IIML LT Finesse XL Bankers

8/13/2019 IIML LT Finesse XL Bankers

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Team: XL Bankers | XLRI, Jamshedpur

FINESSE



Bid overview

Bid for Emaar’s project consisting of receiving substation and

distribution substation; Includes target PBIT of ~10% on cost

Effective matching of inflows and outflows = The key to our bid

Ensures negligible working capital

requirement by optimising timing

and quantum of cash flows

Ensures minimisation of currency

risk by matching currency of

receipts and payments

Working capitalminimisation objective

Currency riskmanagement objective

Effective vendor

selection balancing

quality and flexible

payment terms

Timely execution of

work and prompt

billing to ensure

collection from

Emaar in 45 days

Structuring contract

with Emaar to obtain

exact foreign currency

requirement for

payments

USD-INR risk

minimised due to

extensive hedging

through forwards

$ 33 mn

$ 33 mnBid amount



Bid overview

$15.6mn + €3.8mn

+ ¥331.2mn + AED33.1mn

Bid for Emaar’s project consisting of receiving substation and

distribution substation; Includes target PBIT of ~10% on cost

Effective matching of inflows and outflows = The key to our bid

Ensures negligible working capital

requirement by optimising timing

and quantum of cash flows

Ensures minimisation of currency

risk by matching currency of

receipts and payments

Working capitalminimisation objective

Currency riskmanagement objective

Effective vendor

selection balancing

quality and flexible

payment terms

Timely execution of

work and prompt

billing to ensure

collection from

Emaar in 45 days

Structuring contract

with Emaar to obtain

exact foreign currency

requirement for

payments

USD-INR risk

minimised due to

extensive hedging

through forwards



Key assumptions

Indian suppliers are willing to be flexible in payment terms

Vendors pass on copper price risk to bidder

Emaar to pay invoices within 45 days with no delays and nodisputes over invoice amount exist

Instruments for hedging currency and copper price risks are

available and deep and liquid market exists for the same

Bank guarantee commission = 1% and no margin requirement



Strategies Adopted: Vendor selection

SuppliesIndia

60%

Europe

25%

Japan

15%

Balance supply

quality, flexible

payment terms,

currency risk

Utilisation of in

house capacity is the

primary mandate

Prior experience of

dealing with

European vendors

and cheap supplier

financing

Well known

suppliers. Provides

an opportunity to

reduce reliance on

European suppliers

ConstructionSteel

40%

Cement

40%

Labour

20%

• Construction expenditure would be mostly locally incurred in the UAE

• Procuring steel and cement locally makes sense due to product bulk and value

• Chance to reduce labour cost by recruiting lower cost labour from India, subject to local

governmental regulations



Strategies Adopted: Working capital (1/2)

Our bid for the project$ 33 mnVendor payment terms structured such that investment in

working capital becomes negligible

Working capital required

$ 0.03 mn

Matching multi-

currency inflows

from Emaar with

payments to vendors

DLP applied to suppliers to

ensure parity with Emaar terms

Ensuring steady cash

flow through timely

submission of bills on

quarterly basis

Negotiate elongation of

vendor payment terms

Continued cheap financing expected from European suppliers due to depressed

economic environment

Arrangement of

bank guarantee

Favourable terms from Japanese

vendors expected weighing on

their urge for gaining strong

foothold in the market



Strategies Adopted: Working capital (2/2)

$ 33 mnUSD million 02-Aug-14 01-Nov-14 31-Jan-15 01-May-15 01-Aug-15 01-Feb-16 Total

Supply 2.31 0.00 16.17 0.00 2.31 2.31 23.10

Construction 0.66 1.32 1.32 1.32 1.32 0.66 6.60

E&C 0.33 0.00 0.00 0.00 2.64 0.33 3.30

Total 3.30 1.32 17.49 1.32 6.27 3.30 33.00

USD million 02-Aug-14 01-Nov-14 31-Jan-15 01-May-15 01-Aug-15 01-Feb-16 Total

Supply 1.30 0.71 15.87 0.00 1.37 1.75 21.00

Construction 0.48 1.38 1.38 1.38 1.38 0.00 6.00

E&C 0.00 0.30 0.00 0.00 2.40 0.30 3.00

Total 1.78 2.39 17.25 1.38 5.15 2.05 30.00

1. Includes bank guarantee commission of $ 0.04 mn on ABG/PBG paid at the time of bid acceptance

Inflow

Outflow

Net cash1 1.48 0.41 0.65 0.59 1.71 2.95 2.95



Financing package for Emaar

Our bid for the project$ 33 mnTo arrange for attractive financing package for Emaar while

minimising cost and risk to contractor Financing required

$ 33 mn

$ 33 mn• Financing from export development

agencies (EDAs) of vendor’s countries canbe an option

• Depressed economic scenario in EU

• Abenomics expected to promote

exports from Japan

• Possibility of obtaining atleast part of

financing from EDAs of vendors’

countries

• Financing from EXIM Bank, India

•

Promotion of exports is the mainobjective of EXIM Bank

• Financing package will enable the

Indian bidder to obtain the project,

hence falls within scope of EXIM Bank

• Also, a substantial portions of

supplies would be sourced from India

Option 1 Option 2

Bidder could guarantee the financing extended by EXIM Bank/EDAs to Emaar, to reduce

cost of finance in case bidder is rated higher than Emaar as well as to provide comfort to

lenders. However this will result in acceptance of credit risk by bidder on Emaar.



JPY to

depreciate;EUR to

depreciate;

INR tostrengthen

Bidsubmittedbased on 3m

forwardrates

Eurozonebreak up risk

No option toreceive

paymentfrom Emaar

in INR

Multiplecurrency

payments tovendorsrequired

Currency Risk : Adopting a conservative approach

• Bidding in a combination of USD, AED, JPY & EUR, with the bid amount in non-USD currencies

being equal to contracted vendor payments

• Vendors asked to bill in their home currencies

• Would ensure exact matching of JPY,EUR and AED inflows and outflows

• Only USD portion would not have 100% matching outflows

• Hedge 100% of USD equivalent of INR expenses and 80% of estimated profits by entering into 18

month USD-INR forwards, ensuring majority of exposure is covered

• Clause to handle situation of EU breakup and subsequent redenomination to be added

Managing risks



Prices may

decline owingto increase in

supply anddecline inChinesedemand

Price riskbetween Bid-Award periodand Award to

purchase period

Vendors pass oncopper price

risk

Copper is majorinput; prices

being linked toLME Copper

Commodity Risk: Factors and management

• Bid to acceptance: Risk of price changing between submission of bid and bid opening date to be

managed by buying copper options

• Copper options premiums usually range between 0.8% to 2% of contract value

• For 500 tons of copper @ current prices of $7400/mt, option premium would range between $

0.03 - $ 0.07 mn

• Post bid acceptance, copper can be fully hedged by buying copper forwards

Managing risks



Team XL Bankers

Mahaveer Agarwal

- Mechanical Engineer from IIT, Guwahati

- Worked with RIL as a reliability engineer for 3 years- A CFA Level 2 candidate

Ajay M

- A qualified Chartered Accountant from ICAI

- Worked with ICICI Bank’s corporate strategy team for 2 years

Documents

IIML LT Finesse XL Bankers