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BUSINESS PLAN/CASE:

PLAN FOR

ACQUISITION,

RECAPITALISATION

and

MARKET REPOSITIONING

of

SEMBULE STEEL MILLS LTD.

by

VIRAT ALLOYS

APRIL 2013
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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
A. TABLE OF CONTENTS

S/NO. DESCRIPTION PAGE

1.0 EXECUTIVE SUMMARY 1


1.1 Introduction 1
1.2 Market 1
1.3 Technical Evaluation 2
1.4 Financial Appraisal 3
1.5 Conclusions and Recommendations 3

2.0 INTRODUCTION 4
2.1 Overview 4
2.2 Objective and Scope of Study 4
2.3 Methodology 4
2.4 Capital Requisition 5

3.0 HISTORICAL & CURRENT BUSINESS STATUS OF SEMBULE STEEL


MILLS 6
3.1 Overview 6
3.2 Company History 6
3.3 Management Set Up 7
3.4 Current Business Status 8

4.0 BUSINESS ACQUISITION & RECAPITALISATION STRATEGY10


4.1 Type and Purpose of Acquisition 10
4.2 Strategic Motivations 10
4.3 Post-Acquisition Strategy 12

5.0 PRODUCTS 13
5.1 Overview 13
5.2 Product Range 13

6.0 NEED/MARKET ASSESSMENT 16


6.1 Background 16
6.2 World Steel Production 17
6.3 Problems Affecting the Ugandan Steel Industry 18
6.4 Steel Product Demand and Supply 21
6.5 Raw Material Sources 22
6.6 Competition 23
6.7 Tariff Structure 23
6.8 Key Findings 24
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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
7.0 TECHNICAL EVALUATION 26
7.1 Locational Analysis 26
7.2 Production Capacity 26
7.3 Casting of Parts and Components 27
7.4 Manufacturing Process 27
7.5 The Tube Mill Process 35
7.6 Raw Materials 42
7.7 Facilities/Utilities Required for Project 43
7.8 Quality Control and R & D 44

8.0 MARKETING STRATEGY 46


8.1 Overview of Business Strengths and Strategy 46
8.2 Business Strategy 46
8.3 Sales and Marketing 48

9.0 GOVERNANCE & MANAGEMENT STRUCTURE 50


9.1 Corporate Status of Project 50
9.2 Management Structure/Organogram 50
9.3 Manpower Requirements 52
9.4 Systems and Procedures 52
9.5 Internal Control 53
9.6 Administration Department 54
9.7 Training 54

10.0 FINANCIAL APPRAISAL 55


10.1 Financial Plan 55
10.2 Cost of Project 55
10.3 Profit & Loss Account 56
10.4 Rates of Return 57
10.5 Payback Period 57
10.6 Capital: Output Ratio 57
10.7 Cash Flow 58
10.8 Balance Sheet 58
10.9 Break-Even Analysis 59
10.10 Value Added/Contribution to GDP 60

11.0 EXIT STRATEGY 62

12.0 CONCLUSION & RECOMMENDATIONS 63


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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
B. LIST OF TABLES

T/NO. DESCRIPTION PAGE

1. Earnings Forecast 3

2. Products and Services by the Existing Plant 14

3. Construction and Building Materials Sector Brief 20

4. Metal/Metal Products Sector Brief 21

5. Iron and Steel Mills in Uganda 22

6. Iron Ore Deposits in Uganda 23

7. Tariff Structure 23

8. Summary of Planned Production Facilities/Capacities 44

9. Proposed Manpower Structure 52

10. Cost of Project 55

11. Financial Plan 56

12. Summary of Profit & Loss Account 56

13. Rates of Return 57

14. Calculation of Payback Period for Equity and Total Investment 57

15. Capital: Output Ratios 58

16. Projected Cash Flows 58

17. Projected Balance Sheet 59

18. Calculation of Break-Even Analysis in Project Year 6 60

19. Value Added Contribution to GDP 61


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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
20. Key Assumptions Tables 65
20-1: Project Assumptions 65
20-2: Operating Assumptions 65
20-3: Revenue Assumptions 65
20-3: Financial Assumptions 65

C. LIST OF FIGURES

F/NO. DESCRIPTION PAGE

1. Exports and Imports trends in Ugandan Steel Industry 16

2. Typical Steel Rolling Mill 28

3. 12 Rolling Mill Configuration 29

4. 8 Rolling Mill Configuration 30

5. Stainless Steel Mill Products: The Production Process 31

6. Process Chart 37

7. Layout of High Frequency Welded Tube Mill 38

8. Process Chart of Spiral Welded tube mill line 39

9. Process Chart for a Stainless Steel Tube mill line 41

10. Management Structure 51


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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
D. LIST OF FINANCIAL ANALYTICAL SCHEDULES

S/NO. DESCRIPTION PAGE

01. Key Financial Modelling Assumptions 65

02/1 Initial Fixed Investment Costs 66

02/2 Project Component Expenditures by Source of Finance 67

03. Pre-Production Capital Expenditure by Category 68

04/1 Calculation of Working Capital 69

04/2 Calculation of Working Capital 70

04/3 Calculation of Working Capital: WorkingCapital Requirements 72

05. Fixed Assets and Depreciation Allowances 73

06. Total Investment Costs 74

07. Total Assets 79

08. Sources of Finance 84

09. Projected Cash Flow Table 85

10. Projected Cash Flow Table and Calculation of Present Value 86

11. Projected Income Statement 87

12. Projected Balance Sheet 88

13. Business Ratios 89

14. Projected Payback Period 91


VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
1.0 EXECUTIVE SUMMARY

1.1 Introduction

Iron and steel provides the basic input in a range of industries comprising capital
goods, consumer items, shipping, transport, housing and construction, energy
distribution, infrastructural facilities, etc.

The objective of this Business Plan is to evaluate market and financial viability of
acquiring and recapitalizing an existing steel rolling mill by expanding its operations to
include iron and steel scrap melting and re-rolling facilities.

1.2 Market

World steel production crossed 1.00 billion tons for the first time in 2004 (1.06 billion
tons) with annual growth rate of 5.7% per annum after 2000, the highest level of annual
increase recorded. Global steel consumption has been spurred by rapid economic
growth in China (8-10% pa) and India (7-8% pa).

The Ugandan iron and steel industry has been growing at unprecedented rates
averaging from 20% and 30% per annum for imports and exports respectively between
2002 and 2006 due to the booming housing and construction sector in the region.

Sembule Steel Rolling Mills Ltd. has a capacity of 20,000 tons per annum which has
remained more or less the same since its inception in 1971. Expansion of capacity was at
the forefront of the companys decision in the early 2000s to procure a loan from bank of
Baroda to enable it enhance its output capacity and replace obsolete or aging machinery
plant and equipment. However, owing to a lack of a dynamic market expansion and
business growth strategy, coupled with stiff competition from the other steel producers
in the country, the companys cash flow could not match its ambitious expansion
targets and servicing loan portfolios to such an extent that it ultimately failed to service
its outstanding debt obligations that shot up to UShs 7 billion (about US$ 3
million).The sensible way out of this debt trap was for the company to shop for a
business acquisition strategy in which the buyer would not only pay to redeem the
outstanding debt but also bring on board new technology and capital to revamp the
business while putting in place new marketing and management expertise to revive its
fortunes. The companys production in 2010-2011 was 21,000 tons of billets and various
finished steel products.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Relying on basically scrap (which constitutes 70% of their raw material intake), most of
the steel rolling mills in Uganda mills currently suffer from shortage of this raw
material. This has negatively affected the quality of their products and led to fervent
competition between them for scrap input, making their continued existence quite
doubtful.

Even with the very low annual per capita consumption (4.7 kg/year), the absolute steel
demand in Ugandan is estimated at a little over 150,000 MT p.a. remains well above the
current actual steel production of over 100,000 MT p.a. The existing steel industry
would thus have to increase both its liquid steel production and rolling capacity by at
least 50 per cent to cover just the local demand.

Present demand of 150,000 tons in 2011-2013 is expected to increase to 220,400 tons in


2016-2017 (at 8% per annum growth), raising deficit from 50,000 tons to 73,470 tons.

Key challenges facing the steel industry in Uganda include the use of old equipment in
most of the steel rolling mills which results in frequent breakdowns leading to low
capacity utilization; averaging below 50%. Besides, workers lack proper technical skills;
there being no serious linkages with research institutions to complement on quality and
work skills. Furthermore, is the problem of intermittent power supply that is
detrimental to the continuous casting process.

1.3 Technical Evaluation

The project will produce billets in the melting section which will become the input for
the re-rolling mills to produce a range of products (plain round bars, twisted bars,
deformed bars, girders, beams, channels, sections, etc.)

Annual production capacity of the melting unit is planned to be 62,700 tons/year whilst
the re-rolling mills will have a capacity of 65,000 tons per annum. High frequency
induction heating furnaces will be installed which have several significant advantages
over the relatively older process of arc furnaces.

A holding furnace of 5 tons capacity can be added along with a casting section for
producing precision parts and components for the engineering goods industry and the
industrial sector in general. A Chinese origin furnace and accessories will cost about
US$ 1.445 million plus US$ 252,630 (total US$ 1,697,630). At 100% capacity operations
the casting section can produce parts, components valued at US$ 3 - 4 million per
annum depending upon the size/weight of the items and materials used.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
The project will need a 5 acre plot, 4,765 square meters of built-up area and imported
machinery valued at US $ 7.451 million (US $ 1.251 million for the melting unit and US
$ 6.20 million for the re-rolling mill). Electric power requirement is placed at 8,500 KW
(connected load). Total staffing of 461 persons includes professionals, skilled and
unskilled workers.

Professional expertise, efficient corporate management and suitable systems and


procedures are essential for profitable operation of the project.

1.4 Financial Appraisal

Total project cost is estimated at US $ 16 million including working capital of US $


1,418,970. Summarized financial operating results for the first five years of operation are
shown in Table 1below.

Table 1: Earnings Forecast (In USD)


Description Year 2 Year 3 Year 4 Year 5 Year 6
Sales 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181
Gross Profit 15,088,128 14,034,706 15,615,027 17,334,532 19,142,917
Operating Profit 7,312,334 5,359,836 5,973,953 6,657,718 7,337,167
Net Profit 4,278,634 1,861,885 2,396,767 2,980,403 3,561,017
Cum. Retained Earnings 4,278,634 6,140,519 8,537,286 11,517,689 15,078,706

1.5 Conclusions and Recommendations

Iron and steel production capacity is inadequate to meet the countrys demand of over
150,000 tons in 2011-2012 (deficit of about 50,000 tons in current year is expected
toincrease to 107,000 million tons by 2016-2017).

Production capacity can be increased through three available options:-

Leveraged Buy Out for expansion of Sembule Steel Mills.


Establishment of a new steel mill based on indigenous iron are (this is likely to
take too much time, however, this option deserves serious consideration).
Setting up of new induction furnaces.

Prospective investors, both Ugandan and foreign need to be motivated and supported
through development financial institutional financing capacity to enable them invest in
this sector.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
2.0 INTRODUCTION

2.1 Overview

Iron and steel provides the basic input for development of a range of industries
comprising capital goods, consumer items, transport, housing and construction, energy
distribution, infrastructural facilities, etc. In view of its crucial importance for the
overall national economic development, VIRAT ALLOYS proposes to stake its role and
presence in the steel and steel production industry of Uganda by acquiring,
recapitalizing and strategically repositioning the current lowly performing market
status of SEMBULE STEEL ROLLING MILLS LTD. which is currently in receivership
over default of a USD 3 million bank loan.

In this business proposal, VIRAT ALLOYS proposes to fully rehabilitate and upgrade
from the current installed capacity of 30,000 Metric tonnes per annum to 70,00 Metric
tonnes of steel and steel products per annum. In view of the increasing demand for steel
and steel products in the country, and ambitious targets for industrial and economic
growth, it is evident that domestic supply capability will be insufficient to cater for
domestic demand in the coming years and additional output capacity needs to be
implemented soon.

The Government of Uganda is encouraging establishment of iron steel scrap melting


mills (arc-induction furnaces) in the country in order to develop indigenous melting
capacity to meet the shortage. The Plan evaluates the viability of setting up a scrap
melting unit along with a rolling mill.

2.2 Objectives and Scope of Study

The scope of this project covers the entire country since the project would procure raw
materials from, and market its products all over the country. The main objective is to
evaluate the technical, market and financial viability of the proposed project and its
capacity to service the USD 12 million loan that it would have secured from a
development financial institution for the purpose.

2.3 Methodology

2.3.1 Data Collection

Data collection methodology adopted for this Business Plan is described below:

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Data from secondary sources was collected and analyzed. Government
publications were consulted and various data analyzed.
Primary sources of data were identified and contacted for collection of
unpublished information.
Data was collected on costing inputs, selling prices, tariffs, etc. to compute cost of
production and evaluate financial viability of the project.

2.3.2 Project Appraisal Techniques

The consultants have adopted industrial project appraisal techniques followed by the
development financial institutions (DFIs) in the country which will facilitate
procurement of financial assistance.

2.4 Capital Requisition

VIRAT ALLOYS intends to seek financial assistance from the a development financial
institution in the form of a MEDIUM TERM LOAN in the amount of USD 12 million
for purchase of steel mill plant machinery & equipment; overhaul of existing plant
machinery and building infrastructure; provision of working capital and upgrading of
plant production capacity for steel and steel products as scheduled herein which will
assist in the operational set-up required and provide jobs to meet with the objectives of
this business plan. Initial approaches to the various development financial institutions
(DFIs have been made and indications are that they are willing to back the project, as it
represents an investment of only USD 26,149 per job. (461 jobs total).

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
3.0 HISTORICAL & CURRENT BUSINESS STATUS OF SEMBULE STEEL
MILLS

3.1 Overview

The Sembule Group is an enterprise involved in several industries from Steel to


Electronics. The companys product range includes:- Barbed Wire, Chainlink Fencing,
Roofing Sheets, Expanded Metal Lath, Hollow Sections, Mild Steel Plates, Mild Steel
Welding Electrodes, Reinforcing Bars, Reinforcing Fabric (BRC), Round Iron Bars,
Welded Wire Mesh, Wire Nails, Television sets, Radio sets and Telephones.

The Sembule Group has been active in the construction steel industry for more than 30
years (since its establishment in 1971) and it manufactures and supplies wire and
roofing products to customers in over 10 countries in the East and Central Africa region.

The parent company, Sembule Steel Mills Limited is organized into three divisions,
the wire division, steel rolling division and the roofing division. These three divisions
provide all the steel products listed above.

Consumer electronics products are produced by Sembule International Limited.


Sembule Limited is responsible for the group's real-estate and general trading
businesses.

The company is located in the Nalukolongo industrial area, 4/5 km off Masaka road,
Kampala, Uganda. It is strategically located in an industrial area with direct access to
several main roads, a railway siding and a very reliable industrial-strength high-voltage
electric power grid and our own power substation.

Sembule Steel Mills Limited is owned by its original founders, Mr. Christopher
Sembuya and the Late Mr. Henry Buwule's family. Today, Mr. Christopher Sembuya
continues to serve as the chairman of the Board of Directors. The management team is
led by the Managing Director, Mr. Francis Sembuya.

3.2 Company History

The Sembule Group has very humble beginnings. The original company Sembule
Steel Mills Limited was founded in 1971 by two brothers Mr. C. C. Sembuya (right)
and the Late W. H. Buwule (left). In fact the name Sembule comes from the
combination of their last names Sembuya and Buwule.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Sembule Steel Mills Limited started with a few wire-nail
manufacturing machines from WAFIOS. And in a few
years it had grown into one of the largest wire-nail
manufacturing companies in Uganda. Throughout the
1970s and 1980s the company continued to grow and
increase its product lines from wire nails to welding
electrodes and to diversify into the real estate business.

In the 1990s, Sembule diversified into banking, insurance


and electronics. Sembule Steel Mills Ltd on the other hand was able to increase its
product lines even further by introducing roofing and fencing products.

Throughout this period the Sembule Group managed to keep its lead as the group that
provides the highest quality products in the region as well as offering the best
customer service in the industry.

Today the company is still completely owned and run by the Sembuya and Buwule
families.

3.3 Management Set Up

Sembule's management philosophy continues to be based on providing the best quality


products to our customers and offering the best customer service possible.

Mr. C. Sembuya is the Chairman of the Board of the Sembule Group. He is also a co-
founder of the Sembule Group together with his brother, the Late Mr. W. Buwule.

Mr. C. Sembuya served as the Managing Director of Sembule Steel Mills Limited from
it's founding until 1996.

The management team is led by the Managing Director, Mr. Francis Sembuya.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Francis holds a Bachelor of Science degree in Business
Administration from Houghton College in New York, USA
and a Master of Science Degree in Economics from Eastern
University in Pennsylvania, USA.

3.4 Current Business Status

Sembule Electronics which was founded by Mr. Christopher Sembuya and his late
elder brother Henry Buwule, hit zenith in the early 80's, when it became the first
indigenous company to manufacture radio sets plus black and white TV sets, going by
the name "Makula".

Trouble for the company started when its founders took loans from the PTA bank and
other local banks, in a bid to embark on an ambitious expansion programme of their
businesses.

The otherwise well-meaning expansion however could not materialize and this resulted
in the brothers failing to repay the loans alongside suppliers of raw materials and other
service providers. Creditors would open a floodgate of cases in order to recover their
monies.

Apparently out of frustration for the long list of debts and other liabilities, Mr.
Christopher Sembuya decided to sell off the plant after the company failed to repay the
loan he had obtained from Bank of Baroda in a bid to raise money to clear the
accumulated debts.

Recently, Mr. Christopher Sembuya entered a consent agreement with Bank of Baroda,
undertaking to sell off the plant located on FRV 659, Folio Plot 3AKyaddondo (read
Nalukolongo off Masaka Road).

The consent gives Sembule Steel Rolling Mills, "the liberty to sell the Steel Rolling Mill
and the land on which it's sitting measuring 1.525 hectares plus all the buildings."

In order to safeguard its interests, the bank will maintain the mortgage -- it created on
the Land title while giving out the loan. Meaning the mortgage will only be removed
after Mr. Christopher Sembuya has paid fully a total of UShs 7bn (about USD 2.73
million), bank charges, legal expenses and any other incidental charges.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
The proceeds will be banked in Bank of Baroda and Mr. Christopher Sembuyapaid
monies over and above the amount that would be due and owing by the time of sale.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
4.0 BUSINESS ACQUSITION & RECAPITALISATION STRATEGY

4.1 Type and Purpose of Acquisition

Improve the target companys performance. Improving the performance of the target
company is one of the most common value-creating acquisition strategies. Put simply,
you buy a company and radically reduce costs to improve margins and cash flows. In
some cases, the acquirer may also take steps to accelerate revenue growth.

The proposed business acquisition of Sembule Steel Rolling Mills by VIRAT ALLOYS
is both a Purchase Existing and Leveraged Buyout methods of business acquisition
since it contains elements of both types of acquisition.

In the Purchase Existing method of business acquisition a business buys another


business, but operates the new business as a separate entity. Acquisitions can include
smaller or larger competitors or companies that complement the core business. Buying
an existing business ensures that the business is already operating with cash flow and
profits. The biggest advantage with this kind of purchase is that an existing business
already has "an established customer base, reputation and employees who are familiar
with all aspects of the business." This creates a better foundation for success as opposed
to starting fresh.

In the Leveraged Buyout method of business acquisition a company acquires another


company using a significant amount of borrowed money (bonds or loans) to meet the
cost of acquisition.

4.2 Strategic Motivations

The dominant rationale used to explain business acquisition activity is that acquiring
firms seek improved financial performance. The following motives are considered to
improve financial performance:

Economy of scale: This refers to the fact that the combined company can often
reduce its fixed costs by removing duplicate departments or operations, lowering
the costs of the company relative to the same revenue stream, thus increasing
profit margins.
Economy of scope: This refers to the efficiencies primarily associated with
demand-side changes, such as increasing or decreasing the scope of marketing
and distribution, of different types of products.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
Cross-selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire and
sell complementary products.
Synergy: For example, managerial economies such as the increased opportunity
of managerial specialization. Another example is purchasing economies due to
increased order size and associated bulk-buying discounts.
Taxation: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In the United States and many
other countries, rules are in place to limit the ability of profitable companies to
"shop" for loss making companies, limiting the tax motive of an acquiring
company.
Geographical or other diversification: This is designed to smooth the earnings
results of a company, which over the long term smoothens the stock price of a
company, giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders (see
below).
Resource transfer: resources are unevenly distributed across firms and the
interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources.
Vertical integration: Vertical integration occurs when an upstream and
downstream firm merges (or one acquires the other). There are several reasons
for this to occur. One reason is to internalise an externality problem. A common
example of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have
monopoly power and each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. Following a merger, the
vertically integrated firm can collect one deadweight loss by setting the
downstream firm's output to the competitive level. This increases profits and
consumer surplus. A merger that creates a vertically integrated firm can be
profitable.
Hiring: some companies use acquisitions as an alternative to the normal hiring
process. This is especially common when the target is a small private company or
is in the startup phase. In this case, the acquiring company simply hires the staff
of the target private company, thereby acquiring its talent (if that is its main asset

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
and appeal). The target private company simply dissolves and little legal issues
are involved.
Absorption of similar businesses under single management: similar portfolio
invested by two different mutual funds namely united money market fund and
united growth and income fund, caused the management to absorb united
money market fund into united growth and income fund.

However, on average and across the most commonly studied variables, acquiring firms'
financial performance does not positively change as a function of their acquisition
activity. Therefore, additional motives for merger and acquisition that may not add
shareholder value include:

Diversification: While this may hedge a company against a downturn in an


individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a much
lower cost than those associated with a merger.
Manager's hubris: manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company.
Empire-building: Managers have larger companies to manage and hence more
power.
Manager's compensation: In the past, certain executive management teams had
their payout based on the total amount of profit of the company, instead of the
profit per share, which would give the team a perverse incentive to buy
companies to increase the total profit while decreasing the profit per share
(which hurts the owners of the company, the shareholders).

4.3 Post-Acquisition Strategy

Since VIRAT ALLOYS proposes to run Sembule Steel Rolling Mills Ltd. as a separate
company, it will jointly set guidelines and leave it alone. A business is like a banana
both bruise easily. VIRAT ALLOYS will therefore work closely with the management
team of Sembule Steel Rolling Mills Ltd. to develop a sound written strategy and
long-range plan. It will attempt to reach agreement on goals and realistic timetables for
achieving them. It will also provide adequate capital and give the authority and
autonomy to succeed. It will put in place a simple, timely reporting system. Reward
successful achievement with lots of things, but mostly recognition for results they produce!

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
5.0 PRODUCTS

5.1 Overview

SEMBULE STEEL ROLLING MILLS produces a wide range of steel products for the
construction industry specializing in the manufacture of various high tensile steel bars and
sections conforming to Ugandan and British standards requirements in Uganda. These products
come in a broad category of grades in different standards, shapes, sizes and also as per
customer specifications. Company products find their application in various industries
comprising of capital goods, consumer items, transport, housing and construction,
energy distribution, infrastructural facilities, etc.

The objective of the proposed plant overhaul project is to turn into an integrated facility
consisting of an iron/steel scrap melting plant and a re-rolling mill. The scrap melting
unit will produce billets, which becomes the raw material for the re-rolling mill, from
which various re-rolled products will be made depending upon market requirements
(mild steel plain bars, twisted bars, deformed bars, girders, beams, channels, sections,
etc.)

5.2 Product Range

The current steel rolling mill has eight production lines that put out the following listed
products:

Wire nails and cold rolled round iron bars;


Welding electrodes;
Welded wire mesh ( BRC);
Fencing products (Barbed wire and chain link);
Roofing and cladding iron sheets;
Tubes ( hollow sections) and mild steel plates;
Expanded metal lath; and
Hot rolled steel products (Iron bars, able iron bars).

Products and services put out by the company are specifically listed in Table 2 below:

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN

Table 2: Products and Services by the Existing Plant


Sembule Steel Products
Expanded Metal Lathing
Galvanized and Pre-painted Roofing Sheets
Galvanized and Pre-painted Plain Sheets
Hollow Sections:
o Circular
o Square
o Rectangular
Mild Steel Plates
Wire Nails and Fencing Staples
Welded Wire Mesh (BRC)
Round Iron Bars
Galvanized Barbed Wire
Galvanized Chainlink Fencing
Galvanized Plain Wire
Steel Pipes

Consumer Electronics
Personal Computers
Television Sets
Radios

IT Support

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
6.0 NEED/MARKET ASSESSMENT

6.1 Background

Iron and steel is mainly used for the manufacture of industrial and agricultural
machinery and equipment, transportation vehicles, rolling stock, earth moving
equipment, ships / boats / vessels, durable consumer products and by the housing and
construction sector. However, these are broad areas of usage, its actual application is so
widespread that it would be difficult to list all specific uses and applications.

The Ugandan iron and steel industry has been growing at unprecedented rates
averaging from 20% and 30% per annum for imports and exports respectively between
2002 and 2006 due to the booming housing and construction sector in the region (URA,
2010). The industry is donned with a few companies which have been operating steel
mills in the country over the years, first based on imported billets and later
predominantly using scrap iron. From the 1960s to 1988, the Madhvani group ran East
African Steel Corporation in Jinja carried out steel production. Steel Rolling Mills under
the Alam Group of companies was also established at Jinja in 1987. BM Technical
Services in Mbarara which is run by local entrepreneurship also began operations while
more recently in 2002,Tembo Steel Mills was added to the list followed by several
others.

These industries have enabled substantial import substitution, supporting the rapidly
expanding building and construction sector and are the major reason why ratio of the
imported steel products to the exported ones has generally been reducing (Fig.1).

Relying on basically scrap, these mills currently suffer from shortage of this raw
material. Scrap which constitutes 70% of their raw material (Janke and Savov, 2000).
This has negatively affected the quality of their products and led to fervent competition
between them for scrap input, making their continued existence quite doubtful. None
the less, a mini-mill type outlook backed by sponge iron technology has to be
considered rather than the integrated mill option. Substantial state involvement seems
to be inevitable, be it in policy environment design or in the facilitation of financial
logistics.

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Figure 1: Exports and Imports trends in Ugandan Steel Industry (UBOS, 2009)

Year

6.2 World Steel Production

Global bulk steel production began in the late 1850s with the development of the
Bessemer converter, until then; steel was expensive to produce and was only used
because there was no other alternative. The innovation of scale of the Bessemer process
facilitated cheap and efficient mass production of steel rails for railway lines and
enabled the industrial steel production to increase sharply during the World War II
when the US government issued large amounts of money in loans to fund new plants
and expand existing ones so that by the end of war period in mid-1940s, the United
States controlled 60% of the world's steelmaking potential. However, in due course,
poor labor relations and deficient financial management added to lack of
innovativeness led to the collapse of the US steel industry in the 1960s while in later
years, competition from countries like Brazil and South Korea broke the industries
backbone as they dug deep into the American market.

Steel production in the USA in earlier times was almost exclusively from integrated
mills; this situation has been quickly changing. Up to 1974, for example, there were50
integrated steel mills in the United States; in 1994 however, there were only 23;most
having disappeared from the scene by closing down or merging to form new major
producers (Hogan, 1994). Mini-mills have since expanded as they had lower start-up
costs, greater freedom of location, and more flexible job organization. They also need

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less skilled workers and do not need to be located in particular areas since they are not
dictated by iron ore deposits and yet require minimal investments.

The Brazilian steel industry on the other hand started with the commissioning of Sabar
Works, an association between foreign and local investors with a 4.5 MT p.a.
production. Similarly, in the 1950s, Usiminas, a joint venture between the Brazilian
State and Japanese companies was led by the then Yawata Steel (now, Nippon
Steel).During the 1960s, the steel industry in Brazil was given high priority by the
government while the banks facilitated them with affordable credit. Today as the
abundance of raw materials and availability of relatively cheap labor compared to the
more developed countries complements this background, Brazil is quickly becoming a
world steel producer; posting an increase in production of 5.6 million tons, a 22.4%rise
between 1996 and 2006 alone. Brazil, for instance produced almost as much steel(2.7
MT) as the whole of Africa including the Middle East (2.75 MT), ISSB, 2010.

In China, most of the steel and iron making plants started in 1958. Their results were
generally poor because of the extremely small scale production i.e. less than 0.6MTpa.
This was due to poor technology, lack of skills and poor management skills. China
being a big importer of steel and steel products, import substitution with new home
made steel would have required immense amounts of capital. New large steelworks
were out of the question. The immediate answer was in modern mini mills which
required less capital, labor and energy with less pollution. The actual compromise
between the quickly growing demand for steel and the vast financial requirements was
actually to modernize and revamp the existing inefficient small and medium steel
plants on the mini-mill concept. The Chinese small and medium steel industries
currently account for more than 30% of the national steel production, forming an
important link in the steel chain. The cumulative effect is actually that Chinese steel
industry has been the worlds fastest growing in the past two decades. The Chinese
government remains intimately involved in its steel industry; providing significant
subsidies in the form of favorable tax regimes, export credit support, research and
development initiative and direct funding of new projects.

6.3 Problems Affecting the Ugandan Steel Industry

The major problems facing the Ugandan steel industry are low product quality and
quantity and shortage of raw materials. While the lack of product standardization
cannot be overlooked, the main shortcomings are associated with inconsistent chemical
composition which ultimately precludes good mechanical properties. Shortage of steel
scrap has caused stiff competition between the steel mills and has ultimately meant that

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low quality scrap is unavoidable; perpetuating poor quality of steel and threatening the
very existence of the steel industry in the country. The installation of continuous casting
steel rolling mills at Steel Rolling Mills, Jinja and Tembo Steel Mills, Iganga has
improved on the level of production. Because of old equipment, however, there are
frequent breakdowns leading to low capacity utilization; averaging below 50%. Besides,
workers lack proper technical skills; there being no serious linkages with research
institutions to complement on quality and work skills. Furthermore, is the problem of
intermittent power supply that is detrimental to the continuous casting process.

The key challenges facing the steel industry in Uganda can thus be summarized as
follows:

High cost of production.


o Soaring energy cost
o High transport cost
o Cheap imports
o Use of expensive imported raw-materials such as billets
Lack of enough qualified staff.
Unreliable technology in laboratories.
Lack of equipment especially in laboratories.

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Table 3: Construction and Building Materials Sector Brief


Sector brief Drivers and commercial Challenges
business opportunities
The sector has grown Booming demand for Tendering processes are
rapidly over the past construction services and often bureaucratic and
decade, with annual rates building materials. lengthy, while the lack of
averaging more than 10%, transparency is sometimes
largely due to the high rate Associated with this is the a problem.
of urbanization. need for investment in
infrastructure. Contractors are not using
The key activities include innovative and low-cost
road works, the construction The high demand for building materials.
of residential, office and materials in northern
commercial buildings and Uganda, arising from the The importation of key
the manufacture of paint, cessation of hostilities there, equipment, machinery and
cement, tiles, paving stones, after years of civil strife. materials involves long
corrugated iron and steel lead times, is subject to
fittings. Ugandan construction firms delays and can be costly.
are winning large contracts Energy costs are also high.
A limited number of large- in the DRC, Rwanda and
scale operators in the sector Southern Sudan.
are complemented by
several small and more- Most building materials are
specialized sub-contractors. locally available, while the
bulk of the materials for
There are a variety of finishing are imported from
industries that make China, Europe, India and
construction materials. South Africa.

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Table 4: Metal/Metal Products Sector Brief
Sector brief Drivers and commercial Challenges
business opportunities
A number of import- Metal for recycling is Erratic power supplies and
substitution firms exist, readily available (but the high cost of the energy
mainly using scrap metal. scattered). limits utilization levels of
rolling mills.
A few firms have metal and The high cost of imported
foundry workshops from items, coupled with long Poor working conditions in
which they make utensils lead times due to many metal-working
and implements and inefficiencies at the ports enterprises.
fabricate spare parts for the and at border crossings.
local industry. Poorly-trained workforce.
Low-cost, trainable labour.
Rolled steel is imported
through Kenya. Less than Both local and regional
10% of the demand for steel markets are expanding
products is met from local rapidly.
production.

6.4 Steel Product Demand and Supply

The Domestic demand in steel is dependent on the growth of the domestic construction
industry and due to Ugandas strategic location in the region, the local demand for steel
products is also influenced by the general aggregate demand in the region (URA, 2010).

Demand for steel in Uganda has been rising driven by a surge in infrastructure projects,
manufacturing and the housing sectors, where it is mostly used to build supporting
structures for houses.

Even with the very low annual per capita consumption (4.7 kg/year), the absolute steel
demand in Ugandan estimated at a little over 150,000 MT p.a remains well above the
current actual steel production of over 100,000 MT p.a. (MISSB, 2006). The existing steel
industry would thus have to more than double both its liquid steel production and
rolling capacity to cover just the local demand.

Last month, China Machine Building International Corporation pledged to establish a


$100 million iron ore mining and integrated steel plant in Mbarara District, western
Uganda.

The plant whose construction date is yet to be announced, is expected to be fully


operational 18 months after its construction has begun.

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Table 5: Iron and Steel Mills in Uganda (MISI, 2006)
Steel Mill Production Installed Rolling Actual Product
Facilities Capacity Capacity Production Range
(MTpa) (MTpa) (MTpa)
Steel Rolling 2 x 8 MT IF; 70,000 50,000 40,000 Rebars
Mills Ltd. Jinja 1 x 15 MT
EAF
Tembo Steel Ltd. 1 x 1.5 MT IF; 9,000 9,000 7,200 Rebars
Lugazi 1 x 2.0 MT IF; Angles
Tembo Steel Ltd. 1 x 5 MT EAF 12,500 10,000 6,000 Rebars
Iganga Angles
Hollows
BM Steel. 1 x 3 MT IF Not Not working Not working Not working
Mbarara working
BM Steel. 1 x 2 MT IF 4,000 5,000 4,000 Rebars
Kilembe
E. A. Steel Corp. 1 x 10 MT 24,000 Not working Not working Not working
EAF
UGMA Eng. 2 x 1 MT IF 4,000 2,000 _ Rebars
Corp.
Total _ 123,500 76,000 57,200 _

Data from the Uganda Bureau of Statistics shows that the real estate sub-sector grew by
5.8 per cent in 2010 compared to a 5.7 per cent growth in 2009, hence the surge in
demand for steel products.

Steel industries already in operation in Uganda include Roofings, Rolling Mills, Steel
and Tube Industries Ltd, Tembo Steel Mills, Uganda Baati and MM Integrated Steel
Mills.

6.5 Raw Material Sources

There is an outstanding shortage of steel scrap, the major raw material at present. By the
year 2000, the national scrap deposits were estimated at 150,000 to 200,000 MT while the
local steel production capacity stood at 72,000 MT p.a. (UIA, 2000). This shows that the
scrap steel input is currently mainly imported. However, substantial iron ore deposits
exist in the country and have been shown to be of relatively good quality reaching over
90% yield in some places and on the average over 60% iron ore (Table 6). There is also

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hope in the use of gas as reductant since the confirmation of 400,000,000 m3 per day
natural gas at Nzinzi in the Albertine basin in 2007.

Table 6: Iron ore deposits in Uganda (UIA, 2008)


Deposit location Iron ore grade Deposits
Butare, Kabale 90-98% Hematite 500 MT
Kashenyi, Kyanyamuzinda, 90% - 98% Hematite NA
Kamema
Mugabuzi, Nyaituma Hematite 20 MT
Bakusu, Nakhupa, Nangawale, Magnetite 41 MT
Surumbusa
Sakulu, Tororo 62% Magnetite 45 MT
Napak, Tororo Hills Magnetite Not known

6.6 Competition

Currently there are about four other active steel rolling mills providing competition to
Sembule Steel Rolling Mills in the Ugandan market. These are Roofings Limited,
Alam Group, Tembo Steel, Steel Rolling Mills, and Tororo Steel Works, and their
presence and market growth is driven by the high demand for steel products in the East
African region, a result of rapid economic development and the fast growing
construction sector.

6.7 Tariff Structure

Applicable rates of duties, levies on import of machinery and equipment for a scrap
melting unit, a re-rolling mill and import of iron/steel scrap is given below:-

Table 7: Tariff Structure (EAC Common External Tariff 2012)


Description Import Duty (on C VAT (on Duty paid Withholding Tax (on
& F Value) value) Duty paid value)
Machinery and
Equipment for a 0% 17% 6%
Scrap Melting Plant
Machinery and
Equipment for a Re- 0% 17% 6%
rolling Mill
Iron and Steel Scrap 0% 17% 6%

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6.8 Key Findings

The national steel industry is characterized by low production and dormancy with
relatively low capacity utilization. Out of the total melting capacity of 56.6 MT, electric
arc furnaces (EAF) represent 30 MT, constituting 53% of the total installed melting
capacity although they are only 27% of the number of furnaces in the country. Given the
fact that the EAF are either not regularly in operation or are actually dormant, the
overall melting capacity utilization is damped to less than 50% (Table 5). Thus although
the installed production capacity stands at 123,500 MT p.a., the actual production trails
at a mere 57,200 MT p.a.

The low volume and resulting poor quality of scrap present the largest problem to the
melting industry. Railway transportation of scrap from Mombasa at US$ 85/t is hardly
viable since rebars for example are produced internally at US$ 570/t (UIA, 2008).Steel
production, based on the mini mills variant rather than integrated mills, has been
proved quite effective in many parts of the world, given their lower fixed to variable
costs, making higher return on investment besides more effective human resource
allocation than integrated mills as shown in the case of China and USA. They also
require less start-up capital, enjoy greater freedom of location, and more flexible job
organization (Hogan, 1994). Mini mills, however, have long been waiting for
alternatives to scrap as raw material. The possibility of replacing scrap with direct
reduced iron (DRI) is strongly supported by the availability of iron ore in Uganda
(Table 6). Gas based DRI production looks attractive as there is little hope of obtaining
coal in the country. Both Circored and Finmet processes were thus floated in1997
(GSMD, 1997).

Considering the current steel demand of 150,000 MT p.a. (Table 5), the 60% grading of
the ore at Muko deposits (Table 6) with an estimated 8% mining losses (DGSM,1997),
252 MTpa of iron ore would be required to meet the current national demand, which
can be amply met by any Ugandan ore deposit (Table 6). About half of the nearly 70
DRI plants operating globally produce at less than 0.5 MT p.a. (ACTED,2000). This rate
applied to the Ugandan steel industry, would leave up to 50% of the production for
export. A DRI plant can produce viably in the range of US$ 315 a tonne (based on
electrical power at $US 0.105/kwh) while the world price for DRI is in the range of US$
420/tonne (Metal Bulletin Ltd, 2010), leaving a 33% profit margin. A tonne of liquid
steel made from the DRI in Uganda would be expected at US$ 402 produced in an EAF
while the billet steel price in August 2010 stood at US$490 (Metal Bulletin Ltd, 2010).
This leaves the sponge iron/mini mills option more attractive than integrated mills
which are only viable above 3 m MT/year (Jung, et al, 2005); whether DRI is used alone

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in the EAF or at 20 to 30% level in combination with the locally available scrap. About
half of the steel producers in Uganda still use billet casting (Table 5). The IISI estimated
that by 2003, 88% of world liquid steel production was continuously cast. Continuous
casting can reduce labor requirements in steel making by 10 to 15% and yet continuous
casters can be obtained suitable for annual capacities of 0.5mMT (OTA, 1979); a likely
production level to start with in Ugandan DRI based steel making.

Additionally, only two of the steel mills in Table 5, have fast, effective means of
determining the composition of steel such as spectrometers; the rest use slow outdated
quality control procedures. This can lead to poor and unreliable quality of the final steel
product.

On the other hand, considering the low wage rates at an average US$ 54 per
month,(UIA, 2008) the labor cost in Uganda contributes less than 15% of the cost of
liquid steel cost according to recent survey done by the researcher. Comparing this with
around 30% labor cost in many developed countries like Japan and United States (P.K.
De, 2000), one would expect the Ugandan steel making firms to be making very high
profits. This, however, is not necessarily true, most likely due to the low productivity of
poorly trained workers besides the high power tariffs, irregular power supply and high
taxation and all put together.

Furthermore, empirical findings show that the loss of efficiency due to outdated
equipment outweighs any efficiency gains from the learning-by-doing associated with
aging (Jung, et al, 2005). Uganda government should stand strongly against the transfer
of very old technology into the country; introducing incentives for example for
investors with new technology as the Chinese government has ably done (AISI, SMA,
2007).

The technical efficiency of iron and steel firms is positively related to their production
levels as measured by their shares of the total world production of crude steel (Jung, et
al, 2005). The Ugandan steel industries share of the world steel production is also so
insignificant that the overall production levels do not allow them to influence the price
of the steel in the region or globally. In Brazil, China, India and the USA, the production
quantities of the steel industry have been influenced by policy and financial
interventions of their Governments in order to uplift their economies of scale to decisive
levels either directly by providing funding as in Brazil and USA or indirectly by
involving foreign investors at national level as in India or providing incentives as in the
case of China and Malaysia.

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7.0 TECHNICAL EVALUATION

7.1 Locational Analysis

There are certain pre-requisites in the form of infrastructural facilities, availability of


professionals, etc. for the implementation of this kind of project as enumerated below:

Professionals;
Pool of skilled, semi-skilled workers;
Electric power;
Water;
Transport network;
Telecommunication facilities;
Proximity to source of raw materials;
Proximity to market for finished goods;
Availability of banking and financial services;
Socio-economic facilities for the large pool of staff (educational institutions,
hospitals/health facilities, recreational/entertainment facilities, etc.)

The current site of Sembule Steel Rolling Mills at Nalukologo Industrial Areaoff
Masaka road qualifies it as a suitable location for the project on the basis of the above
parameters.

7.2 Production Capacity

Annual production capacity of the melting unit is placed at 62,700 tons. The project will
have two furnaces, each furnace of 5 tons capacity requiring 60-70 minutes for a
complete cycle per heat or pour resulting in 18-20 heats per 24 hours of operation. For
the purpose of this study 19 heats per furnace per day has been assumed (2 x 19 heats =
36 pours of 5 tons each, or 190 tons per day).

Furnaces of this type normally operate for 350 days in a year, however, on a
conservative basis only 330 working days have been assumed per year (190 tons x 330
days = 62,700 tons per annum). The molten steel will feed a two strand continuous billet
caster which has a nominal capacity of 65,000 tons per annum.

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7.3 Casting of Parts and Components

Production of parts and components through the casting process is an avenue of


diversification which is available to investors of this project. This can be achieved by
installing a holding furnace of 5 tons capacity and setting up a separate section for
casting of parts and components in line with market demand.

The normal procedure in business relating to casting is that the customer provides the
moulds if the order size is relatively small, and in case of large and recurring 21 orders
the manufacturer prepares the moulds (having worked the cost of moulds into the
pricing structure and total business volume expected).

The investor (VIRAT ALLOYS) can purchase a Chinese origin facility estimated to cost
US $ 1.445 million (landed cost inclusive of duties, VAT, import related expenses, etc.).
Accessories including ladles, etc. for imported equipment will cost about whilst
imported equipment, accessories (including spare parts), etc. will cost about US $
252,630 (landed cost).

The project will possess the capacity to produce precision parts and components
through the casting process for the engineering goods industry and for the industrial
sector in general. The capacity (in terms of weight) and annual sales revenues generated
from this section will depend upon the size/weight of parts and components produced
and the materials used.

Price per unit can vary substantially depending upon the material used and the
size/weight of parts, components produced. However, as a rough approximation, it is
estimated that the project can produce parts and components valued at US $ 3 4
million per annum (at 100% capacity operations).

In implementing this project the investor (VIRAT ALLOYS) will need to assess the
viability of including a casting section in the plant and decide accordingly. This will
definitely raise the investment level.

7.4 Manufacturing Process

7.4.1 Technology Options

Three types of furnaces are generally operating in the country:

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Main frequency (low frequency) furnaces
Arc furnaces
Induction heating furnaces (high frequency)

Figure 2: Typical Steel Rolling Mill

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Figure 3: 12 Rolling Mill Configuration

12 rolling mill has 3 roughing stands and 2 finishing stands.

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Figure 4: 8 Rolling Mill Configuration

8 rolling mill has 1 roughing and 6 finishing stands. Roughing stands have plain rolls
while finishing stands have grooved patterns on them.

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Figure 5: Stainless Steel Mill Products: The Production Process

Structural
shapes
Blooms

Argon-Oxygen Blooming or Bar


Ingots Soaking
decarburization slabbing
Pit
mill Billets

Continuous Wire rods Wire


casting
Modern
Steel Electric
Stainless
Scrap Furnace
Steel

Cold mill
Vacuum Oxygen
decarburization Cold-rolled
Hot-rolled
sheet and sheet and
strip strip
Sendzimir
Slabs mill
Continuous
casting
Plate

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Very few main frequency furnaces are seen in operation (old models still in operation).
The number of arc furnaces is substantial, but not being added wherever new capacity
is being implemented. The preference for high frequency Induction furnaces is clearly
evident amongst melters, since new furnaces of this type are being ordered and
installed owing to their comparative advantages (given later in this chapter).

High Frequency Induction furnaces have a wide range of applications for melting of
both ferrous and non-ferrous metals and alloys like Mild Steel, Carbon Steel, Alloy
Steel, Grey Cast Iron, Malleable Iron, High Alloy Steel, Stainless Steel, Copper, Brass,
Bronze, Aluminium, Zinc, Lead, Tin, etc. Specially designed furnaces are being used for
surface hardening of parts, heating of billets from forging and pressing for a range of
uses, applications.

7.4.2 Principle of Induction Heating

When an object is placed near or inside a coil carrying an Alternate Current conductor,
a current is induced (by transformer action) in the object. When this induced current in
the object is large enough, it causes heating of the object and if this heating is for
sufficient duration and intensity, it can melt the said object.

7.4.3 Description of Production Process

Scrap is checked for carbon content, processed if necessary, weighed and then charged
into the furnace. Melt sample is taken out for chemical testing. Accordingly alloy
additions are made or more charge is put into the furnace as indicated by the melt
sample. One batch takes about 60-70 minutes for melting and pouring.

When molten steel comes into contact with the walls of the water cooled mould a thin
solid skin forms. However, due to the physical characteristics of steel and owing to
thermal contraction, the skin separates from the mould wall shortly after solidification.
The thickness of the skin increases due to the action of the water sprays as the casting
moves downward and eventually the entire section becomes solid.

The use of oscillating moulds that move up and down for pre-determined distances at
controlled rates during casting have practically eliminated sticking of the casting in the
mould.

Conservation and control of temperature of the molten steel requires the use of pre-
heating of the tundish. Small ladles may even be fired to compensate for heat loss. The

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molten metal is poured into the tundish from either a stoppered or tilting ladle. The
tundish is equipped with one or more nozzles that feed the metal into the moulds.

7.4.4 Advantages of Induction Furnaces

Induction furnaces have a number of advantages compared to Arc and main frequency
furnaces, as enumerated below:

Induction is suitable both for Ferrous and Non-Ferrous metals and alloys and
there is no metal or alloy which cannot be melted and cast through induction
furnaces.
Faster melting and more output is achieved with a given amount of energy
compared to other systems because very little exposed area reduces loss of
power due to heat radiation.
Regular induction stirring of the metal helps in production of metals of uniform
chemical composition and temperature, whereas in case of main frequency
furnaces excessive stirring leads to oxidation of alloys.
In induction furnaces the consumption of alloying elements is low because
oxidation of these alloys is not possible from small exposed areas of metal.
High quality melting is obtained, as electrical melting does not need any type of
fuel. Thus there is no risk of Carbon, Sulphur and Phosphorous contaminating
the metal.
It is possible to maintain precise control over furnace temperature during the
melting process to suit various metals, alloys and other metallurgical
requirements.
Changeover from Ferrous to Non-Ferrous metals is possible on charge to charge
basis which demonstrates the versatility of the furnace.
Low maintenance cost and little down time, particularly with solid state design.
Refractory cost is considerably lower compared to other furnaces. High stirring
in main frequency furnaces leads to faster erosion of furnace lining (replacement
of which is expensive).
Energy and space requirements are considerably lower for same output of
required metal. In case of main frequency the kwh consumption is more by about
200-250 kwh per ton of metal (650 kwh per ton of metal produced in induction
furnaces compared to 850-900 kwh for other furnaces).
Special techniques like vacuum melting to produce pure metal is possible with
Induction furnaces.

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Improved working conditions in induction furnaces where lesser heat losses
from the furnace prevents air pollution since no smoke, dirt or ashes are
discharged.

7.4.5 Specifications of High Frequency Induction Furnace

High frequency is defined as anything between 500-3,000 cycles per second.


Any object placed in the interior coil through which a high frequency alternating
current is passed becomes heated the heat being actually generated in the object
itself.
If a crucible is placed inside such a coil and filled with steel scrap, this scrap may
actually be melted by the heat generated in the pieces.
The HF induction furnace consists of a refractory holding vessel encircled by a
stout, hollow water cooled copper coil, the ends of which are connected to the
terminals of a high frequency motor.
A current alternating at some 1,000 cycles per second and amounting to about
400 amps at 2,000-3,000 volts passes through the coil. At these high frequencies of
alternation, this voltage is not dangerous to human life.
Melting temperature ranges between 1,600-1,800 degrees celsius.
Power consumption in HF-IF is about 650 kwh per ton of metal produced.
One cycle of heating (up to pouring) takes about 60-70 minutes. Approximately
18-20 heats per 24 hours of operation can be achieved.
Molten metal stirs itself under the action of the high frequency current, a deep
turning over movement being set up from the top to the bottom.
Recent technological developments in USA and Europe offer HF induction
furnaces with the following features:-
METALS APPLICATIONS
All ferrous metals Small to medium-sized foundries
All non-ferrous metals Batch melting
Precious metals Vacuum melting
SIZES POWER SUPPLIES
3 kgs to 2,000 kgs Solid state converters
Solid state to 2,200 kW 1 KHz to 10 KHz
TYPES
Transit type
Steel case
Lift coil (truck type)
Lift coil (swing type)
Table top
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7.5 The Tube Mill Process

VIRAT ALLOYS proposes to introduce the tube mill process to the plant that will
prove quite handy in outputting a variety of pipe products as part of its market
diversification programme. The pipe products that VIRAT ALLOYS proposes to roll
out include: Petroleum conveyance pipes, Natural gas pipes, City gas pipes, Pipe
network pipes, Chemical industry, Electricity, Steel trusses, Water and Gas pipeline;
they are also widely used for a variety of pressure pipelines.

The kind of pipe products that are manufactured by the tube mill process depend on
the type on any of the four major types of tube manufacturing process employed ERW
(Electric Resistance Welding) pipe mill; High Frequency Welded tube mill line; Spiral
Welded tube mill line; and the Stainless Steel Welded tube mill line which are described
below.

7.5.1 ERW (Electric Resistance Welding) pipe mill

1. Brief introduction of ERW pipe mill

The ERW (Electric Resistance Welding) pipe mill is a series of machines that builds
longitudinal weld seam pipe with steel strips of certain width. It starts by uncoiling and
flattening the slitted steel coils into steel strips. The flattened steel strips will then be
inserted into the forming machine and the rollers in the machine will bend the strip to a
round pipe shape. The round pipe will then be sent into the weld box where the tube is
welded by a high frequency or solid state welder. The welded pipe will be formed to
expected shape or size in a sizing machine. Finally the pipe will be cut to length and
bundled.

2. Function:

This pipe is used especially for Petroleum pipes, Natural gas pipes, City gas pipes, Pipe
network pipes, Chemical industry, Electricity, Steel truss, Water and Gas pipeline; it is
widely used for a variety of pressure pipelines.

3. Process Flow

Feed - uncoil - straighten - shear and buttweld - loop storage - form - HF welder - IF
anneal - cool - size -cut - output - end bevel - hydraulic test - collect.

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4. Machine parts working in the line

1) Uncoiler
2) Hoop cage or Horizontal Accumulator
3) Main Machine:
a) Forming Machine
b) Roller System of Forming
c) Seam Guide
d) High Frequency Induction Welding Machine
e) Roller System for Moving
f) Burr Removing Frame (Inside and outside Burr )
g) Water Cooling System
h) Sizing Machine
i) Roller System of Leveling
j) Speed Testing Wheel
k) Turkish Frame
4) Auto Flying Saw Controlled by Computer
5) Run out table
6) Electric Control Equipment
7) High Frequency Welding Machine

5. Technical Specification

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7.5.2 High Frequency Welded tube mill line

Figure 6: Process chart

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Figure 7: Layout of High frequency welded tube mill

Introduction of the roll forming process

Roll forming is a continuous metal forming process, in which roll forming machines are
used to shape metal coils or sheets into parts as the material moves through the
machine. Roll forming machines consist of sequences of roller die pairs, located on both
the top and bottom of the machine. As the metal moves through the machine, the rollers
bend the material along the linear axis, forming a variety of different configurations.
Typically, roll formed parts are created at room temperature, making this a cold
forming process. Roll forming is able to accommodate a wide selection of metals,
including bronze, brass, zinc, titanium, copper, aluminum and steel. Of these metals,
however, aluminum and steel remain the most commonly used.

Some of the parts that manufacturers use roll forming to create include channels, angles
and rings. These parts are the foundations for many industrial products, providing
support and connection for a variety of applications. Channels provide a support
system for numerous roll-formed products, such as frames and rails. Angles provide
support in two directions, and they are used on corners and edges. Angles also contain
holes for connecting parts. Finally, rings are commonly rolled from other shapes and
often function as container seals and lids. In addition to standard configurations, many
manufacturers will offer custom roll forming services to fulfill customer requests.
Roll forming services can quickly and efficiently accommodate high-volume orders.
Roll forming machines are able to maintain production speeds ranging from 100 to 180
feet per minute. Most roll forming services use approximately 94% of the coil material
during the forming operation, resulting in fewer leftover scraps than other processes.
The range of shapes that roll forming can create is diverse, and the final products have
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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
more consistency and tighter dimensional control. On the downside, however, the
production of extremely short parts may not be feasible for everyone, since to cover the
tooling costs, 100,000 feet per year must be produced and sold. Roll forming is,
therefore, best for high volume productions.

A variety of industries utilize roll forming services. For the aerospace industry, roll
formed products are used for window frames, helicopter blades and trimming. The
appliance industry uses these products for handles, drawer slides, refrigerator shelves,
ladder supports and control panels. Fence posts and lawn and garden equipment for
agriculture are other examples of the many diverse products created from the roll
forming process. Further uses are products for vending machines, conveyor systems,
gas station pumps, ramps, rail cars, craneways, racks and shelving, guardrails and
doorframes.

7.5.3 Spiral Welded tube mill line

Figure 8: Process chart

This mill is capable of making pipe for oil, water, and gas transmission or for pilings.
1. Decoiler and testing: decoiling with the steel strip, operate ultrasonic testing firstly.
2. Edge miller: make the steel sheet to required width, edge parallelization and groove
shape.
3. Shearing and forming: shear the steel sheet to tubular shape according to the out-to-
out spiral.
4. Welding and cutting: after finishing the inner and outer welding, cut the pipe to
length.
5. Visual test: operated by technician with the main parameters.
6. Ultrasonic test: test the inner, outer welded seam and the base metal.
7. X-ray test: test the inner and outer welded seam.
8. Bulge test: test every steel tube with the hydrostatic testing machine.
9. Bevelling and facing: bevel the steel tube edge to required size.
10. Final test: ultrasonic and X-ray test again, magnetic particle inspection.
11. Oil coating and marking: do oil coating to protect corrosion, marking with
customers requirement.

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7.5.4 Stainless Steel Welded tube mill line

Stainless Steel Welded Tubes/Pipes are manufactured on Continuous tube mill using
Multitorch TIG (Tungsten Inert Gas) welding Process. Prime quality stainless steel
strips having trimmed edges are fed to the tubes mill after through quality checks. Strip
passes through various sets of rollers fitted in mill as per the required size. This strip is
gradually converted in to the tabular shape. The Edges are welded using TIG welding
process by welding unit fitted on the mills the inside weld bid is instantaneously
removed by online bid removing machine.

Rolled Tubes/Pipes thus produced are cut to required length. This is further subjected
to heat treatment (annealing) after proper cleaning to remove the stresses included
while formation as well as welding and to restore the original grain structure. Heat
Treatment is carried out on the continuous roller hearth furnace fitted with temperature
controller and recorder. After heat treatment Tubes/Pipes are Straightened and
subjected to pickling to remove the scale on the surfaces.

In case the final size cannot be produced from the mill directly, the same is produced by
cold drawing operation. To make the tube/pipe suitable for cold drawing, it is coated
with oxalate & shop solution which acts as a lubricant and reduces friction while
drawing. In the drawing operation, the tube/pipe is drawn over the draw bench using
precision tooling i.e. Dies Plugs as per the requirements of finished size. The drawn
tube/pipe under goes heat treatment, Picking and other operations as specified above
after surface cleaning.

Finished pipes/tubes are marked with computerized ink Jet Marking Machine. Each
pipe/tube is marked as "Manufacturing Standard. Grade of Material, Size, Heat No.,
Stamp of third party inspection agency "to Correlate with our Test Certificate.

The Finish tubes/pipes thus produced undergo various testing and quality checks
followed by proper packing and dispatch.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Figure 9: Process Chart for a Stainless Steel Tube mill line

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7.6 Raw Materials

7.6.1 Inputs

Scrap melting has become an integral part of the countrys steel industry in order to
augment steel production. Raw material for both processes (induction and arc) are the
same. All grades of scrap (excepting cast iron turnings) can be melted in Induction
Furnaces to produce mild steel (MS) ingots or billets once they are free from rust and
dust. Production cost of Induction furnaces is somewhat less on account of:

Low melting loss because the loss of Fe in the form of FeO is negligible.
Metal is not exposed to Arc (3,000 degrees Celsius) thereby minimizing the
oxidation of metal.
No loss of metal during slag removal.
Lower power consumption.

The main raw material is iron and steel scrap. At 100 % capacity utilization the project
will need 67,089 tons of scrap (inclusive of 7% wastage) to produce 62,700 tons of billets.
In addition it will also require other inputs:

Mineral / Chemical At 100% Capacity


Ferro Silicon 160 tons
Aluminum 35 tons
Laboratory Chemicals
Consumables (wood, furnace oil, coffee husks, etc.)

7.6.2 Sponge Iron as Raw Material

After considerable research and development efforts, sponge iron-making technology,


in particular coal based sponge iron making, has become an established iron making
process in both developed and developing countries. Sponge iron manufacturing is
expanding rapidly owing to the following reasons:-

Sponge iron has become an accepted substitute for scrap.


Sponge iron is a high quality metallic product produced from iron ore having
low amount of tramp elements.
The use of alternative iron has started exceeding 20% of the charge used in
secondary steel making worldwide.

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Generation of reduced scrap quantities in integrated plants due to continuous
casters and other modern techniques.
Coal-based sponge iron processes have low capital requirements and
comparatively a simpler technology.

As far as Chemical composition is concerned, even if Mild Steel scrap is of an assorted


type and the opening carbon content varies from low to high, it can be easily
controlled/adjusted within the limits by using Sponge iron. There are no tramp
elements in Sponge Iron, therefore, the steel made by using sponge iron is of better
quality.

Current international prices of sponge iron range between US $ 250-280 per ton, C&F
Mombasa. The landed cost Kampala is estimated at US $ 460-500 per ton (assuming a
freight rate of US$ 120 per ton from Mombasa to Kampala and total duty incidence of
24% including import related expenses). This is nominally in excess of the price of
imported scrap (US $ 440per ton) being offered by importers (from ready stocks
maintained at local warehouses). Presently melters seem to prefer shredded scrap
imported from UK and UAE.

7.7 Facilities/Utilities Required for Project

7.7.1 Land

Land for this project is already available at the Sembule Steel Rolling Mills current site
at Nalukolongo Industrial Area and measuring 1.525 Ha (approx. 3.8 Acres).

7.7.2 Buildings and Civil Works

Production area requirement estimated at 3,500 square meters whilst administration.


block, stores, laboratory and ancillary structures will have a built-up area of 1,265
square meters (total 4,765 square meters). Along with internal lanes, gates, etc. Total
cost of buildings and civil works is estimated at US $ 424,420.

7.7.3 Machinery and Equipment

Machinery and equipment proposed to be imported for the project is given in Annex-1.
Cost of machinery can vary widely depending upon origin of supply. Scrap melting
plant of Italian origin will cost US $ 2.500 million whilst Chinese origin machinery can
be procured for US $ 1.500 million. Project cost estimates have been based on Chinese
machinery and equipment.
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The melting units power requirements are estimated at 5,200 KW (connected load) with
the re-rolling mill needing an additional 3,300 KW (total 8,500 KW). Power
consumption and expenses for the first five years of operation are shown in the
earnings forecast.

Table 8: Summary of Planned Production Facilities/Capacities


Plant Units Capacities
Electric Induction Furnace 40,000 Tonnes per annum of liquid steel
Continuous Caster 35,000 Tonnes per annum of billets
Rolling Mill 62,700 Tonnes per annum of rolled products

The Plant will also be equipped with the following ancillary facilities

Plant Raw Material Handling


Air Separation Plant
Computer Centre
Electrical & Mechanical Maintenance
Workshops
Power distribution & Compensation Unit
Water Supply System
Training Centre
Warehouses
Laboratory

7.7.4 Water

In an induction furnace the cooling water is re-circulated after passing through a


cooling tower, therefore the only losses which can occur are windage, spillage and
evaporation loss. Along with requirements for human consumption, general cleaning,
gardening, etc. water requirements are estimated at 150,000 litres a day (49,500,000 litres
rounded off to 50.0 million litres per year).

7.8 Quality Control and R & D

7.8.1 Quality Control

Raw material is stacked grade wise. Raw material personnel regularly check the
material to ensure that there is no mix up of heats.

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Measuring and Testing Equipment are periodically calibrated. Chemical analysis,
tensile test, hardness test and bend tests are carried out at in-house laboratory equipped
with 60 T capacity universal testing machine, Brinnel & Portable hardness test
machines. Thorough multistage inspection is carried out right from raw material
preparation to the dispatch of the finished products.

Finished Material meeting the required quality standards only is shipped.

The Sembule Group production equipment is manufactured by industry leaders such


as Oerlikon, Wafios and Schlatter

The Sembule Group is ISO 9001:2000 certified.

7.8.2 Quality Assurance

Quality is the hallmark of VIRAT ALLOYS. This is inline with the Company quality
policy of sustaining and enhancing the level of customer satisfaction by producing
quality products and prompt services.

The Quality Assurance Process will ensure that quality checks are done at each stage of
the production process, starting from raw material to finished products.

Finished products will be subjected to stringent quality checks such as chemical


analysis, mechanical testing, surface inspections, dimensional control and
metallographic investigation.

VIRAT ALLOYS Quality Assurance department will be equipped with ultra-modern


facilities as spectrometer, Universal Testing Machine (UTM), microscopic laboratory etc.

VIRAT ALLOYS laboratory facilities will be periodically calibrated by the Uganda


National Bureau of Standards (UNBS).

7.8.3 Research & Development

VIRAT ALLOYS will install a well-equipped and sophisticated laboratory at the plant
with in-house R & D Team for adopting stringent Quality Control measures as per the
BIS standards at all stages of production process, to assure best quality products. Before
the production process begins, the raw material will be passed through all required
testing such as chemical composition and mechanical properties.

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8.0 MARKETING STRATEGY

8.1 Overview of Business Strengths and Strategy

8.1.1 Business Strengths

VIRAT ALLOYS plans to capture a significant share of the domestic market within five
years of operation by employing and projecting the following core strengths:

a) Putting in place vertically integrated operations;


b) Generating strong cash flows;
c) Employing low cost and flexible steel production;
d) Establishing a nationwide distribution network;
e) Building strong brand names;
f) Crafting a history of innovation; and
g) Applying an experienced management team and workforce.

8.1.2 Strategy

The key elements of VIRAT ALLOYS business strategy will be:

a) being the customers preferred supplier;


b) improving operating performance;
c) optimizing the business portfolio;
d) people providing competitive advantage; and
e) focused strategic expansion.

8.2 Business Strategy

The key elements of VIRAT ALLOYS business strategy are to be the customers
preferred supplier, improve operating performance, optimize the business portfolio,
ensure VIRAT ALLOYS people provide a competitive advantage and expand the
business through focused strategic expansion.

(a) Being the customers preferred supplier


VIRAT ALLOYS management intends to implement a range of measures aimed at
further focusing the business on delivering value to its customers.
Initiatives include:
i. establishing customer driven performance criteria throughout the business;

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
ii. restructuring sales and marketing activities to provide a single customer contact
point;
iii. expanding services including inventory management, e-commerce, technical
advice and providing improved customer solutions; and
iv. capitalising on direct sales to accelerate the introduction of new products and
services.

(b) Improving operating performance


The formation of VIRAT ALLOYS provides significant opportunities to improve
operational efficiency.
Initiatives being pursued include:
i. completion of the integration of VIRAT ALLOYS business units to maximize
the profitability of the overall business;
ii. building on VIRAT ALLOYS existing competitive cost position through an
ongoing cost reduction program;
iii. improving integrated logistics management to reduce operational complexity,
enable better production planning and reduce inventory levels;
iv. implementing e-commerce initiatives to lower operating and transaction costs;
and
v. establishing shared services to deliver lower cost business support.

(c) Optimising the business portfolio


VIRAT ALLOYS has been formed by bringing together businesses which have
historically been managed independently. Initiatives being pursued to reduce costs and
capital requirements and improve overall margins by optimizing the business portfolio
include:
i. continually reviewing the configuration and loading of manufacturing facilities
and operating sites to ensure optimum utilization;
ii. reducing VIRAT ALLOYS fixed asset base by keeping capital spending at levels
less than depreciation;
iii. rationalization of low margin products and activities;
iv. pursuing opportunistic export sales when international prices deliver profitable
returns; and
v. changing and challenging existing distribution channels.

(d) People providing competitive advantage


VIRAT ALLOYS will implement programs aimed at:
i. aligning employees to customer and business needs;
ii. driving learning and continuous improvement; and

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iii. rewarding employees for their contributions to the achievements of the total
business.

(e) Focused strategic expansion


VIRAT ALLOYS expansion strategies include:
i. active participation in steel industry rationalization and taking advantage of
acquisition opportunities that exist in Uganda and the broader EAC market;
ii. entering new markets through the development of new applications for existing
products;
iii. pursuing opportunities for long term export sales of selected high value added
finished products; and
iv. a commitment to research and development of new products and services aimed
at meeting future customer needs, and acceleration of the commercialization of
patented and unique technologies.

8.3 Sales and Marketing

VIRAT ALLOYS is made up of individuals who are experts in their fields. As a result
of the stress on its human resources and their continuous training and development, the
sales and marketing teams implement the most advanced sales and marketing
techniques in their operations.

The most remarkable advantages of our sales and marketing teams to our customers
can be summarized as follows:
Timely and accurate response to all customer needs.
Application of all recognized trade practices.
Instantaneous adaptation to market changes thanks to usage of the most
developed information and communication systems.
Ability to satisfy all customers' requirements with regards to serving the most
complicated trade structures.
Ability to offer the best sales alternatives due to the deep knowledge in sourcing,
logistics, transportation and finance.
Strategic planning and guidance for customers according to the accurate
forecasts due to extensive knowledge about the markets and trends.
In addition to its own sales and marketing staff, the company will aggressively
pursue the development of a nationwide agency network in throughout Uganda
and the wider EAC market for its steel products.
Regular visits of personnel to customers.

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Use of a fleet of company dedicated trucks for easy and quick delivery of
company products. These trucks will criss-cross the nation delivering VIRAT
ALLOYS products to customers.
Set up of a dedicated customer care cell to handle customer complaints will be an
integral part of the marketing operation. Complaints will be promptly attended
to and settled to the utmost satisfaction.
On a regular basis, the level of customer satisfaction will be monitored and
corrective actions are taken.

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9.0 GOVERNANCE & MANAGEMENT STRUCTURE

9.1 Corporate Status of Project

The project will be owned and operated by a public limited company (VIRAT
ALLOYS) incorporated in Uganda under the Companies Act (Cap 110) 1961. The
sponsors have the option to contribute to the extent of 50 % or more of paid-up capital
with the remaining amount to be offered to the general public through public flotation
of shares subsequent to procurement of the consent of the Controller of Capital Issues.

9.2 Management Structure/Organogram

The project involves large investment in manufacturing facilities and related assets, a
substantial portion expected to come from the general public through Initial Public
Offering (IPO) of shares through the stock markets, and a sizeable chunk as financial
assistance from financial institutions. Professional management in all spheres and at all
levels is essential to ensure high productivity, efficiency and profitability. The proposed
management structure is described below and subsequently depicted in the form of an
organogram.

9.2.1 Board of Directors

The apex body presided by the Chairman, it is elected by shareholders at the Annual
General Meeting, and is mandated to formulate policies, review operations and perform
various functions as laid down in the Companies Act (Cap 110) 1961in conjunction with
the Memorandum of Association and Articles of Association of the Company.

In order to ensure that the project is professionally and competently managed, it is


imperative that Directors on the Board of Directors should be from the steel sector with
appropriate qualifications and experience.

9.2.2 Managing Director (Chief Executive Officer)

The CEO performs his functions in accordance with the MA/AA and as per policy
guidelines laid down by the board, to which he is accountable. The CEO must be a
qualified, experienced professional in the field of metals, metallurgy in order to exercise
effective control on the organization.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Figure 10: Management Structure

Board of
Directors

Managing
Directors

Director Director Director Finance


Production Marketing &
Administration

Factory Sales Manager


Manager Manager Manager
Accounts Admin.

Sales Executive

Shift In- Maintenance Accountant Cashier


charges Staff

Labour Purchase Security


Officer Officer Officer

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
9.2.3 Directors (Production, Marketing, Finance and Administration)

These senior level executive positions need to be filled by professionally competent


persons. Job descriptions should be prepared for this hierarchy of executives, and also
for lower levels (down to the lowest level of managerial positions).

9.2.4 Management Team

This is a body of senior executives comprising CEO and all three Directors who
collectively take executive decisions and exercise supervisory control. The Managing
Director is assisted by his senior colleagues on issues of corporate significance. It
normally meets once a week (scheduled) or as and when necessary.

9.3 Manpower Requirements

The project will need to employ 461 persons of various skills and experience including a
substantial number of un-skilled workers.

Table 9: Proposed Manpower Structure


Staff Category No. of Persons
Factory Admin. 71
Production Supervisor 28
Production Staff 301
Workshop maintenance 21
Kitchen, canteen 10
Head Office (Admin., Sales, Accounts, etc.) 30
Total 461

9.4 Systems and Procedures

An organizations performance is largely dependent upon the formulation of


appropriate systems and procedures to cover all organizational aspects, such as:-

Materials Procurement
Finance and Accounts
Inventory Management
Quality Control
Marketing
Delegation of Authority

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Human Resource Management
Due importance must be given to this management aspect by the board of directors and
senior executives in order to ensure organizational efficiency.

9.5 Internal Control

The main activities of the Internal Control can be summarized as follows:

1. Stock taking
2. Stock of iron rod
3. Raw materials and finished goods stocks card
4. Scrap stock card
5. Counting and supervising the packing out of pipe
6. Preparing of weekly sales and value record
7. Keeping of invoice
8. Writing of invoice, receipt and credit paper
9. Weekly report on sales
10. Monthly sales report
11. Supplier account
12. Customers account
13. Writing of voucher
14. Petty expenses
15. Monthly and daily expenses report
16. Cash analysis on expenses
17. Recording of sales day book
18. Recording of purchases day book
19. Recording of bank deposit
20. Recording of bank turnover
21. Recording and keeping of disbursement sheet
22. Preparation of work order
23. Advance payment
24. Posting on the system
25. Credit paper
26. Releasing of materials
27. Petty cash analysis book
28. Staff loan account

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
9.6 Administration Department

The main activities of the Administrative department can be summarized as follows:

1. Implementation of the company's policies


2. Recruitment and selection
3. Training and Development
4. Implementation of Salary structure
5. In charge of staff welfare viz: (a) Canteen (b) Clinic (c) Safety
6. Handling Public relations issues
7. Implementation of Government policies as directed
8. Complying with Labour law as agreed
9. Handling security issues
10. In charge of fire and prevention
11. Fully in charge of staff promotion
12. Handling staff discipline and related issues
13. Handling protocol matters

9.7 Training

Some technical positions such as that of metallurgist, chemist, finance, marketing, etc.
will be filled by persons possessing requisite qualifications and experience. Middle and
junior level employees need to be trained regarding organizational matters, at times on
operations/maintenance of machinery and equipment, etc. In the present day
competitive environment companies need to provide specific skills training to staff
along with refresher courses to enable them to keep up with technological progress and
advancements.

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10.0 FINANCIAL APPRAISAL

This section evaluates various financial aspects of the project (cost of project, earnings
forecast, rates of return, payback period, cash flow, balance sheet, etc.). Wherever
calculations, workings, etc. are voluminous, a summarized version is presented in this
chapter and detailed calculations are given in the relevant Schedules of Financial
Analysis.

10.1 Cost of Project

Total project cost is estimated at US$ 16 million as shown below in Table 10 in


summarized form.

Table 10: Cost of Project (In USD)


Description Local Currency Foreign Total
Currency
Land 2,860,620 _ 2,860,620
Buildings and Civil Works 422,240 _ 422,240
Machinery and Equipment _ 5,415,930 5,415,930
Freight & Import Related Costs 2,035,490 _ 2,035,490
Erection and Installation 270,800 _ 270,800
Sub-station, Electrification 200,590 _ 200,590
Furniture & Fixtures, etc. 30,090 _ 30,090
Vehicles 56,920 _ 56,920
Prelim. & Pre-op. Expenses 87,760 _ 87,760
Contingencies 200,590 _ 200,590
Fixed Cost 6,165,100 5,415,930 11,581,030
Capitalized Debt Repayment 3,000,000 _ 3,000,000
Working Capital 1,418,970 _ 1,418,970
TOTAL PROJECT COST 10,584,070 5,415,930 16,000,000

10.2 Financial Plan

The project is proposed to be financed through a combination of equity and


development banking institutional financing in the ratio of 75:25 respectively. The
development banking institutional loan will carry a profit markup rate of 10 percent per
annum payable over a period of ten years.

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Table 11: Financial Plan (In USD)
Source of Finance/Component Share Local Foreign Total
Currency Currency
1) Financial Assistance
Medium-Term
Development Loan
Machinery and Equipment 33.85% _ 5,415,930 5,415,930
Freight & Import Related Costs 12.72% 2,035,490 _ 2,035,490
Furniture & Fixtures, etc. 0.19% 30,090 _ 30,090
Vehicles 0.36% 56,920 _ 56,920
Capitalized Debt Repayment 18.75% 3,000,000 _ 3,000,000
Working Capital 8.87% 1,418,970 _ 1,418,970
Sub-Total (1) 74.73% 6,541,470 5,415,930 11,957,400
2) Equity
Project Sponsors
Land 17.88% 2,860,620 _ 2,860,620
Buildings and Civil Works 2.64% 422,240 _ 422,240
Erection and Installation 1.69% 270,800 _ 270,800
Sub-station, Electrification 1.25% 200,590 _ 200,590
Prelim. & Pre-op. Expenses 0.31% 50,000 _ 50,000
Contingencies 1.49% 238,350 _ 238,350
Sub-Total (2) 25.27% 4,042,600 0 4,042,600
TOTAL (1) + (2) 100.00% 10,584,070 5,415,930 16,000,000

10.3 Profit & Loss Account

A summarized version of the profit & loss account is given in Table 12 below.

Table 12: Summary Profit & Loss Account for First Five Years of the Project (In USD)
Description Year 2 Year 3 Year 4 Year 5 Year 6
Sales 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181
Less: Cost of Goods Sold 25,039,872 27,935,107 31,045,529 34,380,918 38,016,264
Gross Profit 15,088,128 14,034,706 15,615,027 17,334,532 19,142,917
Less: Operating Expenses 7,775,794 8,674,870 9,641,074 10,676,814 11,805,750
Operating Profit 7,312,334 5,359,836 5,973,953 6,657,718 7,337,167
Less: Interest service 1,200,000 1,200,000 1,050,000 900,000 750,000
Less: Loan service 0 1,500,000 1,500,000 1,500,000 1,500,000
Provision for Tax 1,833,700 797,951 1,027,186 1,277,315 1,526,150
Net Profit 4,278,634 1,861,885 2,396,767 2,980,403 3,561,017
Cum. Retained Earnings 4,278,634 6,140,519 8,537,286 11,517,689 15,078,706

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
10.4 Rates of Return

On the basis of the earnings forecast and related projections, rates of return for the
project are calculated below:

Table 13: Rates of Return (In Percentages)


Description Year 2 Year 3 Year 4 Year 5 Year 6
Gross Profit to Sales 37.60 33.44 33.47 33.52 33.49
Operating Profit to Sales 18.22 12.77 12.80 12.87 12.84
Net Profit to Sales 10.66 4.44 5.14 5.76 6.23
Net Profit to Equity 51.42 17.51 18.39 18.62 18.20

10.5 Payback Period

Payback period for the project, both in terms of owners equity and total investment, is
calculated below:

Total Investment = US$ 16,000,000


Promoters Equity = US$ 4,042,600

Profits = Net Profit + Interest + Depreciation

Table 14: Calculation of Payback Period for Equity and Total Investment
Year Amount paid back from Balance of Total Balance of Total
Profits Investment Equity
1 0 -16,000,000 -4,042,600
2 6,279,340 -9,270,660 2,236,740
3 3,862,591 -5,858,069
4 4,247,473 -1,610,596
5 4,681,109 3,070,513

Payback period for Equity = 0.64 Years


Payback period for Total Investment = 4.34 Years

10.6 Capital: Output Ratio

Capital output ratios, representing the production potential of the project in relation to
the investment involved in its establishment, are calculated below:

57
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Table 15: Capital: Output Ratios (In USD)
Description Year 2 Year 3 Year 4 Year 5 Year 6
Total Investment 16,000,000 _ _ _ _
Sales (Output) 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181
Capital: Output Ratio 1: 2.51 1: 2.62 1: 2.92 1: 3.23 1: 3.57

10.7 Cash Flow

The projected cash flow for the first five years of the project is shown hereunder:

Table 16: Projected Cash Flows (In USD)


Project Year 1 2 3 4 5 6
Production Programme 1,610 MT/ 1,840 MT/ 2,070 MT/ 2,300 MT/ 2,300 MT/
annum annum annum annum annum
Costs (US Dollars)
A. Cash inflow 16,000,000 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181
1. Financial resources
total 16,000,000 _ _ _ _
2. Sales revenue total _ 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181

B. Cash outflow -16,000,000 -41,751,797 40,532,312 -44,626,353 -49,001,353 -53,794,573


1. Total assets schedule
including replacements -16,000,000 -7,443,385 -840,973 -897,317 -962,559 -1,049,709
-
2. Operating Costs _ -32,815,666 36,609,977 -40,686,603 -45,057,732 -49,822,014
3. Debt Service
a) Interest _ -1,200,000 -1,200,000 -1,050,000 -900,000 -750,000
b) Repayments _ 0 -1,500,000 -1,500,000 -1,500,000 -1,500,000

4. Corporate tax _ -132,746 -221,362 -332,433 -421,062 -512,850

5. Dividends 4% on equity _ -160,000 -160,000 -160,000 -160,000 -160,000

C. Surplus / deficit 0 -1,623,797 1,437,501 2,034,203 2,714,097 3,364,608

D. Cumulative cash
balance 0 -1,623,797 -186,296 1,847,907 4,562,004 7,926,612

10.8 Balance Sheet

Projected balance sheet for the first five years of operation is shown below:

58
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Table 17: Projected Balance Sheet (In USD)
CAPITAL EMPLOYED: YR.1 YR.2 YR.3 YR.4 YR.5 YR.6
Share Capital 4,042,600 4,042,600 4,042,600 4,042,600 4,042,600
Retained Earnings 4,278,634 6,590,519 8,987,286 11,967,689 15,528,706
Shareholder's Equity/Deficit 8,321,234 10,633,119 13,029,886 16,010,289 19,571,306
Long-Term Liabilities 12,000,000 12,000,000 10,500,000 9,000,000 7,500,000
20,321,234 22,633,119 23,529,886 25,010,289 27,071,306
EMPLOYMENT OF CAPITAL: `

Steel Mill Buildings 422,240 401,128 380,016 358,904 337,792 316,680


Steel Mill Equip. & Machinery 7,451,420 6,706,278 5,961,136 5,215,994 4,470,852 3,725,710
Electrical equipment 200,590 180,531 160,472 140,413 120,354 100,295
Vehicles 56,920 45,536 34,152 22,768 11,384 56,920
Office Equipment & Fittings 30,090 27,081 24,072 21,063 18,054 15,045
LONG-TERM ASSETS: 7,360,554 6,559,848 5,759,142 4,958,436 4,214,650
CURRENT ASSETS: 16,736,819 20,147,276 22,014,754 24,489,013 27,517,825
Accounts Receivable 2,734,639 3,050,831 3,390,550 3,754,811 4,151,835
Stock (Inventory) 4,539,368 5,050,346 5,599,352 6,188,001 6,829,603
Bank Balance and Cash 169,378 183,181 191,773 201,423 212,506
Other Current Assets 9,293,434 11,862,918 12,833,079 14,344,778 16,323,881

CURRENT
LIABILITIES/DEBT: 3,776,139 4,074,005 4,244,010 4,437,160 4,661,169
Accounts Payable 2,576,139 2,874,005 3,194,010 3,537,160 3,911,169
Current Portion of Long-term
Liabilities 1,200,000 1,200,000 1,050,000 900,000 750,000
NET CURRENT ASSETS: 12,960,680 16,073,271 17,770,744 20,051,853 22,856,656
TOTAL CAPITAL 20,321,234 22,633,119 23,529,886 25,010,289 27,071,306

10.9 Break-Even Analysis

The projects commercial break-even level (profitability break-even) in Project Year 6 is


calculated below:

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VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Table 18: Break-Even Analysis in Project Year 6 (In USD)
Items Variable Cost Fixed Cost Total Cost
Raw Material 36,554,100 _ 36,554,100
Stores and Spares 1,113,777 556,889 1,670,666
Salaries and Wages 550,726 183,575 734,301
Depreciation _ 800,706 800,706
Utilities 6,688,325 2,229,442 8,917,767
Repairs/Maintenance 32,936 16,468 49,404
General & Admin. Expenses 176,552 58,851 235,403
Selling Expenses 91,991 45,995 137,986
Financial Expenses _ 810,223 810,223
TOTAL 45,208,407 4,702,149 49,910,556

Sales Value of Production = US$ 57,159,181

Break-even Sales = 4,702,149 4,702,149 4,702,149


1 - 45,208,407 1 0.79 0.21
57,159,181

Break-even Sales = US$ 22,391,186

Capacity utilization required to Break-even = US$ 22,391,186 x 100 = 39.17%


US$ 57,159,181

Margin of Safety = 100% 39.17% = 60.83%

10.10 Value Added/Contribution to GDP

Implementation of the project is expected to have a beneficial economic impact on


regional/national economic development. The projects contribution towards the
countrys Gross Domestic Product (GDP) is estimated below.

60
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Table 19: Value Added/Contribution to GDP (USD)
Description Year 2 Year 3 Year 4 Year 5 Year 6
Value of Production (Sales) 40,128,000 41,969,813 46,660,556 51,715,450 57,179,181
Less Intermediate Input:
Raw Material 24,076,800 26,860,680 29,851,470 33,058,575 36,554,100
Utilities 5,873,795 6,552,952 7,282,588 8,064,996 8,917,767
Mfg. Overheads 1,223,724 1,365,217 1,517,362 1,680,379 1,858,056
Depreciation 800,706 800,706 800,706 800,706 800,706
Total Intermediate Inputs 31,975,025 35,579,555 39,452,126 43,604,656 48,130,629
Value Added 8,152,975 6,390,258 7,208,430 8,110,794 9,028,552
Value Added as % of
output 33.86% 23.79% 24.15% 24.53% 24.70%
Value Added per Worker
(US$) 17,685 13,862 15,637 17,594 19,585

61
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
11.0 EXIT STRATEGY

VIRAT ALLOYS will consider three key exit strategies which have been tried and
tested with proven results elsewhere. The basic characteristics of each option are
described below:

An IPO In an IPO, VIRAT ALLOYS can sell a portion of the company in the
public markets. VIRAT ALLOYS and its management team typically remain in
place for a period of years, our investors and managers may be able to sell some
stock, and our company continues to operate much as it has in the past.
However, our company will be subject to additional regulations, such as
Sarbanes-Oxley requirements, and USE (Uganda Securities Exchange) analysts
and institutional investors will scrutinize your quarterly performance.

A strategic acquisition In a strategic acquisition, another company (mostly a


friendly company) purchases our business, either with cash or stock in the
acquiring company or with some combination of stock and cash. The acquirer
may or may not retain us and our management team, and may or may not make
substantial changes in our company's operations, staff, and business lines. The
benefit is typically liquidity because if you sell the company to a strategic
acquirer we might be able to sell most or all of your stock. The disadvantage of
this exit strategy is that we are likely to lose our operating control and
independence. The management team may have run the company for a long time
and enjoyed the freedom of controlling day-to-day operations. Selling the
company to a strategic acquirer probably means we will give that up."

Management buyout If VIRAT ALLOYS decides to recapitalize and sell the


company to the next generation of managers it is known as a management
buyout. This type of transaction is usually financed through some combination
of debt and/or private equity investment, with the debt collateralized by the
assets of the company. It provides immediate liquidity to the owner and early
shareholders, and allows the company to continue as a private enterprise. The
benefit, is that we can usually have a smoother transition. The founders most
likely will not be managing the company on a day-to-day basis, ceding that to
the management team, which is now buying the company. This exit strategy
marks a change of ownership, gets the shareholders some liquidity, yet provides
a seamless transition for the company and employees and other constituencies.

62
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
12.0 CONCLUSION AND RECOMMENDATIONS

Global demand for iron and steel has risen sharply in the last five years mainly due to
increasing demand from China and India, the worlds two most populous countries
which are experiencing high rates of economic growth.

Ugandas consumption of iron and steel, which is still very low by international
standards (about 4.7 kgs per capita in 2010) is however rapidly increasing owing to the
housing and construction boom that is being experienced by the Ugandan economy.
The rapid growth in the consumption of iron and steel products is also being made
possible by very high rates of growth in the steel and metal fabrication industries
(especially the small-scale industrial sector). The industrial and construction sectors
have also recorded rapid growth fuelling demand for iron, steel and its products.

New capacity is being added by steel scrap melters over 10 new furnaces have been
ordered by melters in the recent past, out of which about 8 have been already been
installed and are operational. Induction furnaces are now being preferred by melters
due to their clear-cut advantage over arc furnaces and the older types of main
frequency (low frequency) furnaces.

Ugandas demand for iron and steel is estimated at 150,000 tons in 2011-2012 against
which domestic production capacity is placed at slightly over 100,000 tons leaving a
deficit of about 150,000 tons. To fill this deficit 1 induction furnace of 65,000 tons per
annum capacity are needed.

There is a large shortage of production capacity in the iron and steel sector which
should be urgently developed. Three options are available to develop production
capacity:

Leveraged Buy Out for expansion of Sembule Steel Mills.


Establishment of a new steel mill based on indigenous iron are (this is likely to
take too much time, however, this option deserves serious consideration).
Setting up of new induction furnaces.

Local and foreign investors need to be motivated to set-up new iron, steel production
capacity in Uganda. A multi-pronged strategy, action plan needs to be effectively
pursued in order to achieve the desired objective.

63
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
VIRAT ALLOYS is one of those local investors who have shown strong interest and are
at the forefront of expanding Ugandas iron and steel production capacity to meet the
surging demand through its bid to acquire and recapitalize Sembule Steel Mills Ltd. as
expressed in this Business Plan.

64
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 01: KEY FINANCIAL MODELING ASSUMPTIONS

Table 20-1: Project Assumptions


Period of reconstruction & machinery delivery 10 Months
Total Covered Area (production facilities + built 5,000 Square Meters
up area)
Total Area of Existing Plant Site 15,250 Square Meters
Projected life of the project 10 Years

Table 20-2: Operating Assumptions


No. of working days in one year 330
No. of working hours in one day 8
Annual plant operating expenses growth rate 5%
Cost of raw material US$ 480 per ton
Depreciation Rates
Steel Mill Plant Buildings 5%
Steel Mill Plant Equipment & Machinery 10%
Office Equipment 10%
Furniture, Fittings& Fixtures 10%
Vehicles 20%

Table 20-3: Revenue Assumptions


Mill Capacity Ton per Day 190
Total Production per year (at full capacity) 62,700 tons
Average Sales prices of steel products US$ 800 per ton
Capacity utilization in First year 80 %
Sale price growth rate 5%
Production capacity utilization growth rate 5%
Maximum Capacity utilization 100%

Table 20-4: Financial Assumption


Debt 75%
Equity 25%
Interest Rate on medium term debt 10%
Grace Period 2 Years
Debt payments per year 1
Exchange rate US$ 1 = UGX 2,603
Inflation rate 5% p.a.

65
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 02/1:INITIAL FIXED INVESTMENT COSTS (USD)

Description Local Foreign Total


Currency Currency
Land (Existing) 2,860,620 _ 2,860,620
Buildings and Civil Works 422,240 _ 422,240
Machinery and Equipment
Mills 1,554,888 4,137,169 5,692,057
Mills Conveyor and Plate Form 47,118 125,368 172,486
Cooling Bed Optional
Overhead Cranes 10 Ton, 01 No. 122,506 325,959 448,465
Electric main motors,kw.700,RPM
1000 01 Nos. 376,106 141,354 517,460
Electric cables, light motors and
panels 169,624 451,328 620,952
Erection and Installation 270,800 _ 270,800
Sub-station, Electrification 200,590 _ 200,590
Furniture & Fixtures, etc. 30,090 _ 30,090
Vehicles 56,920 _ 56,920
Prelim. & Pre-op. Expenses 50,000 _ 50,000
Contingencies 238,350 _ 238,350
Fixed Cost 6,165,100 5,415,930 11,581,030
Capitalized Debt Repayment 3,000,000 _ 3,000,000
Working Capital 1,418,970 _ 1,418,970
TOTAL PROJECT COST 10,584,070 5,415,930 16,000,000

66
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 02/2: PROJECT COMPONENT EXPENDITURES BY SOURCE OF
FINANCE (USD)

A. Equity Finance

Source of Finance/Component Share Local Foreign Total


Currency Currency
Land 17.88% 2,860,620 _ 2,860,620
Buildings and Civil Works 2.64% 422,240 _ 422,240
Erection and Installation 1.69% 270,800 _ 270,800
Sub-station, Electrification 1.25% 200,590 _ 200,590
Prelim. & Pre-op. Expenses 0.31% 50,000 _ 50,000
Contingencies 1.49% 238,350 _ 238,350
TOTAL EQUITY FUNDING 25.27% 4,042,600 0 4,042,600

B. Medium-Term Loan

Source of Finance/Component Share Local Foreign Total


Currency Currency
Machinery and Equipment
Mills 35.58% 1,554,888 4,137,169 5,692,057
Mills Conveyor and Plate Form 1.08% 47,118 125,368 172,486
Overhead Cranes 10 Ton, 01 No. 2.80% 122,506 325,959 448,465
Electric main motors,kw.700,RPM
1000 01 Nos. 3.23% 376,106 141,354 517,460
Electric cables, light motors and
panels 3.88% 169,624 451,328 620,952
Furniture & Fixtures, etc. 0.19% 30,090 _ 30,090
Vehicles 0.36% 56,920 _ 56,920
Capitalized Debt Repayment 18.75% 3,000,000 _ 3,000,000
Working Capital 8.87% 1,418,970 _ 1,418,970
TOTAL LOAN FUNDING 74.73% 6,541,470 5,415,930 11,957,400

67
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 03: PRE-OPERATING CAPITAL EXPENDITURE BY CATEGORY

Foreign Local Total


Currency Currency
Item Pre-Investment Studies (USD)
1 Pre investment studies _ 2,125 2,125
2 Preparatory investigations _ 1,690 1,690
3 Management of project implementation _ 6,875 6,875
4 Detailed planning & tendering _ 3,310 3,310
5 Supervision, co-ordination, test-mgmt
& take-over-of-steel mill plant _ 13,000 13,000
Build-up of administration, recruitment
6 training of staff and labour _ 10,000 10,000
7 Arrangements for Steel Mill Supplies _ 3,000 3,000
8 Arrangements for marketing _ 3,310 3,310
9 Build-up of connections _ 2,000 2,000
Preliminary and capital issue
10 expenditure _ 4,690 4,690
Total 0 50,000 50,000

68
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 04/1: CALCULATION OF WORKING CAPITAL

(a) Accounts receivable: 30 days at production costs minus depreciation and


interest
(b) Inventory:
Raw Material Inputs: 30 days
Labour Costs: 90 days
Steel Mill Plant Operations: 60 days
Machy& vehicle maintenance: 180 days
Work in progress: 9 days at raw material inventory costs + labour costs
+ consumption of stores and spares + insurance +
power and fuel + rates and taxes + rent and hire
charges + repairs and maintenance + depreciation
cost of goods sold.

Finished products: 45 days at raw material inventory costs + labour costs


+ consumption of stores and spares + insurance +
power and fuel + rates and taxes + rent and hire
charges + repairs and maintenance + depreciation
cost of goods sold.

Cash-in-hand: 15 days, see separate calculations at the bottom of this


schedule
(d) Accounts payable: 30 days of cost of goods sold and utilities.
N.B.: All the local cost price factors for cost of goods sold, utilities and working capital
are indicated in equivalent convertible currency (US Dollars) for the ease of
computational and financial analysis.

69
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 04/2: CALCULATION OF WORKING CAPITAL

II: Annual Production - Cost Estimate (US$): Cost of Goods Sold (COGS) and Payroll Expenses

Full
Period Set Up Capacity Year 10
% of
Year PY 1 PY 2 PY 3 PY 4 PY 5 PY 6 PY 7 PY 8 PY 9 PY 10 Total
Production Programme 0 50,160 53,295 56,430 59,565 62,700 62,700 62,700 62,700 62,700 Operating
(Steel Products Output) MT MT MT MT MT MT MT MT MT Costs
Cost of Goods Sold (US$)

1. Raw Material 24,076,800 26,860,680 29,851,470 33,058,575 36,554,100 38,372,400 40,316,100 42,322,500 44,454,300

2. Burning Loss 963,072 1,074,427 1,194,059 1,322,343 1,462,164 1,534,896 1,612,644 1,692,900 1,778,172
Sub-Total COGS 25,039,872 27,935,107 31,045,529 34,380,918 38,016,264 39,907,296 41,928,744 44,015,400 46,232,472 76.31%
Personnel Expenses (US$)
1. Salaries, wages & bonus 420,570 469,199 521,442 577,463 638,523 670,284 704,237 739,284 776,523
2. NSSF Contributions 63,086 70,380 78,216 86,620 95,778 100,543 105,635 110,893 116,478
Sub-Total 483,656 539,579 599,658 664,083 734,301 770,827 809,872 850,177 893,001
COGS AND PERSONNEL COSTS 25,523,528 28,474,686 31,645,187 35,045,001 38,750,565 40,678,123 42,738,616 44,865,577 47,125,473 77.79%

70
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 04/2: CALCULATION OF WORKING CAPITAL
II: Annual Production - Cost Estimate (USD): Manufacturing, Administrative, Selling and General Expenses
Full
Period Set Up Capacity Year 10
Year PY 1 PY 2 PY 3 PY 4 PY 5 PY 6 PY 7 PY 8 PY 9 PY 10 % of Total
Production Programme 0 50,160 53,295 56,430 59,565 62,700 62,700 62,700 62,700 62,700 Operating
(Steel Products Output) MT MT MT MT MT MT MT MT MT Costs
Manufacturing,
Administrative, Selling and
General Expenses (US$)
Advertisement 62,661 69,906 77,690 86,037 95,134 99,891 104,885 110,129 115,636
Auditor's remuneration 3,334 3,719 4,133 4,577 5,061 5,314 5,580 5,859 6,152
Bank charges 27,984 31,220 34,696 38,424 42,487 44,611 46,842 49,184 51,643
Commission on sales 4,092 4,565 5,073 5,618 6,212 6,523 6,849 7,191 7,551

Consumption of stores and spares 1,100,405 1,227,639 1,364,330 1,510,907 1,670,666 1,754,199 1,841,909 1,934,005 2,030,705
Directors' remuneration 22,741 25,370 28,195 31,224 34,526 36,252 38,065 39,968 41,967
Directors' sitting fees 760 848 942 1,043 1,153 1,211 1,271 1,335 1,401
Filling Fee 74 83 92 102 113 119 125 131 137
Insurance 11,682 13,033 14,484 16,040 17,736 18,623 19,554 20,532 21,558
Legal and professional charges 31,471 35,110 39,019 43,211 47,780 50,169 52,677 55,311 58,077
Loss on sale of fixed assets 370 413 459 508 562 590 620 651 683
Postage, telegram & telephone 19,723 22,003 24,453 27,080 29,943 31,440 33,012 34,663 36,396

Power and fuel 5,873,795 6,552,952 7,282,588 8,064,996 8,917,767 9,363,655 9,831,838 10,323,430 10,839,602
Printing and stationery 5,915 6,599 7,334 8,122 8,981 9,430 9,902 10,397 10,916
Rates and taxes 6,311 7,041 7,825 8,666 9,582 10,061 10,564 11,092 11,647
Rent and hire charges 24,613 27,459 30,516 33,743 37,311 39,177 41,135 43,192 45,352
Repairs and maintenance
- Plant and machinery 12,893 14,384 15,986 17,703 19,575 20,554 21,581 22,661 23,794
- Others 19,647 21,919 24,360 26,977 29,829 31,320 32,886 34,531 36,257
Sales promotion expenses 14,549 16,231 18,108 20,053 22,173 23,282 24,446 25,668 26,951
Travelling and conveyance 13,569 15,138 16,888 18,702 20,679 21,713 22,799 23,939 25,135
Miscellaneous expenses 35,549 39,659 44,245 48,998 54,179 56,888 59,732 62,719 65,855
Sub-Total 7,292,138 8,135,291 9,041,416 10,012,731 11,071,449 11,625,021 12,206,273 12,816,586 13,457,415
TOTAL OPERATING COSTS 32,815,666 36,609,977 40,686,603 45,057,732 49,822,014 52,303,144 54,944,889 57,682,163 60,582,888 100.00%
1. Financial Costs [Interests] 1,200,000 1,200,000 1,050,000 900,000 750,000 600,000 450,000 300,000 150,000
2. Depreciation 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706
TOTAL PRODUCTION COSTS 34,816,372 38,610,683 42,537,309 46,758,438 51,372,720 53,703,850 56,195,595 58,782,869 61,533,594

71
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 04/3: CALCULATION OF WORKING CAPITAL: WORKING CAPITAL REQUIREMENTS

X Y Requirements (USD)
Minimum Coefficient Full-
days of Capacity
Item of coverage turn-over PY 2 PY 3 PY 4 PY 5 PY 6 PY 7 PY 8 PY 9 PY 10

I. Current assets
A. Accounts receivable 30 12 2,734,639 3,050,831 3,390,550 3,754,811 4,151,835 4,358,595 4,578,741 4,806,847 5,048,574

B. Inventory
a) Raw Material Inputs 30 12 2,086,656 2,327,926 2,587,127 2,865,077 3,168,022 3,325,608 3,494,062 3,667,950 3,852,706
b) Labour Costs 90 4 120,914 134,895 149,915 166,021 183,575 192,707 202,468 212,544 223,250
c) Steel Plant Operations 60 6 1,209,933 1,349,831 1,500,178 1,661,342 1,837,008 1,928,858 2,025,301 2,126,566 2,232,894
d) Maintenance & Repair 180 2 16,270 18,152 20,173 22,340 24,702 25,937 27,234 28,596 30,026
e) Work-in-progress 9 40 184,266 203,257 223,660 245,537 269,383 281,856 294,935 308,681 323,111
f) Finished products 45 8 921,330 1,016,286 1,118,299 1,227,685 1,346,914 1,409,278 1,474,675 1,543,406 1,615,556

C. Cash-in-hand 15 24 169,378 183,181 191,773 201,423 212,506 215,295 218,623 222,343 226,624
( from V below)

D. Current assets _ _ 7,443,385 8,284,358 9,181,676 10,144,235 11,193,944 11,738,134 12,316,039 12,916,932 13,552,741

II. Current Liabilities


A. Accounts payable 30 12 -2,576,139 -2,874,005 -3,194,010 -3,537,160 -3,911,169 -4,105,913 -4,313,382 -4,528,236 -4,756,006

III. Working Capital


A. Net Working Capital 4,867,246 5,410,353 5,987,666 6,607,075 7,282,775 7,632,221 8,002,657 8,388,696 8,796,735
B. Increase in Working
Capital _ 543,107 577,312 619,409 675,700 349,446 370,436 386,039 408,039

IV. Total Production Costs _ _ 34,816,372 38,610,683 42,537,309 46,758,438 51,372,720 53,703,850 56,195,595 58,782,869 61,533,594

Less: Raw Material Inputs _ _ 24,076,800 26,860,680 29,851,470 33,058,575 36,554,100 38,372,400 40,316,100 42,322,500 44,454,300

Utilities _ _ 5,873,795 6,552,952 7,282,588 8,064,996 8,917,767 9,363,655 9,831,838 10,323,430 10,839,602
Depreciation _ _ 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706
15 24 4,065,071 4,396,345 4,602,545 4,834,161 5,100,147 5,167,089 5,246,951 5,336,233 5,438,986
V. Required Cash Balance _ _ 169,378 183,181 191,773 201,423 212,506 215,295 218,623 222,343 226,624

72
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 05: FIXED ASSETS AND DEPRECIATION VALUES

Year 1 2 3 4 5 6 7 8 9 10

Initial Dep Dep Dep Dep Dep Dep Dep Dep Dep Dep

Asset Value Value Value Value Value Value Value Value Value Value Value

Steel Mill Plant Buildings 422,240 21,112 21,112 21,112 21,112 21,112 21,112 21,112 21,112 21,112 21,112

Steel Mill Plant


Machinery & Equipment 7,451,420 745,142 745,142 745,142 745,142 745,142 745,142 745,142 745,142 745,142 745,142

Electrical Equipment 200,590 20,059 20,059 20,059 20,059 20,059 20,059 20,059 20,059 20,059 20,059

Office Equipment &


Fixtures 30,090 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009

Motor Vehicles 56,920 11,384 11,384 11,384 11,384 11,384 11,384 11,384 11,384 11,384 11,384

TOTALS 8,161,260 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706

73
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 06/1: TOTAL INITIAL INVESTMENT COSTS (US DOLLARS)

Foreign Local Total


Currency Currency Cost
Item Investment
Category (In USD)

1. Initial fixed investment

costs 5,415,930 10,534,070 15,950,000

2. Pre-establishment operating

expenditures _ 50,000 50,000

3. Working Capital (at start-up

capacity - Year 2) _ 4,867,246 4,867,246

TOTAL 5,415,930 15,451,316 20,867,246

74
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 06/2: TOTAL INVESTMENT COSTS (US DOLLARS)

Period Construction
Year 1 2 3
Currency (US Dollars) FC LC Tt FC LC Tt FC LC Tt

1. Fixed Investment Costs 5,415,930 10,534,070 15,950,000 _ _ _ _ _ _


a) Initial fixed investment costs 5,415,930 10,534,070 15,950,000 _ _ _ _ _ _

b) Replacement _ _ _ _ _ _ _ _ _

2. Pre-operational capital expenditures _ 50,000 50,000 _ _ _ _ _ _

3. Working Capital increase _ _ _ _ 4,867,246 4,867,246 _ 543,107 543,107

Total Investment Costs 5,415,930 10,584,070 16,000,000 _ 4,867,246 4,867,246 _ 543,107 543,107

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

75
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 06/2: TOTAL INVESTMENT COSTS (US DOLLARS) continued

Full
Period Capacity
Year 4 5 6
Currency (US Dollars) FC LC Tt FC LC Tt FC LC Tt

1. Fixed Investment Costs _ _ _ _ _ _ _ _ _

a) Initial fixed investment costs _ _ _ _ _ _ _ _ _

b) Replacement _ _ _ _ _ _ _ 56,920 56,920

2. Pre-production capital expenditures _ _ _ _ _ _ _ _ _

3. Working Capital increase _ 577,312 577,312 _ 619,409 619,409 _ 675,700 675,700

Total Investment Costs 0 577,312 577,312 _ 619,409 619,409 0 732,620 732,620

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

76
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 06/2: TOTAL INVESTMENT COSTS (US DOLLARS) continued

Period Full Capacity


Year 7 8 9
Currency (US Dollars) FC LC Tt FC LC Tt FC LC Tt

1. Fixed Investment Costs _ _ _ _ _ _ _ _ _

a) Initial fixed investment costs _ _ _ _ _ _ _ _ _

b) Replacement _ _ _ _ _ _ _ _ _

2. Pre-production capital expenditures _ _ _ _ _ _ _ _ _

3. Working Capital increase _ 349,446 349,446 _ 370,436 370,436 _ 386,039 386,039

Total Investment Costs 0 349,446 349,446 _ 370,436 370,436 0 386,039 386,039

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

77
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 06/2: TOTAL INVESTMENT COSTS (US DOLLARS) continued

Period Full Capacity


Year 10 Total
Currency (US Dollars) FC LC Tt FC LC Tt

1. Fixed Investment Costs _ _ _ 5,415,930 10,590,990 16,006,920

a) Initial fixed investment costs _ _ _ 5,415,930 10,534,070 15,950,000

b) Replacement _ _ _ _ 56,920 56,920

2. Pre-production capital expenditures _ _ _ _ 50,000 50,000

3. Working Capital increase _ 408,039 408,039 _ 8,796,734 8,796,734

Total Investment Costs 0 408,039 408,039 5,415,930 19,437,724 24,853,654

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

78
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 07/1: TOTAL INITIAL ASSETS (US DOLLARS)

Foreign Local Total


Currency Currency
Item Investment Category (US Dollars)
1. Initial fixed investment costs 5,415,930 10,534,070 15,950,000

2. Pre-establishment capital
expenditures _ 50,000 50,000

3. Current assets (at start-up capacity - Year 2) _ 7,443,385 7,443,385

TOTAL 5,415,930 18,027,455 23,443,385

79
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 07/2: TOTAL ASSETS (US DOLLARS)

Period Construction
Year 1 2 3
Currency (US Dollars) FC LC Tt FC LC Tt FC LC Tt

1. Fixed Investment Costs 5,415,930 10,534,070 15,950,000 _ _ _ _ _ _

a) Initial fixed investment costs 5,415,930 10,534,070 15,950,000 _ _ _ _ _ _

b) Replacement _ _ _ _ _ _ _ _ _

2. Pre-production capital expenditures _ 50,000 50,000 _ _ _ _ _

3. Current assets increase _ _ _ _ 7,443,385 7,443,385 _ 840,973 840,973

Total Assets 5,415,930 10,584,070 16,000,000 0 7,443,385 7,443,385 0 840,973 840,973

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

80
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 07/2: TOTAL ASSETS (US DOLLARS) continued

Period Full Capacity


Year 4 5 6
Currency (US Dollars) FC LC Tt FC LC Tt FC LC Tt

1. Fixed Investment Costs _ _ _ _ _ _ _ _ _

a) Initial fixed investment costs _ _ _ _ _ _ _ _ _

b) Replacement _ _ _ _ _ _ _ 56,920 56,920

2. Pre-production capital expenditures _ _ _ _ _ _ _ _ _

3. Current assets increase _ 897,317 897,317 _ 962,559 962,559 _ 1,049,709 1,049,709

Total Assets 0 897,317 897,317 0 962,559 962,559 0 1,106,629 1,106,629

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

81
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 07/2: TOTAL ASSETS (US DOLLARS) continued

Period Full Capacity


Year 7 8 9
Currency (US Dollars) FC LC Tt FC LC Tt FC LC Tt

1. Fixed Investment Costs _ _ _ _ _ _ _ _ _

a) Initial fixed investment costs _ _ _ _ _ _ _ _ _

b) Replacement _ _ _ _ _ _ _ _ _

2. Pre-production capital expenditures _ _ _ _ _ _ _ _ _

3. Current assets increase _ 544,190 544,190 _ 577,905 577,905 _ 600,893 600,893

Total Assets 0 544,190 544,190 0 577,905 577,905 0 600,893 600,893

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

82
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 07/2: TOTAL ASSETS (US DOLLARS) continued

Period Full Capacity


Year 10 Total
Currency (US Dollars) FC LC Tt FC LC Tt

1. Fixed Investment Costs _ _ _ 1,502,643 2,902,741 4,405,384

a) Initial fixed investment costs _ _ _ 1,502,643 2,845,821 4,348,464

b) Replacement _ _ _ 0 56,920 56,920

2. Pre-production capital expenditures _ _ _ _ 50,000 50,000

3. Current assets increase _ 635,809 635,809 _ 13,552,740 13,552,740

Total Assets 0 635,809 635,809 1,502,643 16,505,481 18,008,124

FC = Foreign Currency;
LC = Local Currency;
Tt = Total

83
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 08: SOURCES OF FINANCE (US DOLLARS)

Local Foreign Total


Currency Currency
Item Sources of Finance (In US Dollars)
1. Promoters
a) Equity 4,042,600 0 4,042,600
b) Preference Capital 0 0 0
c) Loans _ _ _
d) Other forms such as deferred credits for
supply of assets _ _ _

Total 4,042,600 0 4,042,600

2. Collaborators
a) Equity _ _ _
b) Preference Capital _ _ _
c) Loans
d) Other forms such as deferred credits for
supply of assets _ _ _

Total _ _ _

3. Financial Institutions
a) Equity _ _ _
b) Preference Capital _ _ _
c) Medium Term Loan 6,541,470 5,415,930 11,957,400
d) Additional Set-up Loans _ _ _

Total 6,541,470 5,415,930 11,957,400

Total, all items 10,584,070 5,415,930 16,000,000

84
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 09: PROJECTED CASH FLOW TABLE (US DOLLARS)

Period Construction Full Capacity Salvage Total


Year 1 2 3 4 5 6 7 8 9 10 value in
Production Programme 50,160 53,295 56,430 59,565 62,700 62,700 62,700 62,700 62,700 last year
MT MT MT MT MT MT MT MT MT
Costs (US Dollars)
A. Cash inflow 16,000,000 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181 60,017,140 63,017,997 66,168,897 69,477,342 _ 512,314,376
1. Financial resources
total 16,000,000 _ _ _ _ _ 16,000,000
2. Sales revenue total _ 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181 60,017,140 63,017,997 66,168,897 69,477,342 _ 496,314,376

-
B. Cash outflow -16,000,000 -41,751,797 -40,532,312 -44,626,353 -49,001,353 -53,794,573 -55,658,664 -58,238,061 -60,886,530 -63,734,392 11,868,475 472,355,560
1. Total assets schedule
including replacements -16,000,000 -7,443,385 -840,973 -897,317 -962,559 -1,049,709 -544,190 -577,905 -600,893 -635,809 11,868,475 -17,684,265
-
2. Operating Costs _ -32,815,666 -36,609,977 -40,686,603 -45,057,732 -49,822,014 -52,303,144 -54,944,889 -57,682,163 -60,582,888 _ 430,505,076
3. Debt Service
a) Interest _ -1,200,000 -1,200,000 -1,050,000 -900,000 -750,000 -600,000 -450,000 -300,000 -150,000 _ -6,600,000
b) Repayments _ 0 -1,500,000 -1,500,000 -1,500,000 -1,500,000 -1,500,000 -1,500,000 -1,500,000 -1,500,000 -12,000,000

4. Corporate tax _ -132,746 -221,362 -332,433 -421,062 -512,850 -551,330 -605,267 -643,474 -705,695 _ -4,126,219

5. Dividends 4% on equity _ -160,000 -160,000 -160,000 -160,000 -160,000 -160,000 -160,000 -160,000 -160,000 _ -1,440,000

C. Surplus / deficit 0 -1,623,797 1,437,501 2,034,203 2,714,097 3,364,608 4,358,476 4,779,936 5,282,367 5,742,950 11,868,475 39,958,816

D. Cumulative cash
balance 0 -1,623,797 -186,296 1,847,907 4,562,004 7,926,612 12,285,088 17,065,024 22,347,391 28,090,341 39,958,816

Salvage values. Land: 2,860,620; 1/2 of buildings: 211,120; Working Capital: 8,796,735 11,868,475

85
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 10: PROJECTED CASH FLOW TABLE AND CALCULATION OF PRESENT VALUE (US DOLLARS)

Year 1 2 3 4 5 6 7 8 9 10 Salvage Total


Constr. 50,160 53,295 56,430 59,565 62,700 62,700 62,700 62,700 62,700 value in
MT MT MT MT MT MT MT MT MT last year
Investment Costs (Excl.
existing
assets) -16,000,000 _ _ _ _ _ _ _ _ _ -16,000,000
Net Profit after Tax _ 4,278,634 1,861,885 2,396,767 2,980,403 3,561,017 3,929,797 4,286,176 4,680,714 5,071,118 33,046,511
Depreciation _ 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 7,206,354
Interest Add back
Mid-term Loan _ 1,200,000 1,200,000 1,050,000 900,000 750,000 600,000 450,000 300,000 150,000 6,600,000
NET CASH FLOWS -16,000,000 6,279,340 3,862,591 4,247,473 4,681,109 5,111,723 5,330,503 5,536,882 5,781,420 6,021,824 11,868,475 24,831,041

Discount Factors at 14% 0.8772 0.7695 0.675 0.5921 0.5194 0.4556 0.3996 0.3506 0.3075 0.2697 0.2697 _
PV at 14% -14,035,200 4,831,952 2,607,249 2,514,929 2,431,368 2,328,901 2,130,069 1,941,231 1,777,787 1,624,086 3,200,928 6,528,285
NPV at 14% 6,528,285
Discount Factors at 17% 0.8547 0.7305 0.6244 0.5337 0.4561 0.3898 0.3332 0.2848 0.2434 0.208 0.208 _
PV at 17% -13,675,200 4,587,058 2,411,802 2,266,876 2,135,054 1,992,550 1,776,124 1,576,904 1,407,198 1,252,539 2,468,643 4,478,365
NPV at 17% 4,478,365

Internal Rate of Return = 30.41%

NPV at 14% = $6,528,285

NPV at 17% = $4,478,365

86
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN

Schedule 11: PROJECTED INCOME STATEMENT (US DOLLARS)

Year 1 2 3 4 5 6 7 8 9 10

Sales _ 40,128,000 41,969,813 46,660,556 51,715,450 57,159,181 60,017,140 63,017,997 66,168,897 69,477,342
Cost of Sales _ 25,039,872 27,935,107 31,045,529 34,380,918 38,016,264 39,907,296 41,928,744 44,015,400 46,232,472

GROSS PROFIT _ 15,088,128 14,034,706 15,615,027 17,334,532 19,142,917 20,109,844 21,089,253 22,153,497 23,244,870

Less: Operating Costs


(excl. Cost of Sales) _ 7,775,794 8,674,870 9,641,074 10,676,814 11,805,750 12,395,848 13,016,145 13,666,763 14,350,416

OPERATING PROFIT _ 7,312,334 5,359,836 5,973,953 6,657,718 7,337,167 7,713,996 8,073,108 8,486,734 8,894,454

Less: Accrued interest on


Medium-Term Loan _ 1,200,000 1,200,000 1,050,000 900,000 750,000 600,000 450,000 300,000 150,000
Less: Annual Repayments _ 0 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000

NET PROFIT BEFORE TAX _ 6,112,334 2,659,836 3,423,953 4,257,718 5,087,167 5,613,996 6,123,108 6,686,734 7,244,454

Corporation Tax 30% _ 1,833,700 797,951 1,027,186 1,277,315 1,526,150 1,684,199 1,836,932 2,006,020 2,173,336

NET PROFIT _ 4,278,634 1,861,885 2,396,767 2,980,403 3,561,017 3,929,797 4,286,176 4,680,714 5,071,118

Accumulated Net Profit


(Loss) _ 4,278,634 6,140,519 8,537,286 11,517,689 15,078,706 19,008,503 23,294,679 27,975,392 33,046,510
Net Profit Margin _ 0.107 0.044 0.051 0.058 0.062 0.065 0.068 0.071 0.073
Gross Profit Margin 0.376 0.334 0.335 0.335 0.335 0.335 0.335 0.335 0.335
Rate of Return on
Investment _ 27% 12% 14.98% 19% 22.26% 24.56% 26.79% 29.25% 31.69%
Operating Profit Margin _ 0.182 0.128 0.128 0.129 0.128 0.129 0.128 0.128 0.128

87
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 12: PROJECTED BALANCE SHEET (US DOLLARS)

CAPITAL EMPLOYED: YR.1 YR.2 YR.3 YR.4 YR.5 YR.6 YR.7 YR.8 YR.9 YR.10
Share Capital 4,042,600 4,042,600 4,042,600 4,042,600 4,042,600 4,042,600 4,042,600 4,042,600 4,042,600
Retained Earnings 4,278,634 6,590,519 8,987,286 11,967,689 15,528,706 19,458,503 23,744,679 28,425,392 33,496,510
Shareholder's Equity/Deficit 8,321,234 10,633,119 13,029,886 16,010,289 19,571,306 23,501,103 27,787,279 32,467,992 37,539,110

Long-Term Liabilities 12,000,000 12,000,000 10,500,000 9,000,000 7,500,000 6,000,000 4,500,000 3,000,000 1,500,000
20,321,234 22,633,119 23,529,886 25,010,289 27,071,306 29,501,103 32,287,279 35,467,992 39,039,110

EMPLOYMENT OF CAPITAL: `

Steel Mill Buildings 422,240 401,128 380,016 358,904 337,792 316,680 295,568 274,456 253,344 232,232
Steel Mill Equip. & Machinery 7,451,420 6,706,278 5,961,136 5,215,994 4,470,852 3,725,710 2,980,568 2,235,426 1,490,284 745,142
Electrical equipment 200,590 180,531 160,472 140,413 120,354 100,295 80,236 60,177 40,118 20,059
Vehicles 56,920 45,536 34,152 22,768 11,384 56,920 45,536 34,152 22,768 11,384
Office Equipment & Fittings 30,090 27,081 24,072 21,063 18,054 15,045 12,036 9,027 6,018 3,009
LONG-TERM ASSETS: 7,360,554 6,559,848 5,759,142 4,958,436 4,214,650 3,413,944 2,613,238 1,812,532 1,011,826
CURRENT ASSETS: 16,736,819 20,147,276 22,014,754 24,489,013 27,517,825 30,793,072 34,437,423 38,483,696 42,933,290

Accounts Receivable 2,734,639 3,050,831 3,390,550 3,754,811 4,151,835 4,358,595 4,578,741 4,806,847 5,048,574
Stock (Inventory) 4,539,368 5,050,346 5,599,352 6,188,001 6,829,603 7,164,243 7,518,675 7,887,742 8,277,543
Bank Balance and Cash 169,378 183,181 191,773 201,423 212,506 215,295 218,623 222,343 226,624
Other Current Assets 9,293,434 11,862,918 12,833,079 14,344,778 16,323,881 19,054,939 22,121,384 25,566,764 29,380,549

CURRENT LIABILITIES/DEBT: 3,776,139 4,074,005 4,244,010 4,437,160 4,661,169 4,705,913 4,763,382 4,828,236 4,906,006
Accounts Payable 2,576,139 2,874,005 3,194,010 3,537,160 3,911,169 4,105,913 4,313,382 4,528,236 4,756,006
Current Portion of Long-term
Liabilities 1,200,000 1,200,000 1,050,000 900,000 750,000 600,000 450,000 300,000 150,000

NET CURRENT ASSETS: 12,960,680 16,073,271 17,770,744 20,051,853 22,856,656 26,087,159 29,674,041 33,655,460 38,027,284
TOTAL CAPITAL 20,321,234 22,633,119 23,529,886 25,010,289 27,071,306 29,501,103 32,287,279 35,467,992 39,039,110

TOTAL ASSETS: 24,097,373 26,707,124 27,773,896 29,447,449 31,732,475 34,207,016 37,050,661 40,296,228 43,945,116

88
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 13: BUSINESS RATIOS

Period Construction Full Capacity


Year 1 2 3 4 5 6 7 8 9 10
Sales Growth 5% 5% 5% 5% 5% 5% 5% 5%

Percent of Total Assets


Accounts Receivable 11.35% 11.42% 12.21% 12.75% 13.08% 12.74% 12.36% 11.93% 11.49%
Inventory 18.84% 18.91% 20.16% 21.01% 21.52% 20.94% 20.29% 19.57% 18.84%
Other Current Assets 38.57% 44.42% 46.21% 48.71% 51.44% 55.70% 59.71% 63.45% 66.86%
Total Current Assets 69.45% 75.44% 79.26% 83.16% 86.72% 90.02% 92.95% 95.50% 97.70%
Long-term Assets 30.55% 24.56% 20.74% 16.84% 13.28% 9.98% 7.05% 4.50% 2.30%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Current Liabilities 15.67% 15.25% 15.28% 15.07% 14.69% 13.76% 12.86% 11.98% 11.16%
Long-term liabilities 49.80% 44.93% 37.81% 30.56% 23.64% 17.54% 12.15% 7.44% 3.41%
Total Liabilities 65.47% 60.19% 53.09% 45.63% 38.32% 31.30% 25.00% 19.43% 14.58%
Net Worth (Total Capital) 34.53% 39.81% 46.91% 54.37% 61.68% 68.70% 75.00% 80.57% 85.42%

Percent of Revenues
Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Gross Margin 37.60% 33.44% 33.47% 33.52% 33.49% 33.51% 33.47% 33.48% 33.46%
Management / Administration 1.51% 1.51% 1.43% 1.35% 1.29% 1.29% 1.29% 1.29% 1.29%
Net Profit (after Interest &
Tax) 10.66% 4.44% 5.14% 5.76% 6.23% 6.55% 6.80% 7.07% 7.30%

Main Ratios
Current 4.43 4.95 5.19 5.52 5.90 6.54 7.23 7.97 8.75
Quick 3.23 3.71 3.87 4.12 4.44 5.02 5.65 6.34 7.06
Total Debt to Total Assets 4.98% 4.49% 3.78% 3.06% 2.36% 1.75% 1.21% 0.74% 0.34%
Pre-tax Return on Net
Worth 73.45% 25.01% 26.28% 26.59% 25.99% 23.89% 22.04% 20.59% 19.30%
Pre-tax Return on Assets 25.37% 9.96% 12.33% 14.46% 16.03% 16.41% 16.53% 16.59% 16.49%

Business Vitality Profile


Revenue per Employee $87,046 $91,041 $101,216 $112,181 $123,990 $130,189 $136,698 $143,533 $150,710

89
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN

Additional Ratios
Net Profit Margin 10.66% 4.44% 5.14% 5.76% 6.23% 6.55% 6.80% 7.07% 7.30%
Return on Equity 51% 17.51% 18.39% 18.62% 18.20% 16.72% 15.42% 14.42% 13.51%

Activity Ratios
Accounts Receivable
Turnover 1.47 1.38 1.38 1.38 1.38 1.38 1.38 1.38 1.38
Collection Days 30 30 30 30 30 30 30 30 30
Inventory Turnover 5.52 5.53 5.54 5.56 5.57 5.57 5.58 5.58 5.59
Accounts Payable
Turnover 0.93 0.93 0.93 0.93 0.93 0.93 0.93 0.93 0.93
Payment Days 30 30 30 30 30 30 30 30 30
Total Assets Turnover 1.67 1.57 1.68 1.76 1.80 1.75 1.70 1.64 1.58
Fixed Assets Turnover 3.40 4.26 5.39 6.93 9.02 11.69 16.04 24.28 45.69

Debt Ratios
Debt to Net Worth 1.44 1.13 0.81 0.56 0.38 0.26 0.16 0.09 0.04
Current Liability to
Liability 0.31 0.34 0.40 0.49 0.62 0.78 1.06 1.61 3.27
Debt-Service Coverage
Ratio 2.33 1.43 1.67 1.95 2.27 2.54 2.84 3.21 3.65

Liquidity Ratios
Net Working Capital $4,867,246 $5,410,353 $5,987,666 $6,607,075 $7,282,775 $7,632,221 $8,002,657 $8,388,696 $8,796,735
Interest Coverage [Times
Inte-
rest Earned Ratio - TIE] 6.09 4.47 5.69 7.40 9.78 12.86 17.94 28.29 59.30

Additional Ratios
Assets to Revenue 0.60 0.64 0.60 0.57 0.56 0.57 0.59 0.61 0.63
Current Debt / Total
Assets 15.67% 15.25% 15.28% 15.07% 14.69% 13.76% 12.86% 11.98% 11.16%
Acid Test 3.23 3.706 3.868 4.124 4.438 5.021 5.651 6.337 7.064
Sales/Net Worth 4.82 3.95 3.58 3.23 2.92 2.55 2.27 2.04 1.85

90
VIRAT ALLOYS BUSINESS PLAN: BUSINESS ACQUISITION AND RECAPITALISATION PLAN
Schedule 14: PROJECTED PAYBACK PERIOD (US DOLLARS)

YEAR/ITEM 2 3 4 5 6 7 8 9 10

Net Profit 4,278,634 1,861,885 2,396,767 2,980,403 3,561,017 3,929,797 4,286,176 4,680,714 5,071,118

Interest 1,200,000 1,200,000 1,050,000 900,000 750,000 600,000 450,000 300,000 150,000

Depreciation 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706 800,706

"Profit" 6,279,340 3,862,591 4,247,473 4,681,109 5,111,723 5,330,503 5,536,882 5,781,420 6,021,824

Amount
Year paid Balance of

back from total

"profits" Investment

1 -16,000,000 -16,000,000

2 6,279,340 -9,720,660

3 3,862,591 -5,858,069

4 4,247,473 -1,610,596

5 4,681,109 3,070,513

6 5,111,723 8,182,236

7 5,330,503 13,512,739

8 5,536,882 19,049,621

9 5,781,420

10 6,021,824

Pay Back Period = 4.34 YEARS

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