PRE-FESIBILITY STUDY ON FATTENING OF BUFFALO/CATTLE CALVES

Animal Nutrition Program (ASI) NARC

PAKISTAN AGRICULTURE RESEARCH COUNCIL ISLAMABAD

MINISTRY OF NATIONAL FOOD SECURITY AND RESEARCH

Government of Pakistan

www.parc.gov.pk

1st Draft

January 2014

Contents1- DISCLAIMER.....................................................12- PURPOSE OF DOCUMENT............................................1

3- Introduction to scheme.........................................14- EXECUTIVE SUMMARY..............................................1

5- BRIEF DESCRIPTION OF PROJECT AND PRODUCT.......................26- CRITICAL FACTORS...............................................2

7- INSTALLED AND OPERATIONAL CAPACITY FOR FATTENING of CALVES.....38- GEOGRAPHICAL POTENTIAL FOR INVESTMENT..........................3

9- POTENTIAL TARGET MARKETS.......................................310- PRODUCTION PROCESS FLOW.......................................3

11- PROJECT COST AND BENEFIT SUMMARY..............................312- PROJECT ECONOMICS.............................................3

10.1 Project Cost................................................410.2 Space Requirement...........................................4

10.4 Machinery and Equipment.....................................410.5 Furniture and Fixture.......................................5

10.6 Operational and Maintenance cost............................510.7 Human Resource Requirement..................................5

10.8 Project Financing...........................................510.9 Revenue Generation..........................................6

13- KEY ASSUMPTION................................................614- ANNEXURE......................................................7

1- DISCLAIMERThis information memorandum is to introduce the subject matterand provide a general idea and information on the subject.Although, the material included in this document is based ondata / information generated from experiments and fieldtesting by a team of relevant scientists; however, it is basedupon certain assumptions which may differ from case to case.The contained information may vary due to any change in any ofthe concerned factors, and the actual results may differaccordingly from the presented information. The PARC and itsemployees do not assume any liability for any financial orother loss resulting from this memorandum in consequence ofundertaking this activity. The prospective user of thismemorandum is encouraged to contact qualifiedconsultant/technical expert, especially designated focalperson(s) of this enterprise for reaching to an informeddecision.

2- PURPOSE OF DOCUMENTThe purpose of this document is to facilitate potentialinvestors in by providing them with a general understanding ofthe business, with the intention of supporting potentialinvestors in crucial investment decisions. The project pre-feasibility may form the basis of an important investmentdecision and in order to serve this objective, thedocument/study covers various aspects of project conceptdevelopment, start-up, production, finance, and businessmanagement. The need to come up with pre-feasibility reportsfor undocumented or minimally documented sectors attainsgreater imminence as the research that precedes such reportsreveal certain thumb rules; best practices developed byexisting enterprises by trial and error, certain industrialnorms and well established research findings that become aguiding source regarding various aspects of business set-upand it’s successful management. Apart from carefully studyingthe whole document, one must consider critical aspectsprovided later on, which form the basis of investmentdecisions.

3- Introduction to schemePrime Minister’s Youth Business Loan Program, for youngentrepreneurs, with an allocated budget of Rs. 5.0 Billion forthe year 2013-14, is designed to provide subsidized financingat 8% mark-up per annum for one hundred thousand (100,000)beneficiaries, through designated financial institutions,initially through National Bank of Pakistan (NBP) and FirstWomen Bank Ltd. (FWBL). Loans from Rs. 0.1 million to Rs. 2.0million with tenure up to 8 years inclusive of 1 year graceperiod, and a debt: equity of 90: 10 will be disbursed to SMEbeneficiaries across the Pakistan, covering; Punjab, Sindh,Khyber Pakhtunkhwa, Balochistan, Gilgit-Baltistan, Azad Jammu& Kashmir and Federally Administered Tribal Areas (FATA).

4- EXECUTIVE SUMMARYBeef from young male calves (12-18 months old) of buffalo andcattle is one of major source of proteins of high biologicalvalues and foreign exchange through production of milk, meatand hides. However quality of beef due to their stunted growthrate and poor carcass yield is not satisfactory. Farmersprefer to feed to female calves for replacement of herd. Malecalves become neglected due to malnutrition, emaciation anddiseases leading to low weight at marketing age and lesscarcass yield when slaughter. Growth rate and quality of beefand economic return from calves can be improved by fattening.Domestic and international literature has revealed a growthrate of 700 to 900 g/day when calves are fattened with avariety of protein supplements along with appropriate healthcover and management. Such fattening trials can be successfully carried in rural aswell as urban areas of Sindh, Punjab, Balochistan, KhyberPakhtunkhwa, Gilgit-Balitistan, AJ&K and FATA. Such a projectcan be easily completed by conducting series of trials, eachon 25 calves (12-18 months old) for a period of 120 days.Fattened calves can be sold as live or as carcass or cutpieces in any part of the country. A loan of Rs 1.059 offers agood opportunity for an economic investment not only for theproduction of quality beef but also jobs for our talentedyouth. Given the cost assumptions, Net Present Value (NPV),Internal Rate of Return (IRR), and payback period areRs.3,308,171, 29% and, 4.63 years, respectively.

5- BRIEF DESCRIPTION OF PROJECT AND PRODUCTFollowing key parameters must be addressed as per pre-feasibility study: • Techniques: Calves of respective breeds of buffalo andcattle in rural areas on all over the country can be subjectedto such fattening trials under semi-intensive system. Howeverprotein supplements (of different degradability) for fatteningand green fodders harvested at bloom stage can vary accordingto climatic conditions and cropping pattern.• Location: The business can be initiated in rural and urbanareas having access to marketing throughout the country.

• Product: At the moment most of beef is coming fromslaughtering of spent animals which is and low qualitycompared with that from young calves. Fattening of youngcalves with quality supplements will yield of high grade.Production and use of quality will not only improve our ownhealth but also socioeconomic conditions with foreign exchangeearned through export of surplus.• Target Market: In addition to major cities, such as Quetta,Karachi, Lahore and Islamabad, there is an enormous exportpotential for Middle Eastern countries. • Employment Generation: The proposed project will providedirect employment to two individuals. Financial analysis showsthe profitability of proposed business within first year ofits operation.

6- CRITICAL FACTORSThe commercial viability of the proposed project depends onthe following factors:

• Selection of calves of local breeds of buffalo and cattle,balanced feeding, proper housing, management, appropriatehealth cover, well defined marketing and dedicatedsupervisory staff will play very important role inexploitation of genetic potential local breed and will ensurethe success of the project.

• Farm may be positioned near to market so that supply ofinputs and disposal of final products could be managedeasily.

• It should have enough elevation, so it can be drained easilyduring the off season. • Calves should preferably represent local breed and diseasefree with a desirable body conditions.

• Farm is required to maintain the complete record of inputsand out puts (Calves, fodder production or purchase, Feedintake, body weight, morbidity, mortality, sale of animalsand manure) and infrastructure like buildings, equipments andfuel for successful marketing and traceability.

• Farm should have strong market linkages for effectivedisposal of produce.

7- INSTALLED AND OPERATIONAL CAPACITY FOR FATTENING of CALVES This pre-feasibility suggests that quality beef can beproduced by using local genetic materials feed resources underscientific management in a well defined marketing manner.

8- GEOGRAPHICAL POTENTIAL FOR INVESTMENT Semi-arid and irrigated areas are more suitable for thisinvestment as regard availability of inputs and marketing offinal products.

9- POTENTIAL TARGET MARKETSThe marketing of beef follows the traditional distributionchannel, through middlemen or wholesalers at farm whoidentifies potential buyers and negotiate price, or directlyto retailer in urban markets. The time spent intransportation, from farm to the retail shop, varies from areato area. Over the years, collection and transportation of fishhas improved with the use of loader vehicles. However, greaterthe distance between farm and consumer, more complicated willbe the marketing or distribution system, due to the perishablenature of the product. The key factors in marketing areavailability of current market information, quality of beefproduced and supply & demand which will determine the sellingprice.

10- PRODUCTION PROCESS FLOWAlthough both species are polyestrous but cattle will be moreuseful in ensuring flow of production process due to higherfertility rate. However intellectual planning will play animportant role in arrangement, use of inputs and theirdisposal.

11- PROJECT COST AND BENEFIT SUMMARYA detailed financial model has been developed to analyze thecommercial viability of calf fattening under the PrimeMinister’s Small Business Loan Scheme. Various cost andrevenue related assumptions, along with results of theanalysis, are outlined in this section.

12- PROJECT ECONOMICS All figures in the financial model have been calculated 30animals. The following table shows internal rates of returnand payback period.

Table 1. Project Economics

Description DetailsNet Present Value (NPV) 3,380,171Internal Rate of Return (IRR) 29%Payback Period (years)

Factors that influence the profitability of calve fatteningare farm management, quality of inputs, environmental factorsand market situation.

10.1 Project CostFollowing requirements have been identified for operations ofthe proposed business.

Table 2. Total Project CostCapital Investment Amount (rupees)

Capital Cost (one time investment)

736,636

Initial operational cost 1,077,847Total 1,814,483

10.2 Space RequirementTable 3. Space requirement and its costSpace Requirement (Sq. ft.)

CostRs./Unit

Quantity

(Nos.)

Area(Sq.ft.)

TotalCost(Rs.)

Veterinarydispensary and office

500 1 100 75,000

Feed store 600 1 70 42,000Shed 400 3

sheds625 250,000

Loading areaincluding manager andwater tank

105 1loading area

1000 105,000

Miscellaneousfacilities (cattleCrush)

1cattleCrush

60,000

Total: 532,000

10.4 Machinery and Equipment Table 4. List of Machinery & Equipments and its costDescription Quantit

y(Nos.)

UnitPrice(Rs.)

Total(Rs.)

Weighing scale 01 25,000 25,000Chopper and otherequipments

01 30000 30,000

Veterinary Kit 01 20,000 20,000Misc Machinery - 15000 15000

Total: 90,000

10.5 Furniture and Fixture

Following table provides list of Furniture and Fixture required for fattening calves.

Table 5. List of Furniture & Fixture and its cost

Description

Quantity(Nos)

UnitPrice

Total(Rs.)

Furniture andFixture

Lump sump 50000 50,000

Total: 50,000

10.6 Operational and Maintenance cost

Following table provides list of Consumable Requirement for fattening calves.

Table 6. Operational & Maintenance cost

Description Quantity

(Nos.)

UnitPrice(Rs.)

Total(Rs.)

Cost of purchase of animals (125kgbody weight)

25 23750 593,750

Cost of feeding of animals @ Rs. 116/day (including fodder/silage

- - 348,000

and concentrate)Cost of Medicines - - 1,250Electricity - - 7,500Diesel Charges - - 6,000

Total: 956,500

* Local livestock market.

10.7 Human Resource Requirement The table below provides details of human resource required tomanage basic calves fattening. The staff salaries areestimated according to the market trends. However, theserequirements and pay scales may vary area to area.

Table 7. Human Resource Requirement its cost

Description

No. ofEmployees

Salary/person/month

Total salary peryear

Laborers 2 10000 240,000

10.8 Project Financing Following table provides details of the equity required andvariables related to bank loan;

Table 8. Project financingDescription DetailsTotal Equity (10%) Rs. 180500Bank loan Rs. 1624500Mark up to borrower (per annum) 8%Tenure of Loan (Years) 8Grace Period (years) 1

10.9 Revenue Generation

Final product of the trial is 25 fattened calves ready forsale in market that will generate revenue. Trial will berepeated at least thrice a year with sufficient generation offunds.

Table 9. Revenue of the ProjectProduct

Unit

Survival@100%

AverageWeight of

calf

First TimeProduction

(Kg)

SalesPrice

(Rs./Unit)

FirstTime

Revenue(Rs)

Fattened calves

25 215 kg 215/kgbody

weight

1,,155,625

Farm yard manure

16500

Total Sales Revenue: 1,172,125

13- KEY ASSUMPTIONParticulars Assumption

Sales Price Growth Rate 5% per yearIncrease in cost of raw material 10% per yearIncrease in utilities 10% per yearDebt/Equity Ratio 90:10Plant Building 5%Machinery and equipment 10%Office furniture & fixture 10%

Loan Period 8 yearsGrace Period 1 yearLoan installments MonthlyFinancial charges (interest rate) 8%

14- ANNEXUREStatem ent Sum m aries SM EDAIncome Statement

Rs. in actualsYear 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Revenue 3,456,283 4,127,946 4,811,474 5,172,334 5,560,259 5,977,279 6,425,574 6,907,493 7,425,555 7,982,471 Cost of Goods SoldFeed & Vaccination Cost 1,043,559 1,217,527 1,386,252 1,455,583 1,528,366 1,604,776 1,684,992 1,769,205 1,857,706 1,950,614 Cost of Calves 1,774,125 2,069,813 2,356,594 2,474,423 2,598,145 2,728,052 2,864,454 3,007,677 3,158,061 3,315,964 Direct Labor 240,000 264,000 290,400 319,440 351,384 386,522 425,175 467,692 514,461 565,907 Repair & M aintenance 14,740 17,220 19,625 20,606 21,636 22,718 23,854 25,046 26,299 27,614 Utilities 35,376 43,296 51,691 56,860 62,546 68,801 75,681 83,249 91,574 100,732

Total Cost of Sales 3,212,800 3,722,106 4,220,324 4,448,463 4,689,705 4,944,878 5,214,866 5,500,616 5,803,234 6,123,720 Gross Profit 243,483 405,841 591,150 723,871 870,554 1,032,400 1,210,709 1,406,877 1,622,320 1,858,751

General administration & selling expensesTravelling & Comm. expense (phone, fax, etc.) 6,000 6,300 6,615 6,946 7,293 7,658 8,041 8,443 8,865 9,308 Depreciation expense 67,200 67,200 67,200 67,200 67,200 67,200 67,200 67,200 67,200 67,200 Amortization expense 12,927 12,927 12,927 12,927 12,927 - - - - -

Subtotal 98,127 99,027 99,972 100,964 102,006 90,173 91,322 92,528 93,794 95,124 Operating Income 145,355 306,814 491,178 622,907 768,548 942,227 1,119,387 1,314,349 1,528,526 1,763,627

Other income - - - - - - - - - - Gain / (loss) on sale of assets - - - - - - - - - - Earnings Before Interest & Taxes 145,355 306,814 491,178 622,907 768,548 942,227 1,119,387 1,314,349 1,528,526 1,763,627

Interest expense 135,541 124,089 109,038 92,737 75,083 55,964 35,258 12,834 - - Earnings Before Tax 9,814 182,725 382,140 530,170 693,464 886,263 1,084,129 1,301,515 1,528,526 1,763,627

Tax - - - 13,017 29,346 55,439 85,119 117,727 153,205 200,225 NET PROFIT/(LOSS) AFTER TAX 9,814 182,725 382,140 517,153 664,118 830,824 999,010 1,183,788 1,375,321 1,563,402

Statem ent Sum m aries PARCBalance Sheet

Rs. in actualsYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

AssetsCurrent assetsCash & Bank 133,705 175,125 59,215 207,994 463,490 849,661 1,380,063 2,069,391 2,933,513 4,295,034 8,761,392 Equipment spare part inventory 4,913 6,027 7,212 7,951 8,766 9,665 10,655 11,748 12,952 14,279 - Raw material inventory 939,228 1,150,569 1,375,496 1,516,491 1,671,933 1,843,303 2,032,231 2,240,518 2,470,191 2,723,397 -

Total Current Assets 1,077,847 1,331,720 1,441,923 1,732,436 2,144,190 2,702,628 3,422,950 4,321,657 5,416,656 7,032,711 8,761,392

F ixed assetsLand - - - - - - - - - - - Building/Infrastructure 532,000 478,800 425,600 372,400 319,200 266,000 212,800 159,600 106,400 53,200 - M achinery & equipment 90,000 81,000 72,000 63,000 54,000 45,000 36,000 27,000 18,000 9,000 - Furniture & fixtures 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 -

Total Fixed Assets 672,000 604,800 537,600 470,400 403,200 336,000 268,800 201,600 134,400 67,200 -

Intangible assetsPre-operation costs 64,636 51,708 38,781 25,854 12,927 - - - - - -

Total Intangible Assets 64,636 51,708 38,781 25,854 12,927 - - - - - - TOTAL ASSETS 1,814,482 1,988,229 2,018,304 2,228,690 2,560,317 3,038,628 3,691,750 4,523,257 5,551,056 7,099,911 8,761,392

Liabilities & Shareholders' EquityCurrent liabilitiesAccounts payable - 163,932 192,627 217,270 231,424 246,621 262,949 280,503 299,387 319,715 217,570

Total Current Liabilities - 163,932 192,627 217,270 231,424 246,621 262,949 280,503 299,387 319,715 217,570

Other liabilitiesLong term debt 1,633,034 1,633,034 1,451,689 1,255,293 1,042,596 812,245 562,776 292,600 - - -

Total Long Term Liabilities 1,633,034 1,633,034 1,451,689 1,255,293 1,055,613 854,609 660,578 475,522 300,649 453,854 654,079

Shareholders' equityPaid-up capital 181,448 181,448 181,448 181,448 181,448 181,448 181,448 181,448 181,448 181,448 181,448 Retained earnings - 9,814 192,539 574,679 1,091,832 1,755,950 2,586,774 3,585,784 4,769,572 6,144,893 7,708,295

Total Equity 181,448 191,263 373,987 756,127 1,273,280 1,937,398 2,768,222 3,767,232 4,951,020 6,326,341 7,889,743 TOTAL CAPITAL AND LIABILITIES 1,814,482 1,988,229 2,018,304 2,228,690 2,560,317 3,038,628 3,691,750 4,523,257 5,551,056 7,099,911 8,761,392 Note: Total assets value will differ from project cost due to first installment of leases paid at the start of year 0

Statem ent Sum m aries PARCCash Flow Statement

Rs. in actualsYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Operating activitiesNet profit - 9,814 182,725 382,140 517,153 664,118 830,824 999,010 1,183,788 1,375,321 1,563,402 Add: depreciation expense - 67,200 67,200 67,200 67,200 67,200 67,200 67,200 67,200 67,200 67,200 amortization expense - 12,927 12,927 12,927 12,927 12,927 - - - - - Deferred income tax - - - - 13,017 29,346 55,439 85,119 117,727 153,205 200,225 Accounts receivable - - - - - - - - - - - Finished good inventory - - - - - - - - - - - Equipment inventory (4,913) (1,114) (1,185) (739) (815) (899) (991) (1,092) (1,204) (1,328) 14,279 Raw material inventory (939,228) (211,341) (224,927) (140,995) (155,442) (171,369) (188,928) (208,287) (229,673) (253,206) 2,723,397 Accounts payable - 163,932 28,695 24,643 14,153 15,197 16,328 17,553 18,884 20,329 (102,146) Other liabilities - - - - - - - - - - -

Cash provided by operations (944,141) 41,419 65,435 345,175 468,194 616,521 779,872 959,503 1,156,722 1,361,521 4,466,357

F inancing activitiesChange in long term debt 1,633,034 - (181,345) (196,396) (212,697) (230,351) (249,470) (270,176) (292,600) - - Issuance of shares 181,448 - - - - - - - - - - Purchase of (treasury) shares - - - - - - - - - - -

Cash provided by / (used for) financing activities1,814,482 - (181,345) (196,396) (212,697) (230,351) (249,470) (270,176) (292,600) - -

Investing activitiesCapital expenditure (736,636) - - - - - - - - - - Acquisitions - - - - - - - - - - -

Cash (used for) / provided by investing activities(736,636) - - - - - - - - - -

NET CASH 133,705 41,419 (115,910) 148,779 255,497 386,170 530,403 689,328 864,122 1,361,521 4,466,357

Cash balance brought forward 133,705 175,125 59,215 207,994 463,490 849,661 1,380,063 2,069,391 2,933,513 4,295,034 Cash available for appropriation 133,705 175,125 59,215 207,994 463,490 849,661 1,380,063 2,069,391 2,933,513 4,295,034 8,761,392 Dividend - - - - - - - - - - - Cash carried forward 133,705 175,125 59,215 207,994 463,490 849,661 1,380,063 2,069,391 2,933,513 4,295,034 8,761,392