Case Study : Indraprastha Ice and Cold Storage Ltd.

(A)

Medium to long term strategy:

As a medium to long term strategy, Mr. Aggarwal could consider the following
options. These are in addition to some immediate steps that are required to tide
over the financial crisis at hand.

 Educate the large and medium customers – commission agents and

wholesalers about the benefit of IPCSL’s offerings in form of technologically
superior cold storage solutions.

 Diversification into buying fruits directly from growers, storing and then
selling the same – there seems to be considerable money in the system as
the produce passes through 3 to 4 different hands before reaching to the
final customer.

There is probability of success for this model, if the profits are shared on
some reasonable basis with the growers bridging the market and price
information gap on their part.

By such diversification, the implicit margin for storage business would go

northwards and at the same time reduce the pressure on bottom-line and
dependency on outside customers. However this move could be
counterproductive as some agents and wholesalers would then view IPCSL as
their competitor and that could drive them away

 Increase deep freezer capacity over the next few years and reduce the GC
and CA cold storage facility capacity.

 Enter into strategic alliance with few other cold storage operators for co-
operation and mutual support to counter the tactic used by some competitor
of ‘complete lot orders only’. Under this alliance, IPCSL could pass on the
general cold storage business not requiring CA or GS technology coming its
way to these alliance members and in return they could direct customers
having superior or long term storage needs to IPCSL.

 Concentrating on food processing industry as a potential future customer as

with growing household income of the middle class, consumption of
processed food is likely o increase in the future in the country.

 Concentrate on organized food retail outlets as their share is expected to rise

in the future.

Business Restructuring:
  Mr. Aggarwal needs to reconsider the present organizational structure. The
proposed diversification buying fruits directly from growers, storing and then
selling the same would require additional workforce. After assessing the
present marketing personnel, hiring people with requisite skills to tap
segments like food processing industry and educating the commission agents
and wholesalers would be necessary.

 Financial restructuring – Showcase the new business plan and strategy to

Private Equity investors to raise additional equity. This equity would allow for
additional debt to be raised and the resources should be employed towards
forward and backward integration plans and the medium- long term strategy.

 Slashing operating cost is important and cost benefit analysis of all major
items of expense and overhead should be done to identify and actualize cost
reduction potential.

 Additional value added services like a 24 hour, 24/7 could be considered.

Forward / backward integration:

 Diversification into buying fruits directly from growers, storing and then
selling the same – there seems to be considerable money in the system as
the produce passes through 3 to 4 different hands before reaching to the
final customer.

As per exhibit 5 – the grower receives just about 30 % (=>280/940)of the

price paid by the end customer. If we assume that expenses incurred by the
various entity in supply chain is what the company will incur ( in actual it
would be lower due to less handling cost and scale of operation), the margin
of various component of supply chain( excluding the retailer )out of price of
Rs 940 is Rs 190 ( 90+100) which is about 20%. In the event that a part of
this is shared with grower, the success of the diversification envisaged above
seems plausible.

Envisaged CAPEX and revenue model:

The Capex and revenue model for storage business and office rental business
seems to be reasonable. The office rental business would contribute additional INR
6.6 million from additional space rented and help to boost the cash inflow.

A healthy gross profit ratio (projected) of above 50% from 2007 – 08 onwards lends
credence to this model.
Enterprise Valuation for raising fresh equity:

Based on EBITDA multiple, following valuation emerge for IPCSL. This could be used
as a benchmark for raising fresh equity from a Private Equity investor (as the
company’s projected revenue in 2008 -09 being Rs 5.1 crore, IPO wouldn’t be
feasible).

Amounts In Rs. Lacs

2006- 2007-
2008-09
07 08
Provisio Projecte Projecte
nal d d

EBITDA 88.34 193.32 297.47

EBITDA multiple * 5.44 7.75 8.85

Haircut applied for valuing IPCSL 20% 20% 20%
Adjusted EBITDA multiple 4.352 6.2 7.08

1198.5
Enterprise Value ( Equity + Debt) 384.47 6 2106.07

* from analyst report for a listed company