Loan appraisal for a ten-cow crossbred dairy unit
A young entrepreneur in Nashik prepares a bank project for 10 HF crossbred cows. Total project cost is ₹12.0 lakh: 10 cows at ₹70,000, shed ₹3.0 lakh, equipment ₹1.0 lakh and working capital ₹1.0 lakh. A 25% capital subsidy is available, and the bank will lend the remaining 75% at 9% annual interest for five years with equal annual instalments. Expected milk yield is 18 L/cow/day for 300 days at ₹34/L. Variable cost is estimated at ₹11/L, and fixed costs excluding interest and depreciation are ₹1.2 lakh/year. The entrepreneur will use family labour and has no contingency reserve. He wants to know whether the unit can service the loan and what happens if milk price falls to ₹30/L.
1. Calculate the annual loan instalment and the base-case debt service coverage ratio. State your assumptions.
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Project cost is ₹12.0 lakh and subsidy is 25%, or ₹3.0 lakh, so the loan is ₹9.0 lakh. The annual instalment at 9% for five years is: 9,00,000 × [0.09(1.09)^5]/[(1.09)^5 − 1]. Using (1.09)^5 = 1.5386, the factor is 0.2571, so the instalment is about ₹2,31,400 per year. Annual milk is 10 × 18 × 300 = 54,000 L. Revenue at ₹34/L is ₹18,36,000. Variable cost at ₹11/L is ₹5,94,000, and fixed cost is ₹1,20,000. Cash available before interest and depreciation is ₹11,22,000. Base-case DSCR is 11,22,000 ÷ 2,31,400 = 4.85. Even after allowing 10% depreciation of about ₹1,10,000, the cover is about 4.4. The unit can service the loan, but the calculation assumes full yield, full sale and no cow replacement cost.
2. Test the proposal at a milk price of ₹30/L and with a 10% shortfall in yield. What is the revised DSCR?
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At ₹30/L and full yield, revenue is 54,000 × 30 = ₹16,20,000; variable cost remains ₹5,94,000 and fixed cost ₹1,20,000, leaving ₹9,06,000; DSCR is 9,06,000 ÷ 2,31,400 = 3.92. With a 10% yield shortfall, milk is 48,600 L. At ₹30/L, revenue is ₹14,58,000 and variable cost is 48,600 × 11 = ₹5,34,600; after fixed cost ₹1,20,000, cash available is ₹8,03,400; DSCR is 3.47. Even under both shocks the loan is covered, but the margin is thinner. The important non-cash risk is that the entrepreneur has no contingency reserve for a disease outbreak, delayed subsidy or cow replacement. A 12% interest rate would raise the instalment to about ₹2,49,000 and still leave cover above 3.2 at ₹30/L, so interest rate is not the main threat; cow mortality and price collapse are.
3. What risk-management and project conditions would you recommend before sanction?
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Before sanction, link the subsidy release to the bank's records so that working capital is not used to bridge it. Insure all 10 cows and the shed, and build a contingency of at least two months' loan instalment, about ₹40,000, from the first milk cheques. Phase the purchase in two batches of five cows to reduce disease and price risk, and keep 10% of the project cost as a cash buffer. Test the milk price assumption against the local cooperative's last 12 months rather than a single high price. Because family labour is used, include a replacement cost for one labourer during illness. Set monthly monitoring of milk yield, feed cost per litre and mortality. The project is bankable at the base case, but approval should be conditional on insurance, a written milk sale agreement and a 14-day quarantine facility for newly purchased cows.