Financial Analysis of a Project

Financial Anlaysis is very important for every project. Today, I will show the financial analysis of Surat Metro Project that I undertook as part of my post-graduate program. All of this is original work. I have also attached the complete excel worksheet in this link.

Financial Analysis of a project is the mechanism to find out the financial viability of the project in terms of IRR, NPV, DSCR, and other ratios and tools. Keeping this in mind, the financial model for the Surat Metro Project was prepared by us, which is shown in the excel sheet attached to the report. The major results and noteworthy points are discussed here in this report. By the end of the report, we shall find out the financial viability of the project.

1.1.1       Assumptions

To create the model, some input was required in the form of demand projections, tariff rates, funding sources and cost models. These factors are all calculated as per previous studies, and their results used in the model. The detailed discussion of these models is done further in this section.

1.1.1.1      Revenue Assumptions

1.1.1.1.1    Demand Projections

As calculated in Demand Analysis, the demand projections are used here to calculate expected daily ridership. The demand projections are in PPHPD for each station. This is converted to daily ridership by using the maximum PPHPD among all stations (two-way), and multiplying by 10 (as per the calculations for Delhi Metro). This gives the daily ridership per km. Maximum PPHPD of the city is forecasted to be 15,000. So, based on it, daily ridership would be 15,000*2*10 which would be 3, 00,000 per km.

To get the total annual ridership, the daily ridership is multiplied by average trip length, 7.46 km, and then by no. of days of operation annually, which is 365. This provides us with the annual ridership for the first year of operation. The operation period has been assumed to be from FY 2021-22.  

1.1.1.1.2    Annual Increment in Passengers

Now, as per the calculations for Ahmedabad Metro, the annual increment in passengers is assumed to be 10% p.a. for the first 10 year from start of operation, then 6% p.a. for the next 5 years, 3% p.a. for the next 5 years and 1% p.a. beyond that.

1.1.1.1.3    Fare Structure

As shown in the Tariff Sustainability section of the Procurement Strategy, that fare structure is used. The average fare per km is calculated by using WTP surveys of the trip length. This comes out to INR 1.82 per person per km. This is used to estimate box-fare revenues. Table shows the fare structure that we propose for Surat Metro.

Distance (Km)	Fare (INR)
0-2	17
2-4	22
4-6	26
6-9	32
9-12	35
12-15	39
15-18	41
18-21	45
21-24	47
24-27	50
27-31	54
31-35	59

1.1.1.1.4    Non-Fare Revenue

Non-fare revenues are assumed to be from property development and advertisement at 10% p.a. of the box-fare revenue. This income will be directly accrued to the SPV. This helps in increasing the revenue options for the project. Using the above-mentioned assumptions, the revenues for 40 years from start of construction are calculated. The revenues are calculated till the year FY 2057-58.  

1.1.1.2      Office Expenses

1.1.1.2.1    Corporate Office Expenses

The staff is divided as per the Organization Breakdown Structure. The salaries are as per the standard market salary of October 2018 price level, with an escalation of 7.5% every two years. Apart from that, office rent is assumed at Rs. 7,50,000 per month, office supplies at Rs. 1,00,000 per month and travel expenses at Rs. 2,10,000 per month. These are standard assumptions and the travelling expense is calculated by taking no. of estimated travel done by officials and no. of vehicles deployed for that purpose.

1.1.1.2.2    Station Expenses

The staff at station is assumed as 35 persons per station, with the average salary of Rs. 10,000 per month and an escalation of 1.25% every two years. Annual traction power (in kVA) required per car per km is calculated and then multiplied by the length of track, no. of cars and the cost. This is added to the station operating expense.

1.1.1.3      Capital Expenditure

Capital expenses are derived from the Cost Breakdown Structure. These include cost of construction, cost of feasibility studies and designing, and the cost of rolling stock, electrification et al. The complete breakdown is shown in the Cost Breakdown Structure. The dispatch of funds for capital expenditure annually is given in the table.

Year	Cost (INR in crore)
2018-19	2,000
2019-20	2,986
2020-21	3,699
2021-22	1,989

1.1.1.4      Operating Expense

The operating expense includes the station expenses, electricity expense, housekeeping expenses for depot and stations, and the maintenance of P-way. 

1.1.1.5      Funding Sources

Funding is assumed in three ways – equity, debt and grant. Equity is assumed to be provided by government of India and government of Gujarat in equal proportions, with total equity as 20.8%. The total debt is proposed as 62.2 %, all of which is to be taken from any international agency like JICA, ADB, World Bank. Assuming the loan is taken from JICA, the interest rate shall be 1.45% p.a. The loan repayment period is 40 years for such projects, with first 10 years as grace period and the repayment only starts from 11^th year. Land is provided free of cost by the government, or an interest-free subordinate debt is issued of the same amount. We have assumed the provision of subordinate debt, which comes to be 7% of total funding.

1.1.1.6      Depreciation

The depreciating assets are first identified. The list of these assets is shown in table.

Depreciating Assets	Opening Value (INR)	Useful Life (years)	Rate (%)
Rolling Stock	12,210,000,000	30	6.67
Automatic Fare Collection Equipment	2,464,500,000	15	40
Stations	32,773,100.000	100	3.02
Depots	3,200,000,000	100	3.02
Viaduct	29,742,450,000	100	8.00
S&T	4,603,100,000	50	20
Traction	3,373,300,000	50	7.84
Trackwork	2,864,900,000	100	6.00
Bridge	257,600,000	100	3.02

The depreciation rates for Rolling Stock, Track Work, Traction and S&T are taken from the Indian Railways Manual. All others are as per standard manuals. The depreciation for Viaducts and Stations will start from FY 2022-23, while for all others it will start form FY 2021-22.

1.1.1.7      Financial Parameters

To check the financial viability of the project, the financial parameters used are FIRR and NPV. The NPV for the project at 7.5% interest p.a. comes out to be INR 3,315 crore. Since the NPV is positive, the project is financially viable. The IRR comes out to 12.37%. 

 As IRR is 12.97%, NPV is positive before that interest rate. Figure shows the yearly cashflow closing balance. The graph starts high because the loan amounts are assumed to be acquired initially. As the graph shows, the outflows are higher than the inflows for latter years when maintenance cost becomes prominent. 

Link to the Worksheet