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Nirma Limited-Capital Expenditure Plans

Nirma Limited’s Capital Expenditure (Capex) has been increasing for the past few years as

shown below:

Salient Points on Nirma’s Capex:

There is a drastic increase (around 6 times) in the capex of the company from FY 2007 to

FY 2008.

The Company successfully completed the acquisition of Searles Valley Minerals Inc., the

USA based Soda Ash producer in FY 2008 for USD 225 million which explains the

sudden rise in capex activity.

Trends

Nirma Ltd. FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

Capex Very Good

(102)

Decrease

(48)

Decrease

(26) Increase(29) Increase(52)

Drastic

Increase(311)

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With this acquisition, the Company has become one of the largest producers of soda ash

in the world, with a combined soda ash capacity of nearly 2 million tpa. and has started

establishing a strong presence in the international market.

The Company has six plants, mostly located in backward areas of Gujarat.

The company has investments in Government Securities, Equity Shares, Debentures and

in shares of subsidiary companies- Karnavati Holdings Inc. and Nirma Consumer Care,

which forms around 87% of the total investments of worth Rs. 45.85 Crores in FY 2008.

The Company has multiple product lines with principal products as Detergents, Soaps and Edible

Salt. As a part of the integration strategy the Company has, in stages, set up facilities to

manufacture the required key raw materials. Its strong backward-integrated operations are a

source of a strong competitive advantage. Accordingly, the plants have already been set up to

manufacture N-Paraffin, Linear Alkyl Benzene, Linear Alkyl Benzene Sulphonate, Sulfuric

Acid, Alpha Olefin sulphonate, Glycerine, Fatty Acid and printing and packing facilities for

Detergents, Soaps and Salt. Soda Ash and Industrial Salt are other key products of the Company.

The products being manufactured at Healthcare division include I.V. fluid, Injectable, Medical

devises and I.V. sets.

The various Capex projects by Nirma (on-hand) are tabulated below:

Nirma Ltd.

Capacity

Project Name Location Cost (Rs.

Crore) Product Tonnes/day Tonnes/annum Status

Soda Ash Project

Porbandar GUJ 300 Sodium

carbonate (Soda Ash)

1200 438,000 Under

Implementation

Caustic Soda Project

Kalatalav Bhavnagar GUJ

170 Sodium hydroxide

(Caustic Soda) 40 14,600

Under Implementation

Pure Water Project

Kalatalav Bhavnagar GUJ

80 Waters 80 29,200 Under

Implementation

Coke Project Mahua Bhavnagar

GUJ 100 Electricity Unit 1 30 Mw - Announcement

Out of the above projects, let us consider the case of the Soda Ash Project for analysis of Capex

Plans of Nirma.

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Nirma’s Soda Ash Project

Type of project:

Expansion of capacity of the existing plant in Porbandar of 650,000 tpa by approx. 450,000 tpa

to a total capacity of 1,100,000 tpa.

Soda Ash Industry in India:

The performance of India's Rs.22-billion Soda Ash industry depends heavily on end user

segments, such as glass and detergents. Driven by the high growth in the construction industry

(key consumers of glass), Soda Ash demand in India is estimated to have registered a

compounded annual growth rate (CAGR) of 4 to 5 percent during the past five years. Indian

Soda Ash prices will continue to be linked to international prices, which were depressed until

2004. However, due to growing demand and limited capacity additions, prices are picking up

steadily. The Company is second largest producer of Soda Ash in India.

Soda Ash is a basic input for glass, detergent and other chemicals. With the strong economic

development and growth in automobile and housing sector, the demand for Soda Ash likely to

grow at a CAGR of 5% in the coming years. During the financial year 2007-08, the Detergent,

Soaps, Soda Ash and LAB continued to be leading products for the company.

Nirma’s Soda Ash Projects- A Snapshot:

Nirma Ltd.

Project Name Soda Ash Project 1 Soda Ash Project 2 Soda Ash Project 3

Project Status Completed Completed Under Implementation

Project Cost (Rs. Crore) 1037 95.73 300

Event (1) Date of announcement Date of announcement Date of announcement

Date (1) 1995.06.01 2001.09.01 2007.01.13

Event (2) Expenses incurred till Expenses incurred till MoU signed

Date (2) 1997.06.10 2002.03.31 2007.01.13

Event (3) Completed Completed Completion by

Date (3) 2000.09.30 2002.09.30 2009.04.30

Event (4) Commercial Prod Commercial Prod

Date (4) 2000.09.30 2002.09.30

* The current capacity of the Soda Ash Plant is 650,000 TPA.

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The past trends in Soda Ash Production and Turnover by Nirma are tabulated below:

Soda Ash 2004-2005 2005-2006 2006-2007 2007-2008

Capacity (tpa) 650,000 650,000 650,000 650,000

Production (Tonnes) 542,378 527,912 465,364 358,742

Turnover (Tonnes) 545,459 519,206 474,864 351,958

Turnover (Rs.) 270.81 323.19 395.65 341.62

Observations:

Both the production and the turnover (in tonnes) have been falling for the past few

years for Soda Ash.

Turnover (in Rs.) has been rising, with a slight fall in FY 2008 clearly indicating

that company’s operational efficiency is improving.

Assumptions for analysis of the project:

The life of the project is assumed to be around 6 years (considering the fact

the company increased its capacity by nearly 70 % after 7 years from 2002).

After 7 years, either a new project to increase the capacity will have to be

introduced (depending on the status of the demand for Soda Ash) or the plant

will have to be scrapped off.

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The demand for Soda Ash likely to grow at a CAGR of 5% in the coming

years. The turnover is expected to grow @ 10% pa in the first few coming

years (considering the fact that now Nirma has become a global player);

however, with the increased competition, the turnover increase would reduce

towards the last few years.

The operating margin is assumed to be 20% considering the fact that with the

acquisition of SVM, Nirma is expected to improve its operations by in-

sourcing the advanced technology.

Depreciation on fixed assets is provided on Straight Line method.

Tax rate is assumed to be @ 33 %.

Total Capex cost = Rs. 300 Crore (Including Working Capital)

Nirma Limited Capex (All Fig. in Rs. Crores) 2009 2010 2011 2012 2013 2014 2015

Nirma Limited Additional Sales

300 330 363 399.3 359.37 323.433

Estimated operating margins

20% 20% 20% 20% 20% 20%

Initial Investment

Fixed Asset Investment -240

Working Capital Investment -60

Periodic Cash Flows

Depreciation

-40 -40 -40 -40 -40 -40

Change in Operating Profit before Tax Due to Capex

60.00 66.00 72.60 79.86 71.87 64.69

Tax @ 33%

19.80 21.78 23.96 26.35 23.72 21.35

Profit after Tax

40.20 44.22 48.64 53.51 48.16 43.34

Operating Free Cash Flow

80.20 84.22 88.64 93.51 88.16 83.34

Terminal Value

60

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FY 2009 2010 2011 2012 2013 2014 2015

Free Cash Flow -300 80.20 84.22 88.64 93.51 88.16 143.34

Thus, we have:

Payback period= Around 3.5 years

NPV @ 15.5 %= Rs.45.91 Crores

IRR = 21%

PI= 1.15

Comments:

The NPV of the project is positive.

The IRR is greater than the discount rate (assumed to be around 15%)

PI > 1

Hence, Nirma should go ahead with the project

References:

1. Nirma’s Annual Reports

2. CMIE-PROWESS

3. www.nirma.co.in