less than cost of capital about 33.257%. According to this

calculation, the project is not acceptable.

Tabel 4: Capital Budget: Cemex Indonesia (millions RP)

Project Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

EBITDA

2,979,029 4,499,067 6,504,982 7,813,589 9,352,941

Recalculated taxes

(@30%) (893,709) (1,349,720) (1,951,495) (2,344,077) (2,805,882)

Net Operating

cash flow 2,085,320 3,149,347 4,553,487 5,469,512 6,547,059

Additions to NWC

(240,670) (139,028) (436,049) (289,776) (625,314)

Initial Investment (22,000,000)

Terminal Value

19,686,258

Free Cash Flow

(FCF) (22,000,000) 1,844,650 3,010,319 4,117,438 5,179,736 25,608,003

NPV @ 33.257% ($9,443,460)

IRR 15.4%

3. Parent Viewpoint Capital Budgeting All incremental earnings to Cemex from the prospective investment project in

Indonesia are important in parent viewpoint. For Cemex, investment must be analyzed in

terms of US dollar cash inflows and outflows associated with the investment over the life

of project, after-tax, discounted at its appropriate cost of capital.

Parent viewpoint capital budget can be estimated in two ways. First, isolate

individual cash flows, adjusted for any withholding taxes imposed by the Indonesia

government and converted to US dollars. In the case of Semen Indonesia, dividends will

be charged a 15% withholding tax, 10% on interest payments, and 5% license fees.

Mexico does not repatriated earnings since they have already been taxed in Indonesia.

After isolate individual cash flows the second step is to calculate the actual parent

viewpoint capital budget, combines these US dollar after-tax cash flows with initial

investment to determine the net present value of proposed Semen Indonesia subsidiary

eyes of Cemex. A specific peculiarity of this parent viewpoint capital budget is that only

the capital invested into the project by Cemex itself, $1,925 million, is included the initial

investment, $1,100 million in equity and $825 million loan. The Indonesia debt of Rp

2.75 billion ($275 million) is not included in the Cemex parent viewpoint capital budget.

58RP19,686,2033257.0

)01(059,547,6

gk

g)1(NOCFValue Terminal

WACC

5

5

Table 5: Semen Indonesias Remittance and Capital Budget: Parent Viewpoint (millions of Rp and US$)


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Dividend Remittance

Dividends paid (RP)

0 0 560,423 555,757 651,450

Withholding tax @ 15%

0 0 (84,063) (83,364) (97,717)

Net dividend remitted (RP)

0 0 476,360 472,393 553,732

Net dividend remitted ($)

0 0 24 19 17

License Fees Remittance

Fees remitted

117,126 184,787 279,871 353,235 445,831


(5,856) (9,239) (13,994) (17,662) (22,292)


111,270 175,547 265,877 335,573 423,539

Net license fees remitted ($)

8.8 11.0 13.2 13.2 13.2

Debt Service Remittance

Promised interest paid ($)

82.5 69.0 54.1 37.8 19.8


(8.25) (6.90) (5.41) (3.78) (1.98)

Net interest remitted ($)

74.3 62.1 48.7 34.0 17.8

Principal payments remitted

($) 135.1 148.6 163.5 179.9 197.8

Capital Budget: Parent Viewpoint

(US$ million)

Dividends

0.0 0.0 23.7 18.6 17.3

License fees

8.8 11.0 13.2 13.2 13.2

Debt service

209.4 210.7 212.2 213.9 215.7

Total

218.2 221.8 249.1 245.7 246.2

Initial Investment (1,925)

Terminal Value

614.66

Free Cash Flow (FCF) (1,925) 218.2 221.8 249.1 245.7 860.8

NPV @ 17.98% (925.62)

IRR -1.84%

In order to evaluate the projects cash flows that are returned to the parent company, Cemex must discount these at the corporate cost of capital. If Cemex were

undertaking an investment of the same relative degree of risk of the firm itself, a simple

discount rate of 11.98% might me adequate. Cemex, however, requires new investment to

yield an additional 6% over the cost of capital for international projects. The discount rate

for Semen Indonesias cash flows repatriated to Cemex will therefore be discounted at 11.98% + 6%, or 17.98%. From the parent viewpoint capital budgeting, it is indicated a

negative NPV of US$925.6 million with IRR -1.84%. Based on this result yhis

investment is unacceptable from the parents viewpoint. Multinational firm should invest only if they can earn a risk-adjusted return greater

than locally based competitors can earn on the same project. If they are unable to earn

superior returns on foreign projects, their stockholders would be better off buying shares

in local firms, where possible, and letting those companies carry out the local projects.

6

Most firms appear to evaluate foreign projects from both parent and project NPV and the

overall effect on consolidated earning of the firm. For foreign projects, must adjust for

agency cost and foreign exchange rate risks and costs.

B. KEY ISSUES Cemex was using traditional capital budgeting for considering expansion in

Indonesia. From traditional capital budgeting, Cemex got negative NPV and IRR that is

less than WACC, not only from project viewpoint but also from parent viewpoint. These

calculations meant the investment should be rejected. Is there any wrong assumption that

Cemex use?

Cemex was considering expansion to Indonesia yet Cemex did not consider the

additional risk or sensitivity analysis from both project viewpoint and parent viewpoint.

From project viewpoint, sensitivity analysis could be measured from foreign exchange

risk and other sensitivity variable such as the capacity utilization rate. Furthermore, from

parent viewpoint, the additional risk can be measured in at least two ways, adjusting the

discount rates or adjusting the cash flows. What will happen if Cemex considers these

additional risks?

C. ALTERNATIVE SOLUTIONS 1. Changing in Foreign Exchange Rate

Cemex should consider additional risks for both project viewpoint and parent

viewpoint. Cemex should consider whether if the rate of rupiah was depreciated or

appreciated. We try to make some estimation based on this consideration, rupiah

depreciate and appreciate.

a. Rupiah depreciate When the rate of rupiah depreciation were greater than US dollar at the PPP it

would make the assumed cash flows to Cemex worth less in dollars and the cheaper

rupiah made Semen Indonesia more competitive. It will happen caused by cash flow of

Semen Indonesia both cash inflows (export to Taiwan) and outflows (imported

components from parent company) are denominated in foreign currencies. Rupiah

depreciation would make higher inflation, so we would like to forecast the capital budget

with Indonesia inflation rate 40% (>30%). And the result is capital budget have the

negative NPV of Rp -6,435,034 and IRR of 24.5%, compared to 36.06%. This result

shows that the project should be rejected.

b. Rupiah appreciate Rupiah appreciates because of the decreasing of inflation rate. For this estimation,

we assume that inflation Indonesia decrease 10% or become 20%, inflation America stays

the same or 3%, WACC for project is 30.45% and 17.98% for parent. Based on these

assumptions, we try to estimate NPV and IRR for both project viewpoint and parent view

point. For project viewpoint, we got a negative NPV of Rp 12,126,108 million and IRR

6.1% that is less than WACC. And for parent viewpoint, we got a negative NPV of

$921.83 million with a negative IRR 1.65%. Based on this estimation, we can assume that

this investment should be rejected.

c. Real Option We can find the NPV and IRR based on the financial assumptions. When the NPV

value is negative, for example $-614.710 it mean that the project must be rejected. In this

7

session, we use several assumptions, whether we got changes on inflation rate or at

capacity amount.

When the inflation rate is assumed very high than 30% like 40%. The NPV value is

($6,435,034). So that when inflation rate higher to 40% and capacity volume of sales

increased became 12,000 on year 1, then 14,000 on year 2, then 16,000 in year 3-5, the

NPV value is still negative ($-614.710).

And if inflation rate is still on 30% but we changes on the capacity as telling above,

it shown at exhibit 4 and we can see that NPV value is ($4,650,934). It is better than cash

flow without changes on capacity but it still got negative value and the project has to

reject.

Figure 2: Real Option for Changing in Foreign Exchange Rate

Actually we dont know exactly the probability so we assume that the probability is about 33.3% each inflation rate (we divided into 40%, 30% and 20% without change on

capacity). Based on those analyses, the total NPV is Rp -9,325,532. When the inflation

rate going higher or lower, but NPV value is still negative. From these analyses we can

conclude that the project still must be rejected because the NPV is still negative.

2. Changing in Capacity Furthermore, we try to estimate NPV and IRR for project and parent by increasing

the capacity utilization rate. We assume that capacity for year 1 is 50%, year 2 is 60%,

year 3 is 70%, year 4 is 80%, and year 5 is 90%. We use the same inflation rate from the

case, 30%. Based on this assumption, we got the results of the capital budget from the

project viewpoint indicate a negative NPV of Rp -4,677,058 million and an IRR of only

25.4%, compared to the 33.257 % cost of capital. Even we optimist with the condition is

different, which means that the production capacity is higher than that so NPV will be

positive. But this projects NPV is still negative and would not acceptable. Then we use probability 50% on each condition (project of 30% inflation rate and project of 30%

inflation rate plus change in capacity), the total NPV is Rp 7,060,259. The project still must be rejected.

Project p=33,3%

p=33,3%

p=33,3%

Inflation rate 40%

Inflation rate 30%

NPV= Rp -6,435,034

NPV= Rp -9,443,460

NPV= Rp -12,126,108

Total NPV = (0,333 x Rp -6,435,034) + (0,333 x Rp -9,443,460) + (0,333 x Rp -

12,126,108)

= Rp -9,325,532

Inflation rate 20%

8

Figure 3: Real Option for Changing in Capacity

3. Real Market Condition From inflation rate data on the appendix, we are assuming that the Indonesian

inflation rate is expected to normalize. Therefore, we are using inflation rate decrease in

30% every year. Based on IMF data, Indonesian inflation rate in 1998 was 77.54% and

we are assuming that it is expected to normalize, so it will decrease into 54.28% then

37.99% in year 2000. While the inflation rate of United States is expected 2%/year with

Indonesian Rupiah exchange rate Rp 10,375 against U.S dollar. Therefore, changing in

the inflation rate will affect in Indonesian Rupiah exchange rate against U.S dollars.

Cemex allocated production capacity was 20,000 mmt/y, but it would not

maximizing the production capacity. It only used 40% from maximum capacity in year 1.

Cemex can use 50% from maximum production capacity in year 1 and it capacity will

increase 10%/year. Thus, Cemex production capacity is 60% in year 2, 70% in year 3,

80% in year 4, and 90% in year 5. We are assuming that Cemex has increased in export

sales because one of Cemex purpose to build plant in Indonesia was global expansion

especially in Southeast Asia market. We believe that the plant can operate at optimum

capacity. Then we used the same additional expenses include license fees, general

administrative expenses and depreciation as the case assumed. We also build this parent

view point capital budget. Dividends are not distributed in the first and second year but it

will distribute at a 50% rate in the year 3-5. Dividends will be charged a 15% withholding

tax, 10% interest payments and 5% license fees. This is illustrated in the Appendix 5

which shows all incremental earnings to Cemex from the prospective investment project.

Based on World Bank data, the components of cost of capital will be changed in

accordance with market condition. The components of cost of capital will describe in the

appendix. We found that the new WACC or WACC adjusted is 16.26% from parent

viewpoint and 46.87% from project viewpoint. The new WACC or WACC adjusted and

exchange rate will affect in free cash flow (FCF) and capital budgets (NPV and IRR) for

Cemex. Based on our calculation, we found that NPV is Rp -3,983,785 million and IRR is

37.7% form project viewpoint. This negative NPV indicates that Cemex should reject this

project. An IRR calculation is less that cost of capital 45.29%, so this project is not

acceptable (reject) from project viewpoint. While NPV and IRR from parent viewpoint

also rejected because of NPV has negative value and IRR less than cost of capital.

Project

p=50%

p=50%

Pesimist NPV= Rp -9,443,460

NPV= Rp -4,677,058

Total NPV = (0.5 x Rp -9,443,460) +(0.5 x Rp -4,677,058) = Rp -7,060,259

Optimist

9

Therefore, using the real inflation rate and cost of capital data, this project is not

acceptable. Cemex should not build plant and equipment in Indonesia.

D. RECOMMENDATION From all of our estimate with sensitivity analysis, this project should be rejected.

We adjusts increase and decrease in inflation rate, the project should not acceptable. We

also adjusts the sales volume into 50%-90%, but still the NPV is negative and IRR still

less than WACC. And we adjust the NPV and IRR by using real market condition, the

result stays the same, NPV still negative and IRR still less than WACC. This investment

could not applied in Indonesia and also the timing of investment was not in good

condition because Indonesia was suffering crisis during 1997-1998.

If Cemex really want to make a greenfield investment in Indonesia, there are

several recommendations that we can give for Cemex:

1. Cemex should use optimist assumption for calculating capital budgeting, both project viewpoint and parent viewpoint.

2. Cemex should use Rupiah for the all debt. Cemex use US dollar as functional currency, so the all revenue will be in US Dollar. At that time Rupiah was

depreciated, Cemex will get more Rupiahs if Cemex converted US Dollar to Rupiah.

3. In 1998, Indonesia faced economic crisis, but the crisis will not last forever. Cemex should make assumption that crisis and hyperinflations are expected to normalize.

E. BIBLIOGRAPHY

Saphiro, Alan C. (2010). Multinational Financial Management 9th

Edition. John Wiley

& Sons, Inc.

http://www.bps.go.id/aboutus.php?inflasi=1

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weorept.aspx?sy=1997&ey=2

003&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=85&pr1.y=8&c=536%2C111&

s=PPPEX%2CPCPI%2CPCPIPCH%2CPCPIE%2CPCPIEPCH&grp=0&a=

http://data.worldbank.org/indicator/FR.INR.RINR?page=3

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Appendix

Exhibit 1: Semen Indonesia Debt Service Schedule


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Indonesian Loan @ 35% for 8

years (million Rp)

Loan Principal 2,750,000 2,654,061 2,524,543 2,349,694 2,113,648 1,794,985

Interest Payment

(962,500) (928,921) (883,590) (822,393) (739,777)

Principal Payment (95,939) (129,518) (174,849) (236,046) (318,662)

Total Payment (1,058,439) (1,058,439) (1,058,439) (1,058,439) (1,058,439)

Cemex Loan @ 10% for 5 years

(million US$)

Loan Principal 825 689.9 541.2 377.7 197.8 0.0

Interest Payment

(82.5) (69.0) (54.1) (37.8) (19.8)

Principal Payment

(135.1) (148.6) (163.5) (179.9) (197.8)

Total Payment

(217.6) (217.6) (217.6) (217.6) (217.6)

Cemex loan converted to Rp

(million Rp)

Scheduled @

Rp10,000/$

Interest Payment

(825,000) (689,867) (541,221) (377,710) (197,848)

Principal Payment

(1,351,329) (1,486,462) (1,635,108) (1,798,619) (1,978,481)

Total Payment

(2,176,329) (2,176,329) (2,176,329) (2,176,329) (2,176,329)

Actual (@ current

spot rate)

Interest Payment

(1,041,262) (1,098,949) (1,088,160) (958,480) (633,669)

Principal Payment

(1,705,561) (2,367,915) (3,287,494) (4,564,190) (6,336,691)

Total Payment

(2,746,823) (3,466,864) (4,375,654) (5,522,670) (6,970,360)

Cash flow in RP on Cemex Loan

(million RP)

Total Actual Cash

Flow 8,250,000 (2,746,823) (3,466,864) (4,375,654) (5,522,670) (6,970,360)

IRR of cash flow: 39%

Foreign Exchange Losses on Cemex Loan (million

RP)

Forex Loss on

Interest:

(216,262) (409,082) (546,940) (580,770) (435,821)

Forex Loss on

Principal:

(354,232) (881,453) (1,652,385) (2,765,571) (4,358,210)

Total Forex Loss on

Debt: (570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031)

Exhibit 2: Semen Indonesia Pro Forma Income Statement


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Sales Volume

10,000 12,000 14,000 16,000 18,000

Sales Price ($)

58 58 58 58 58

Sales Price (RP) 732,039 923,933 1,166,128 1,471,813 1,857,627

11

Total Revenue ('000)

7,320,388 11,087,190 16,325,798 23,549,001 33,437,295

Cash costs ('000)

(1,150,000) (1,794,000) (2,720,900) (4,042,480) (5,912,127)

Additional production costs ('000) (200,000) (312,000) (473,200) (703,040) (1,028,196)

Loading costs ('000)

(252,427) (393,786) (597,243) (887,332) (1,297,723)

Shipping costs ('000) (1,262,136) (1,968,932) (2,986,214) (4,436,660) (6,488,616)

Total

(2,864,563) (4,468,718) (6,777,556) (10,069,512) (14,726,662)

Gross Profit

4,455,825 6,618,472 9,548,241 13,479,489 18,710,633

License Fees

(146,408) (221,744) (326,516) (470,980) (668,746)

General & Admin

Expenses

(585,631) (997,847) (1,632,580) (2,590,390) (4,012,475)

EBITDA

3,723,786 5,398,881 7,589,146 10,418,119 14,029,412

Depreciation &

Amortization

(1,760,000) (1,760,000) (1,760,000) (1,760,000) (1,760,000)

EBIT

1,963,786 3,638,881 5,829,146 8,658,119 12,269,412

Interest on Cemex Debt

(825,000) (689,867) (541,221) (377,710) (197,848)

Forex Losses on Debt

(570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031)

Interest on Local Debt

(962,500) (928,921) (883,590) (822,393) (739,777)

EBT

(394,208) 729,557 2,205,010 4,111,675 6,537,756

Income taxes (30%)

0 0 0 1,995,610 1,961,327

Net Income (RP)

(394,208) 729,557 2,205,010 2,116,064 4,576,429

Net Income ($ million) (31) 46 110 83 143

Exhibit 3: Rupiah Depreciates


Spot Rate (Rp/$) 10.000 13.592 18.475 25.111 34.132 46.393

Sales Volume

8.000 10.000 12.000 12.000 12.000

Sales Price ($)

58 58 58 58 58

Sales Price (RP) 788.350 1.071.543 1.456.466 1.979.663 2.690.804


6.306.796 10.715.430 17.477.595 23.755.954 32.289.647

Cash costs ('000)

(920.000) (1.610.000) (2.704.800) (3.786.720) (5.301.408)

Additional production

costs ('000)

(160.000) (280.000) (470.400) (658.560) (921.984)


(217.476) (380.583) (639.379) (895.130) (1.253.182)

Shipping costs ('000) (1.087.379) (1.902.913) (3.196.893) (4.475.650) (6.265.911)

Total

(2.384.854) (4.173.495) (7.011.472) (9.816.061) (13.742.485)

Gross Profit

3.921.942 6.541.935 10.466.123 13.939.894 18.547.162

License Fees

(126.136) (214.309) (349.552) (475.119) (645.793)

General & Admin

Expenses

(504.544) (964.389) (1.747.760) (2.613.155) (3.874.758)

EBITDA

3.291.262 5.363.238 8.368.812 10.851.620 14.026.611

Depreciation &

Amortization

(1.760.000) (1.760.000) (1.760.000) (1.760.000) (1.760.000)

EBIT

1.531.262 3.603.238 6.608.812 9.091.620 12.266.611

12


(825.000) (689.867) (541.221) (377.710) (197.848)


(781.788) (1.844.413) (3.288.757) (5.251.943) (7.920.352)


(962.500) (928.921) (883.590) (822.393) (739.777)

EBT

(1.038.026) 140.037 1.895.244 2.639.573 3.408.635

Income taxes (30%)

0 42.011 299.176 1.091.048 1.022.590

Net Income (RP)

(1.038.026) 98.026 1.596.067 1.548.525 2.386.044

Net Income ($ million) (76) 5 64 45 51

Capital Budget: Cemex Indonesia (million RP) Project Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Spot Rate (Rp/$) 10.000 13.592 18.475 25.111 34.132 46.393

EBITDA

3.291.262 5.363.238 8.368.812 10.851.620 14.026.611

Recalculated taxes

(@30%)

(987.379) (1.608.971) (2.510.644) (3.255.486) (4.207.983)

Net Operating

cashflow

2.303.883 3.754.266 5.858.168 7.596.134 9.818.628

Additions to NWC

(240.670) (139.028) (436.049) (289.776) (625.314)

Initial Investment (22.000.000)

Terminal Value

27.228.531

Free Cash Flow (FCF) (22.000.000) 2.063.213 3.615.238 5.422.119 7.306.358 36.421.845

NPV @ 36,06% (Rp6.435.034)

IRR 24,5%

Semen Indonesias Remittance and Capital Budget: Parent Viewpoint (million RP & million US$)


Spot Rate (Rp/$) 10.000 12.621 15.930 20.106 25.376 32.028

Dividend Remittance

Dividends paid (RP)

0 0 798.034 774.263 1.193.022


0 0 (119.705) (116.139) (178.953)


0 0 678.329 658.123 1.014.069


0 0 34 26 32


Fees remitted

126.136 214.309 349.552 475.119 645.793


(6.307) (10.715) (17.478) (23.756) (32.290)


119.829 203.593 332.074 451.363 613.503


9,5 12,8 16,5 17,8 19,2



82,5 69,0 54,1 37,8 19,8


(8,25) (6,90) (5,41) (3,78) (1,98)


74,3 62,1 48,7 34,0 17,8

Principal payments remitted ($)

135,1 148,6 163,5 179,9 197,8

Capital Budget: Parent

Viewpoint (US$ million)

13

Dividends

0,0 0,0 33,7 25,9 31,7

License fees

9,5 12,8 16,5 17,8 19,2

Debt service

209,4 210,7 212,2 213,9 215,7

Total

218,9 223,5 262,5 257,6 266,5

Initial Investment (1.925)

Terminal Value

586,91

Free Cash Flow (FCF) (1.925) 218,9 223,5 262,5 257,6 853,4

NPV @ 17.98% (912,79)

IRR -2%

Exhibit 4: Rupiah Appreciates

Cost of Capital: Cemex Indonesia

Risk-free rate 33% Cemex Indonesia 1

Credit Premium 2%

Equity premium 7%

Cost of debt in Rupiah 35%

Cost of equity 40%

Cost of debt, after-tax 24.50%

% equity 50%

Cost of US$ debt 28%

Cost of US$ debt, after-tax 19.71%

% debt 50% WACC 30.4533%

Capital Budget: Cemex Indonesia (million RP)


Spot Rate (Rp/$) 10,000 11,650 13,573 15,814 18,424 21,464

EBITDA

2,666,796 3,708,909 4,936,898 5,457,526 6,009,723

Recalculated taxes

@30%

(800,039) (1,112,673) (1,481,070) (1,637,258) (1,802,917)

Net Operating cash

flow

1,866,757 2,596,237 3,455,829 3,820,268 4,206,806

Additions to NWC

(240,670) (139,028) (436,049) (289,776) (625,314)


Terminal Value

13,813,958

Free Cash Flow (FCF) (22,000,000) 1,626,087 2,457,209 3,019,780 3,530,492 17,395,450

NPV @30.4533% ($12,126,108)

IRR 6.1%

Capital Budget: Cemex Indonesia (million RP & million US$)


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Dividend Remittance

Dividends paid (RP)

0 0 798,034 774,263 1,193,022


0 0 (119,705) (116,139) (178,953)


0 0 678,329 658,123 1,014,069


0 0 34 26 32


Fees remitted

126,136 214,309 349,552 475,119 645,793


(6,307) (10,715) (17,478) (23,756) (32,290)

14


119,829 203,593 332,074 451,363 613,503


9.5 12.8 16.5 17.8 19.2



82.5 69.0 54.1 37.8 19.8


(8.25) (6.90) (5.41) (3.78) (1.98)


74.3 62.1 48.7 34.0 17.8

Principal payments remitted ($)

135.1 148.6 163.5 179.9 197.8

Capital Budget: Parent

Viewpoint (US$ million)

Dividends

0.0 0.0 33.7 25.9 31.7

License fees

9.5 12.8 16.5 17.8 19.2

Debt service

209.4 210.7 212.2 213.9 215.7

Total

218.9 223.5 262.5 257.6 266.5


Terminal Value

586.91


NPV @ 17.98% (912.79)

IRR -2%

Exhibit 5: Changing in Capacity

Semen Indonesia Pro Forma Income Statement


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Sales Volume

10,000 12,000 14,000 16,000 18,000

Sales Price ($)

58 58 58 58 58

Sales Price (RP) 732,039 923,933 1,166,128 1,471,813 1,857,627


7,320,388 11,087,190 16,325,798 23,549,001 33,437,295

Cash costs ('000)

(1,150,000) (1,794,000) (2,720,900) (4,042,480) (5,912,127)

Additional production costs ('000) (200,000) (312,000) (473,200) (703,040) (1,028,196)


(252,427) (393,786) (597,243) (887,332) (1,297,723)

Shipping costs ('000) (1,262,136) (1,968,932) (2,986,214) (4,436,660) (6,488,616)

Total

(2,864,563) (4,468,718) (6,777,556) (10,069,512) (14,726,662)

Gross Profit

4,455,825 6,618,472 9,548,241 13,479,489 18,710,633

License Fees

(146,408) (221,744) (326,516) (470,980) (668,746)

General & Admin

Expenses

(585,631) (997,847) (1,632,580) (2,590,390) (4,012,475)

EBITDA

3,723,786 5,398,881 7,589,146 10,418,119 14,029,412

Depreciation &

Amortization

(1,760,000) (1,760,000) (1,760,000) (1,760,000) (1,760,000)

EBIT

1,963,786 3,638,881 5,829,146 8,658,119 12,269,412

Interest on Cemex

Debt

(825,000) (689,867) (541,221) (377,710) (197,848)


(570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031)


(962,500) (928,921) (883,590) (822,393) (739,777)

15

EBT

(394,208) 729,557 2,205,010 4,111,675 6,537,756

Income taxes (30%)

0 0 0 1,995,610 1,961,327

Net Income (RP)

(394,208) 729,557 2,205,010 2,116,064 4,576,429

Net Income ($

million) (31) 46 110 83 143

Capital Budget: Cemex Indonesia (million RP)


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

EBITDA

3,723,786 5,398,881 7,589,146 10,418,119 14,029,412

Recalculated taxes

(@30%)

(1,117,136) (1,619,664) (2,276,744) (3,125,436) (4,208,824)

Net Operating cash

flow

2,606,650 3,779,217 5,312,402 7,292,683 9,820,588

Additions to NWC

(240,670) (139,028) (436,049) (289,776) (625,314)


Terminal Value

29,529,388

Free Cash Flow

(FCF) (22,000,000) 2,365,980 3,640,189 4,876,353 7,002,907 38,724,662

NPV @ 33.257% ($4,677,058)

IRR 25.4%

Capital Budget: Cemex Indonesia (million RP & million US$)


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Dividend Remittance

Dividends paid (RP)

0 0 1,102,505 1,058,032 2,288,215


0 0 (165,376) (158,705) (343,232)

Net dividend remitted

(RP)

0 0 937,129 899,327 1,944,982


0 0 47 35 61


Fees remitted

146,408 221,744 326,516 470,980 668,746


(7,320) (11,087) (16,326) (23,549) (33,437)

Net dividend remitted

(RP)

139,087 210,657 310,190 447,431 635,309

Net license fees remitted

($)

11.0 13.2 15.4 17.6 19.8



82.5 69.0 54.1 37.8 19.8


(8.25) (6.90) (5.41) (3.78) (1.98)


74.3 62.1 48.7 34.0 17.8

Principal payments

remitted ($)

135.1 148.6 163.5 179.9 197.8


(US$ million)

16

Dividends

0.0 0.0 46.6 35.4 60.7

License fees

11.0 13.2 15.4 17.6 19.8

Debt service

209.4 210.7 212.2 213.9 215.7

Total

220.4 224.0 274.3 266.9 296.2


Terminal Value

921.98

Free Cash Flow (FCF) (1,925) 220.4 224.0 274.3 266.9 1,218.2

NPV @ 17.98% (739.57)

IRR 3.54%

Exhibit 5: Real Market Condition

Indonesian Inflation Rate

Year 0 1 2 3 4 5

Changing 598,54% -30,00% -30,00% -30,00% -30,00% -30,00%

Inflation Rate 77,54% 54,28% 37,99% 26,60% 18,62% 13,03%

Calculation of WACC from Parent Viewpoint Information Calculation Result

Risk-free rate 9.5%

Credit spread 2%

Cost of debt 11.5%

Cost of debt, after-tax 11.5%*(1 0.35) 7.48%

Debt proportion 40%

Cemex Beta 1.5

Equity premium 8.41%

Cost of equity (9.5% + 8.41%)*1.5 22.12%

Equity proportion 60%

WACC = (0.4)*(7.48%) + (0.6*22.12%) = 16.26%

Calculation of WACC from Parent Viewpoint Information Calculation Result

Risk-free rate

48.28%

Credit Premium

2%

Cost of debt in Rupiah

50.28%

Cost of debt, after-tax 50.28%*(1 - 0.3) 35.2%


Cost of US$ debt

50.49%

Cost of US$ debt, after-tax 50.49%*(1 0.3) 35.34%


Total Cost of debt 9.79% + 26.51% 35.31%

Debt Proportion

50%

Cemex Indonesia of beta

1

Equity premium (58.44% - 48.28%) 10.16%

Cost of equity (10.16% + 48.28%)*1 58.44%

Equity Proportion

50%

WACC = (0.5*35.31%) + (0.5*58.44%) = 46.87%

Semen Indonesias Debt Service Schedules and Foreign Exchange Losses (millions of Rp and US$) Project Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

17

Spot Rate (Rp/$) 10,375 15,692 21,230 26,349 30,642 33,956

Indonesian Loan @ 35% for 8

years (million Rp)

Loan Principal 2,750,000 2,654,061 2,524,543 2,349,694 2,113,648 1,794,985

Interest Payment (962,500) (928,921) (883,590) (822,393) (739,777)


Total Payment (1,058,439) (1,058,439) (1,058,439) (1,058,439) (1,058,439)

Cemex Loan @ 10% for 5 years

(million US$)

Loan Principal 825 689,9 541,2 377,7 197,8 0,0



Total Payment (217,6) (217,6) (217,6) (217,6) (217,6)

Cemex loan converted to Rp

(million Rp)

Scheduled @ Rp10,000/$


Principal Payment (1,351,329) (1,486,462) (1,635,108) (1,798,619) (1,978,481)

Total Payment (2,176,329) (2,176,329) (2,176,329) (2,176,329) (2,176,329)

Actual (@ current spot rate)

Interest Payment (1,294,619) (1,464,577) (1,426,066) (1,157,364) (671,806)

Principal Payment (2,120,553) (3,155,736) (4,308,356) (5,511,256) (6,718,058)

Total Payment (3,415,172) (4,620,313) (5,734,422) (6,668,619) (7,389,864)

Cash flow in RP on Cemex Loan

(million RP)

Total Actual Cash

Flow

8,250,000 (3,415,172) (4,620,313) (5,734,422) (6,668,619) (7,389,864)

IRR of cash flow: 50%

Foreign Exchange Losses on

Cemex Loan (million RP)

Forex Loss on Interest: (469,619) (774,710) (884,845) (779,654) (473,958)

Forex Loss on

Principal:

(769,224) (1,669,274) (2,673,248) (3,712,637) (4,739,577)

Total Forex Loss on

Debt:

(1,238,843) (2,443,984) (3,558,093) (4,492,290) (5,213,535)

Semen Indonesia Pro Forma Income Statement


Spot Rate (Rp/$) 10,375 15,693 21,230 26,350 30,643 33,957

Sales Volume

10,000 12,000 14,000 16,000 18,000

Sales Price ($)

58 58 58 58 58

Sales Price (RP) 910,176 1,231,326 1,528,293 1,777,314 1,969,508


9,101,764 14,775,910 21,396,098 28,437,032 35,451,151

Cash costs ('000) (1,150,000) (1,752,600) (2,012,500) (2,244,800) (2,463,300)

Additional production costs ('000) (200,000) (304,800) (350,000) (390,400) (428,400)

Loading costs ('000) (313,854) (524,800) (782,728) (1,071,514) (1,375,882)

Shipping costs ('000)

(1,569,270) (2,623,998) (3,913,641) (5,357,571) (6,879,411)

18

Total

(3,233,124) (5,206,197) (7,058,870) (9,064,285) (11,146,993)

Gross Profit

5,868,640 9,569,713 14,337,228 19,372,747 24,304,158

License Fees

(182,035) (295,518) (427,922) (568,741) (709,023)

General & Admin

Expenses

(728,141) (1,329,832) (2,139,610) (3,128,074) (4,254,138)

EBITDA

4,958,464 7,944,363 11,769,696 15,675,932 19,340,997

Depreciation &

Amortization

(1,760,000) (1,760,000) (1,760,000) (1,760,000) (1,760,000)

EBIT

3,198,464 6,184,363 10,009,696 13,915,932 17,580,997


(825,000) (689,867) (541,221) (377,710) (197,848)


(1,238,918) (2,443,965) (3,558,271) (4,492,673) (5,213,841)


(962,500) (928,921) (883,590) (822,393) (739,777)

EBT

172,046 2,121,610 5,026,614 8,223,156 11,429,531

Income taxes (30%)

51,614 636,483 2,196,081 4,663,028 3,428,859

Net Income (RP)

120,432 1,485,127 2,830,533 3,560,128 8,000,672

Net Income ($ million) 8 70 107 116 236

Capital Budget: Cemex Indonesia (million RP & million US$) Project Viewpoint


Spot Rate (Rp/$) 10,375 15,693 21,230 26,350 30,643 33,957

EBITDA

4,958,464 7,944,363 11,769,696 15,675,932 19,340,997

Recalculated taxes

(@30%)

(1,487,539) (2,383,309) (3,530,909) (4,702,780) (5,802,299)

Net Operating cashflow

3,470,925 5,561,054 8,238,787 10,973,153 13,538,698

Additions to NWC

(240,670) (139,028) (436,049) (289,776) (625,314)


Terminal Value

40,709,318

Free Cash Flow (FCF) (22,000,000) 3,230,255 5,422,026 7,802,738 10,683,377 53,622,702

NPV @ 45,29% (Rp3,983,785)

IRR 37.7%

Capital Budget from Parent Viewpoint


Spot Rate (Rp/$) 10,000 12,621 15,930 20,106 25,376 32,028

Dividend Remittance

Dividends paid (RP)

0 0 1,415,267 1,780,064 4,000,336


0 0 (212,290) (267,010) (600,050)


0 0 1,202,977 1,513,055 3,400,286


0 0 60 60 106


Fees remitted

182,035 295,518 427,922 568,741 709,023


(9,102) (14,776) (21,396) (28,437) (35,451)


172,934 280,742 406,526 540,304 673,572


13,7 17,6 20,2 21,3 21,0

19



82,5 69,0 54,1 37,8 19,8


(8,25) (6,90) (5,41) (3,78) (1,98)


74,3 62,1 48,7 34,0 17,8

Principal payments remitted

($)

135,1 148,6 163,5 179,9 197,8


(US$ million)

Dividends

0,0 0.0 59,8 59.6 106.2

License fees

13.7 17.6 20.2 21.3 21.0

Debt service

209.4 210.7 212.2 213.9 215.7

Total

223.1 228.4 292.3 294.8 342.9


Terminal Value

614,70


NPV @ 22.26% (947,35)

IRR 0.97%

Case 3 Cemex

Documents

Transcript of Case 3 Cemex