iiml lt finesse xl bankers
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8/13/2019 IIML LT Finesse XL Bankers
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Team: XL Bankers | XLRI, Jamshedpur
FINESSE
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Bid overview
Bid for Emaar’s project consisting of receiving substation and
distribution substation; Includes target PBIT of ~10% on cost
Effective matching of inflows and outflows = The key to our bid
Ensures negligible working capital
requirement by optimising timing
and quantum of cash flows
Ensures minimisation of currency
risk by matching currency of
receipts and payments
Working capitalminimisation objective
Currency riskmanagement objective
Effective vendor
selection balancing
quality and flexible
payment terms
Timely execution of
work and prompt
billing to ensure
collection from
Emaar in 45 days
Structuring contract
with Emaar to obtain
exact foreign currency
requirement for
payments
USD-INR risk
minimised due to
extensive hedging
through forwards
$ 33 mn
$ 33 mnBid amount
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Bid overview
$15.6mn + €3.8mn
+ ¥331.2mn + AED33.1mn
Bid for Emaar’s project consisting of receiving substation and
distribution substation; Includes target PBIT of ~10% on cost
Effective matching of inflows and outflows = The key to our bid
Ensures negligible working capital
requirement by optimising timing
and quantum of cash flows
Ensures minimisation of currency
risk by matching currency of
receipts and payments
Working capitalminimisation objective
Currency riskmanagement objective
Effective vendor
selection balancing
quality and flexible
payment terms
Timely execution of
work and prompt
billing to ensure
collection from
Emaar in 45 days
Structuring contract
with Emaar to obtain
exact foreign currency
requirement for
payments
USD-INR risk
minimised due to
extensive hedging
through forwards
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Key assumptions
Indian suppliers are willing to be flexible in payment terms
Vendors pass on copper price risk to bidder
Emaar to pay invoices within 45 days with no delays and nodisputes over invoice amount exist
Instruments for hedging currency and copper price risks are
available and deep and liquid market exists for the same
Bank guarantee commission = 1% and no margin requirement
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Strategies Adopted: Vendor selection
SuppliesIndia
60%
Europe
25%
Japan
15%
Balance supply
quality, flexible
payment terms,
currency risk
Utilisation of in
house capacity is the
primary mandate
Prior experience of
dealing with
European vendors
and cheap supplier
financing
Well known
suppliers. Provides
an opportunity to
reduce reliance on
European suppliers
ConstructionSteel
40%
Cement
40%
Labour
20%
• Construction expenditure would be mostly locally incurred in the UAE
• Procuring steel and cement locally makes sense due to product bulk and value
• Chance to reduce labour cost by recruiting lower cost labour from India, subject to local
governmental regulations
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Strategies Adopted: Working capital (1/2)
Our bid for the project$ 33 mnVendor payment terms structured such that investment in
working capital becomes negligible
Working capital required
$ 0.03 mn
Matching multi-
currency inflows
from Emaar with
payments to vendors
DLP applied to suppliers to
ensure parity with Emaar terms
Ensuring steady cash
flow through timely
submission of bills on
quarterly basis
Negotiate elongation of
vendor payment terms
Continued cheap financing expected from European suppliers due to depressed
economic environment
Arrangement of
bank guarantee
Favourable terms from Japanese
vendors expected weighing on
their urge for gaining strong
foothold in the market
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Strategies Adopted: Working capital (2/2)
$ 33 mnUSD million 02-Aug-14 01-Nov-14 31-Jan-15 01-May-15 01-Aug-15 01-Feb-16 Total
Supply 2.31 0.00 16.17 0.00 2.31 2.31 23.10
Construction 0.66 1.32 1.32 1.32 1.32 0.66 6.60
E&C 0.33 0.00 0.00 0.00 2.64 0.33 3.30
Total 3.30 1.32 17.49 1.32 6.27 3.30 33.00
USD million 02-Aug-14 01-Nov-14 31-Jan-15 01-May-15 01-Aug-15 01-Feb-16 Total
Supply 1.30 0.71 15.87 0.00 1.37 1.75 21.00
Construction 0.48 1.38 1.38 1.38 1.38 0.00 6.00
E&C 0.00 0.30 0.00 0.00 2.40 0.30 3.00
Total 1.78 2.39 17.25 1.38 5.15 2.05 30.00
1. Includes bank guarantee commission of $ 0.04 mn on ABG/PBG paid at the time of bid acceptance
Inflow
Outflow
Net cash1 1.48 0.41 0.65 0.59 1.71 2.95 2.95
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Financing package for Emaar
Our bid for the project$ 33 mnTo arrange for attractive financing package for Emaar while
minimising cost and risk to contractor Financing required
$ 33 mn
$ 33 mn• Financing from export development
agencies (EDAs) of vendor’s countries canbe an option
• Depressed economic scenario in EU
• Abenomics expected to promote
exports from Japan
• Possibility of obtaining atleast part of
financing from EDAs of vendors’
countries
• Financing from EXIM Bank, India
•
Promotion of exports is the mainobjective of EXIM Bank
• Financing package will enable the
Indian bidder to obtain the project,
hence falls within scope of EXIM Bank
• Also, a substantial portions of
supplies would be sourced from India
Option 1 Option 2
Bidder could guarantee the financing extended by EXIM Bank/EDAs to Emaar, to reduce
cost of finance in case bidder is rated higher than Emaar as well as to provide comfort to
lenders. However this will result in acceptance of credit risk by bidder on Emaar.
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JPY to
depreciate;EUR to
depreciate;
INR tostrengthen
Bidsubmittedbased on 3m
forwardrates
Eurozonebreak up risk
No option toreceive
paymentfrom Emaar
in INR
Multiplecurrency
payments tovendorsrequired
Currency Risk : Adopting a conservative approach
• Bidding in a combination of USD, AED, JPY & EUR, with the bid amount in non-USD currencies
being equal to contracted vendor payments
• Vendors asked to bill in their home currencies
• Would ensure exact matching of JPY,EUR and AED inflows and outflows
• Only USD portion would not have 100% matching outflows
• Hedge 100% of USD equivalent of INR expenses and 80% of estimated profits by entering into 18
month USD-INR forwards, ensuring majority of exposure is covered
• Clause to handle situation of EU breakup and subsequent redenomination to be added
Managing risks
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Prices may
decline owingto increase in
supply anddecline inChinesedemand
Price riskbetween Bid-Award periodand Award to
purchase period
Vendors pass oncopper price
risk
Copper is majorinput; prices
being linked toLME Copper
Commodity Risk: Factors and management
• Bid to acceptance: Risk of price changing between submission of bid and bid opening date to be
managed by buying copper options
• Copper options premiums usually range between 0.8% to 2% of contract value
• For 500 tons of copper @ current prices of $7400/mt, option premium would range between $
0.03 - $ 0.07 mn
• Post bid acceptance, copper can be fully hedged by buying copper forwards
Managing risks
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Team XL Bankers
Mahaveer Agarwal
- Mechanical Engineer from IIT, Guwahati
- Worked with RIL as a reliability engineer for 3 years- A CFA Level 2 candidate
Ajay M
- A qualified Chartered Accountant from ICAI
- Worked with ICICI Bank’s corporate strategy team for 2 years