A75z and A75aa : Transportation vehicles for milk transportation in Chitradurga (2 numbers)

Name of the Project

A75z and A75aa : Transportation vehicles for milk transportation in Chitradurga (2 numbers)

Project Dates

First draft of PAD May 1, 2008

Second draft with comments from Russell and answers, May 13 2008

http://docs.google.com/Doc?id=dft8hdgq_9gkbsc9fm

Project Concept

S3IDF has been running two milk trucks at Chitradurga. One truck takes the Chandravalli route and the other truck takes the Parasurampura route. The first truck is running since January 08 and the second truck since March 08. The two trucks supply milk from villages in Chitradurga to the Chitradurga chilling station. The Chitradurga chilling station in turn supplies milk to the diary in Shimoga which is 100 km from Chitradurga. This is a proposal to introduce two more milk trucks.

Why does the opportunity exist for a player like S3IDF.

1. Lack of commercial players entering due to availability of other transportation businesses: Chitradurga and Bellary districts are mining centers where iron ore and manganese being mined. Due to the mining boom, transporting ore has become an attractive transportation business with a number of commercial players getting into this. Also due to this, getting truck drivers for milk transportation, which pays less than mining has become a problem.

2. Nature of the milk transportation business: The milk transportation business is a daily business, which requires punctuality. Milk has to be transported daily and punctually. The risk of not transporting milk daily and punctually falls on the transporter. Due to this not many commercial players find this attractive.
3. Cash flow in the business: Running this business requires a month’s working capital for diesel. This is because there is a month’s delayed payment from the diary. Due to this, a number of small players find it difficult to run the business
4. Poor roads: Rural roads are poorly maintained. Therefore there is a cost to this. Commercial players prefer easier businesses than this.

Potential for S3IDF

The Shimoga diary runs 50 routes. Of this 10 routes come under Chitradurga. Currently S3IDF has taken up 2 routes and looking to take up 2 more routes. As per the Managing Director of Shimoga Diary, there are easily 10 to 15 routes where they need a good transportation service provider. With 4 trucks we will be catering to just under 8% of the requirement of the diary.

Why we should enter this business

1. Pro-poor. The project is pro-poor as it provides services to a large number of small farmers.
2. Returns: The IRR from the project is about 15%. Since we are owners of this project, we capture the returns. Its an excellent annuity project.
3. Easy monitoring: Payments directly come from the diary to us. Also, usage of diesel is easily monitored. So, there is less scope for the person running the truck to manipulate
4. Entry into the milk chain: using this we can do a number of other interventions in the milk chain, such as bio gas units etc.
5. Scaling up our activities in the milk supply chain: I believe in the next one year we will have the competence to invest in chilling units. Moving into this will help us to increase our returns and also to scale up our investments.
6. Good leverage: Local bank is willing to give us loans for this project. We can get loans for upto 75% of the cost of the vehicle with vehicle hypotication.

Project Financials

• Cost of the Project – Rs. 11,60,000 (approx. – USD 29,000). Rs. 5,80,000 per truck
• Margin money – 25% of the project cost – Rs. 2,90,000
• Loan from Pragathi Gramin Bank – Rs. 8,70,000
• Leverage – 75% of Project cost

Link to project financials

http://spreadsheets.google.com/pub?key=pwRdPi0mYDcIiqYeUTaFLIw

Project Risks

Project operator risk: The trucks will be run by S3IDF’s partner in Chitradurga, Chaitanya. Since, Chaitanya has been a partner with S3IDF for 3 years now and has a good track record, the risks are less. Over the past 3 years, Chaitanya has shown that it can handle projects well.

Market risk: There is a risk that we do not get the contract from the diary. The contracts are awarded on a tender basis and for one year. The two trucks we have got after nobody came forward to take the tender. Also, S3IDF will ensure to get the contract for one year. By running the trucks for one year, more than 60% of the cost of the vehicle will be recovered. This way we cover the market risk.

Technology risk: No technology risk

Portfolio risk: No portfolio risk

Mission risk: No mission risk