PROJECT FINANCE

Final Report

Harshit Arora
[email protected]
Contents
Acknowledgment................................................................................................................... 2
Abstract................................................................................................................................. 3
Executive Summary .............................................................................................................. 4
Introduction To Project Finance ............................................................................................. 6
PROJECT FINANCING ..................................................................................................... 6
NON-REFUNDABLE DEBT AND MEZZANINE DEBT: ...................................................... 6
FACTORS THAT MUST BE CONSIDERED WHEN EVALUATING A NEW VENTURE AS
PROJECT FINANCE ......................................................................................................... 7
Methodology ......................................................................................................................... 8
OBJECTIVE OF THE PROJECT ....................................................................................... 8
ANALYSIS TECHNIQUES ................................................................................................. 8
LIMITATIONS: ................................................................................................................... 8
Sector Overview.................................................................................................................... 9
INDIAN MARKET SIZE...................................................................................................... 9
INVESTMENTS/DEVELOPMENTS ................................................................................... 9
GOVERNMENT INITIATIVES FOR RESIDENTIAL AND HOUSING .................................. 9
Detailed Description of the Project ...................................................................................... 10
PROJECT DETAILS ........................................................................................................ 10
LOCATION ...................................................................................................................... 10
PROJECT SIZE ............................................................................................................... 10
PROJECT FINANCING: .................................................................................................. 10
PROJECT ASSUMPTIONS ............................................................................................. 11
Project Feasibility ................................................................................................................ 12
PROJECT FEASIBILITY ANALYSIS ................................................................................ 12
Conclusion .......................................................................................................................... 13
References ......................................................................................................................... 14

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Acknowledgment

This report is a module assignment for the VCE - Internships course. This report is based on
the Financial Modelling and Analysis of the 50-Flat Housing Project in Gurgaon, Haryana.
This is a report prepared for the Project Finance and Modelling topic of the internship. I
would like to thank VCE – Internships for providing me with the opportunity to learn about
Project Finance & Modelling and for allowing me to complete a virtual internship. This has
allowed me to gain knowledge of project finance and project analysis, as well as how to
construct a Financial Model. Then, I would like to thank My Mentor, Mr. Ashish Kumar, CEO
of Vardhan Consulting Engineers, for providing guidance via live interaction sessions
throughout this project. I'd like to thank Miss Celesti Lenka and Miss Kritika Verma for the
opportunity to complete an internship at Vardhan consulting engineers.
The Vardhan Consulting Engineers internship programme is enjoyable. During the duration
of the project, a wealth of knowledge and experience was gained.

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Abstract

Gurgaon, whose official name is Gurugram, is a city in the northern Indian state of Haryana.
It is located near the border between Delhi and Haryana, approximately 30 kilometers
southwest of the nation's capital, New Delhi. Architecturally significant structures in Gurgaon
span a variety of styles and time periods. Modern urban planning has resulted in the
construction of several tall buildings within the city. An estimated 1100 residential towers
exist in Gurgaon. A 93-square-meter (1,000-square-foot) two-bedroom unit in a decent
condominium in Gurgaon costs at least $160,130 (10,000,000).

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Executive Summary

This project required an understanding of the concept of project finance and its associated
terminology. It also sought to distinguish between corporate finance and project finance. It
assisted in practically comprehending the roles of the various financial model functions. The
preparation of revenue models for various sectors and the identification of factors that must
be considered to qualify a project as project finance was required. It assisted in
comprehending the factors that are crucial when a loan or payment is in a different or foreign
currency. It was then possible to apply all of the theoretical knowledge to a real-world project
involving 50 housing units, for which the entire financial modeling and analysis was
conducted using Microsoft Excel and realistic parameters.
Principal Objective: As a management consulting firm, VCE offers financial advisory services
to clients seeking to raise debt and/or equity for extensive infrastructure and energy projects.
VCE prepares and analyses essential project financing components, such as financial
modeling, risk assessment, investment memorandum, CapEx/OpEx breakdown, and
revenue analysis. These financial documents/analyses are necessary for negotiating with
banks / financial institutions in order to raise non-recourse debt and private equity via project
financing, also known as infrastructure financing.
A list of reality-based projects with actual data and case summaries, as well as learning
references and a practical method for preparing financial modeling and analysis of
infrastructure projects, will be assigned to interns. Understand and conceptualize the
terminology of project finance. Prepare a comprehensive financial model and analyze the
eligibility of projects for non-recourse debt.
Understanding the revenue process/model of various industries (Solar PV, Real Estate,
Highways, Airports, etc.)
Prepare a standard corporate report at the conclusion of the internship.
Interns at VCE contribute to the firm in numerous ways. Consultants gain knowledge by
elucidating naive questions and questions from interns. Sometimes, VCE uses interns'
submitted analyses as references for live projects. It's a win-win situation for both the intern
and the company. Vardhan Consulting Engineers is a consulting firm founded by a group of
engineers with a solid academic background and decades of management experience in
order to provide clients with solutions to their complex engineering, management, and
financial problems. They offer engineering and project management consulting services for
energy projects. Particularly Solar PV power projects (Utility Scale Large-Scale Projects) and
Pyrolysis Projects (Plastic to Oil). The firm and its consultants provide technical, financial,
and project management services to energy, power, and infrastructure project developers.
VCE's essential services and areas of expertise include
1. Feasibility Analysis, Detailed Project Report, and Financial Analysis (IM).
2. Financial Closure for Project Finance through Debt or Private Equity.
3. Project Management and EPC-Management Services on-site and off-site.
4. Documentation and Transaction Services for Project Sale.
5. Project Development and Rights Transfer at NTP.

In addition to the businesses listed above, VCE believes in giving back to society in order to
improve the future of our country. The various VCE Society Pay Back initiatives include:

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Vardhan Merit Scholarship: It encourages students to study with greater concentration.
Currently, it allocates Rs. 50,000 (Fifty Thousand Rupees) annually for this purpose. It
anticipates that this amount will increase in the near future. (Over 3.00 Lakhs have been
spent thus far).
Internships and Training: As part of this initiative, it selects students from diverse
engineering and management schools and provide them with internships and training. Their
internships and training programmes are one-of-a-kind, and they are designed to prepare
students in the Core Engineering Sector (Electrical, Mechanical, Civil, and Energy
Engineering) and Finance Management to be corporate/industry-ready. They provide them
with industry mentorship. All of this is done without charging the students a fee or requesting
a favour. Currently, They allocate Rs. 60,000 (Sixty Thousand Rupees) annually for this
purpose. As an incentive, the majority of the funds will be allocated as stipends to the best
interns. (Stipend Paid to Date, Rs. 1.50 Lakhs+) The internship opportunity provided by VCE
has allowed all of its interns to improve their skills and acquire both theoretical and practical
knowledge according to their individual project titles and internship requirements.
My internship focuses on Project Finance and Modelling. The provided modules and tasks
for the project are extremely useful and informative. The initial tasks were so basic that they
helped interns and me gain a foundational understanding of project finance, financial
modelling, and financial analysis. It assists us in understanding the terminology and various
facets of project finance. As a result of completing this internship with VCE, I have
acquired numerous new skills and knowledge. This internship's final module is extremely
beneficial for learning how to conduct analysis and create a financial model. This is a very
useful tool in the financial field. This report is useful for understanding the structure of the
residential and housing industry in India, the potential for investing in residential projects,
schemes, and policies, and an overall analysis of residential, growth in India, and the
housing

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Introduction To Project Finance

PROJECT FINANCING: Project Financing is a long-term, zero or limited recourse

financing option available to a borrower against the rights, assets, and interests associated
with the project in question. In other words, "Project financing entails a corporate sponsor
investing in and owning a single-purpose industrial asset through a legally separate entity
financed with non-recourse debt." The repayment of project financing is not based on the
sponsoring company's assets or balance sheet, but on the revenues the project will generate
once it is completed. Because corporate finance cannot demonstrate that the revenue
stream from the completed project will be sufficient to repay the loan, it cannot include
project finance within its scope.
Project financing consists of:

• Long-term infrastructure, industrial project, and public service financing.

• Non-recourse/recourse limited Financial Structure.
• Payment from project-generated cash flow.
There are three ways to finance a project:

• Low-interest loan financing or cost-sharing financing.

• Finance of Debts.
• Capital Funding.
These are the types of projects for which project financing is appropriate:

• Governmental buildings and transport systems are examples of infrastructure

projects.
• Projects for oil and gas exploration.
• Sporting venues.
• Liquefied natural gas development projects.
• Mining.
• Building.
• Construction.
• Real Estate.

NON-REFUNDABLE DEBT AND MEZZANINE DEBT: Non-repayable debt is a loan

that is backed by collateral. Generally, a non-recourse loan is any consumer or commercial
debt secured by collateral alone. In the event of default, the lender may not seize the
borrower's assets beyond the collateral. Non-recourse loans are frequently used to finance
commercial real estate and other projects with lengthy completion times. In the case of real
estate, the land serves as the loan's collateral. Mortgages are typical examples of non–
recourse debts.
Mezzanine debt derives its name from the fact that it blurs the distinction between debt and
equity. It is the riskiest form of debt but offers some of the highest returns, typically between
12 and 20 percent per annum. A mezzanine lender is typically involved in a buyout to provide
a portion of the capital that would ordinarily be provided by an equity investor. Mezzanine
loans are a combination of equity and debt.

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FACTORS THAT MUST BE CONSIDERED WHEN EVALUATING A NEW
VENTURE AS PROJECT FINANCE
• Business projects are primarily fueled by their adherence to fundamental principles.
Their vision, energy, and willingness to exert effort determine the success or failure of
projects.
• Business Environment Risks: Lenders ensure that you are not deemed to be
exposed to an excessive amount of risk. A lender may be overly cautious if the
impending removal of a tariff barrier, a polluting process, or the fact that your
company operates in a vulnerable sector of the economy are all factors. Additionally,
the Company should be adequately covered by insurance that is tailored to its
activities.
• If lenders or investors decide to invest in your project, it is because they believe the
investment will be profitable. They will ensure that your provision is founded on
reasonable and verifiable facts.
• Company's ability to pay and financial structure: You must demonstrate that the
business can meet all of its financial obligations. Therefore, the company's financial
structure should exhibit a healthy balance between assets and liabilities.
• Principal's Financial History: From the lender's perspective, the future is heavily
dependent on the past. It is likely that they will run a credit check on the business
owners to determine whether or not they have met their previous financial
obligations.
• Typically, debt financing is secured by the company's assets, which may be sufficient
to cover the lender's risk.

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Methodology

OBJECTIVE OF THE PROJECT: The project aims to examine the residential sector and
housing situation in Gurgaon, Haryana, India. Another requirement for the preparation of
this report is to develop a financial model for a 50-unit housing project and to determine
whether the project is feasible.

ANALYSIS TECHNIQUES The analysis techniques are as follows:

• Quantitative Techniques.
• The use of graphs and graphical analysis.

LIMITATIONS:
• The construction cost in real time would be much more than 8 crores.
• The operational expense would also be more than 50 Lakhs.
• The selling cost would also be much more than 4000 per sq. ft.
• The project's debt obligation is exceptionally high because it cannot fulfill it.
• The income generated by the project is insufficient to cover the debt.
• The project will not generate sufficient revenue to cover its own expenses.
• The project is entirely impossible.
• The chosen location for the project is also highly costly for construction.

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Sector Overview

INDIAN MARKET SIZE: By 2040, the Indian real estate market will increase from Rs
12,000 crore (US$ 1.72 billion) in 2019 to Rs 65,000 crore (US$ 9.30 billion). The Indian real
estate market is projected to reach $1 trillion by 2030, up from US$ 120 billion in 2017, and
to contribute 13% of the country's GDP by 2025. Retail, hospitality, and commercial real
estate are also expanding significantly, providing India's expanding needs with the
necessary infrastructure. From 2017 to 2028, the annual growth rate of Indian real estate
was 19.5%. In 2019, housing sales reached 2,611,000 units across seven major cities.

INVESTMENTS/DEVELOPMENTS: Rapid urbanization in the nation drives real estate

expansion. By 2020, urban areas will contribute more than 70 percent of India's GDP. The
Indian government has been supportive of the real estate industry. In August 2015, the
Union Cabinet of India approved one hundred Smart City projects. The government has
also increased FDI (Foreign Direct Investment) limits to 100 percent for township and
settlement development projects. The Housing for All initiative of the Indian government is
expected to attract $1.3 trillion in housing sector investment by 2025. As of December 2019,
1.12 crore urban houses were sanctioned under the Pradhan Mantri Awas Yojana (Urban)
(PMAY (U)), with the potential to generate 1.20 crore jobs. The plan is anticipated to
promote affordable housing and construction in the country and stimulate the real estate
market. The following are some of the most critical investments and developments in this
sector:

• On July 9, 2020, the Union Cabinet approved the development of Affordable Rental
Housing Complexes (AHRCs) as a sub-scheme of PMAY – U for urban migrants and
the poor.
• As of December 2019, 1.12 crore urban houses were sanctioned under the Pradhan
Mantri Awas Yojana (Urban) (PMAY (U)), with the potential to generate 1.20 crore
jobs.
• Government has also issued draught investment guidelines for Real Estate
Investment Trusts (REITs) in the non-residential segment.
• In 2019, housing sales reached 2,611,000 units across seven major cities.

GOVERNMENT INITIATIVES FOR RESIDENTIAL AND HOUSING: The

Government of India and the respective State governments have taken a number of
initiatives to promote growth in the sector. The Smart City Project, which aims to construct
100 smart cities, presents a golden opportunity for real estate firms. Other major
Government initiatives include:

• The Union Cabinet has approved the establishment of a Rs 25,000 crore (US$ 3.58
billion) Alternative Investment Fund (AIF) for the purpose of reviving approximately
1,600 stalled housing projects in the country's major cities.
• Under the Pradhan Mantri Awas Yojana (Urban) (PMAY (U)), 1.12 million urban
homes have been sanctioned, creating 1.20 million jobs.
• Government has established an Affordable Housing Fund (AHF) within the National
Housing Bank (NHB) with an initial corpus of Rs 10,000 crore (US$ 1.43 billion)
utilizing priority sector lending shortfall of banks/financial institutions for
microfinancing of HFCs.

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Detailed Description of the Project

PROJECT DETAILS: Techvardhan Infra Pvt. Ltd (Any Company) "CLIENT" has purchased
land near Gurugram HR and intends to construct a 50-unit, 900-square-foot residential
building on it. ft each. They expect to sell the apartments for Rs. 4000 per square foot. ft.
The anticipated Capex is Rs. 8 crores and Opex is Rs. 50 lakhs per year for the entire
project.
They seek a non-recourse debt (project financing) with a D/E ratio of 70:30 from India's
leading commercial banks for a 12-year term loan.

LOCATION: The project will be built in Gurgaon, officially known as Gurugram, a city in the
northern Indian state of Haryana. It is located near the Delhi-Haryana border, approximately
30 kilometers southwest of the nation's capital, New Delhi. Architecturally significant
structures in Gurgaon span a variety of styles and time periods. Modern city planning has
resulted in the construction of numerous tall structures. There were approximately 1100
residential towers in Gurgaon. A 93-square-meter (1,000-square-foot) two-bedroom unit in a
decent condominium in Gurgaon costs at least $160,130 (10,000,000).
The following factors must be considered when selecting a site for a building:

• Access to the playground and park.

• Water, electricity, and sewage disposal accessibility.
• Contour of land in relation to construction expenses. The price of land.
• Distance from workplaces.
• Facilitated Drainage.
• Location in relation to Schools, Universities, and Public Buildings.
• Transport Facilities.

PROJECT SIZE: The project will be constructed on 5000 square feet. ft., where each flat
would be 900 sq. ft., and additional information regarding the construction of the project are
as follows:

• There would be fifty flats.

• It would have 10 floors, with five 900-square-foot apartments per floor. feet each.
• The building will be equipped with four or five lifts.
• For residential coverage, there would be a parking area.
• The structure would have the most innovative and advanced infrastructure features.

PROJECT FINANCING:

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PROJECT REVENUE SOURCES:

PROJECT ASSUMPTIONS:

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Project Feasibility

PROJECT FEASIBILITY ANALYSIS: A Feasibility Study is the most effective way to

determine whether your project is feasible. This procedure provides assurance that the
required solution can be implemented on time and within budget. The significance of a
feasibility study is to determine whether a company, team, or organisation will fulfil its
promises in a satisfactory manner and within a reasonable time frame. The majority of
feasibility studies must address the following five questions in order to justify a new project,
plan, or method:

• Is this strategy technically viable?

• This plan is legal?
• This plan is operationally feasible, right?
• Is this plan feasible within a practical timeframe?
• Is this proposal financially viable?
You can evaluate the feasibility of this area based on the following factors:

• Profitability Forecast.
• The Total Completion Price.
• Estimated expenditures by external parties.
No matter how incredible a project may appear, if the numbers don't add up, it's either not
worth the risk or you'll need to seek out larger budgets. The result displays that the project's
internal rate of return, and the equity internal rate of return, both are positive. The average
DSCR for the undertaking is 11.03. DSCR is an essential metric for assessing the viability of
a project. DSCR interpretation is essential to the project's debt obligation and repayment
capacity.
The DSCR is interpreted as follows:
1. DSCR1: Your cash flow is negative. You do not have sufficient income to pay off all of the
debt.
2. DSCR > 1: Cash flow is positive. The greater your DSCR, the greater your available
income for debt repayment.
3. DSCR = 1: You have exactly enough cash flow to cover your debt service, but no other
cash flow.
From the following, it is evident that the project is feasible for being built and constructed,
satisfying its debt obligations, and generating income. But there are many assumptions and
limitations that are not realistic in current scenario like the cost of construction is very high
and other costs related to construction of commercial buildings have gone up significantly.

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Conclusion

The following report and analysis demonstrate that there is a distinction between the
theoretical and practical work performed. As practical work will significantly expand the
scope of understanding. As a result of having extensive practical experience, we gain
additional knowledge in such a circumstance. Based on the financial model provided in the
second module of the project, I am able to comprehend the concept of financial modelling.
The overall internship sessions are divided into four modules, as follows:
Module1: Project Finance and the distinction between project finance and corporate finance.
It was helpful to understand the various terms associated with project financing.
Module 2: It focuses on the assumptions that must be considered when preparing a financial
model, the function of the revenue, cost, and debt sheets in the financial model, and the
steps involved in preparing a fin flow sheet.
Module 3: This task helped students understand how a business is evaluated to determine if
it qualifies for project financing and how revenue models are developed for residential, solar
PV, and PPP projects.
Module 4: It is the final and most important module of the internship. In this project, a project
report and financial model are being developed. The project report provides a concise
explanation of the Project finance, the Indian residential and housing sector, how to prepare
a financial model, how to determine the project's viability, and how to analyse the project.
According to the analysis, the Project on Financial Modelling and Analysis of 50 Flats
Housing project in Gurgaon, Haryana is not feasible and should not be considered feasible.
As the project's debt obligations are so substantial, income generation is low at this time.
Therefore, the project cannot be executed. Overall, the internship was a very positive and
instructive experience, as it assisted in the acquisition of many new skills, including Financial
Modelling and project analysis.

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References
• https://en.wikipedia.org/wiki/Gurgaon
• https://efinancemanagement.com/sources-of-finance/project-finance
• https://www.wallstreetmojo.com/project-finance/
• https://techvardhan.com
• https://www.ibef.org/industry/real-estate-india.aspx
• https://mubrealestate.com/india/learn-the-truth-about-real-estate-industry

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