Appraising a 500 MT Cold Storage for a Tomato FPO
An FPO of 620 small farmers in a tomato belt has 1,400 ha and a seasonal glut: farm-gate prices fell to ₹4/kg against a cost of production of ₹9/kg in the peak week, and 22% of the harvest was graded as unmarketable last year. The FPO wants a ₹2.40 crore cold storage of 500 MT. The proposal assumes 70% utilisation, a storage fee of ₹3/kg/month, and five months of operation; operating cost is ₹28 lakh a year including power at ₹6.20/unit. The state offers a 50% capital subsidy, so the FPO seeks a ₹1.00 crore term loan at 9% and contributes ₹0.20 crore. The feeder has 14 hours of supply and voltage fluctuates. A private trader offers a buy-back contract at ₹7/kg for Grade A only, with 60% of volume assured. The FPO's board is split: some want the cold storage for prestige. The loan appraisal must be completed in three weeks.
1. Using the stated assumptions, compute EBITDA, debt service and DSCR. What utilisation level breaks even, and what does that imply for the proposal?
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Base case
- Utilisation = 500 × 70% = 350 MT = 350,000 kg.
- Storage revenue = 350,000 × ₹3/kg/month × 5 months = ₹52.50 lakh.
- EBITDA = ₹52.50 − ₹28.00 = ₹24.50 lakh.
- Interest = ₹1.00 crore × 9% = ₹9.00 lakh. Principal over 7 years = ₹14.29 lakh. Debt service = ₹23.29 lakh.
- DSCR = 24.50 ÷ 23.29 = 1.05.
A DSCR of 1.05 leaves almost no cushion. At 55% utilisation, revenue is ₹41.25 lakh and EBITDA ₹13.25 lakh; DSCR falls to 0.57. Break-even EBITDA equals debt service of ₹23.29 lakh, so revenue must be ₹51.29 lakh, i.e. 342 MT or 68.4% utilisation. The proposal assumes 70% - only 1.6 percentage points above break-even.
The key sensitivity is utilisation, not the storage fee. A one-month delay in the season or a buyer shift can push the project below break-even. The 14-hour feeder also means backup power cost is understated in the ₹28 lakh operating cost.
2. Compare the 500 MT proposal with a phased 200 MT cold room plus grading line and buy-back contract. Which would you recommend and why?
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Recommendation: the phased 200 MT cold room plus grading line and buy-back contract, not the 500 MT build.
Reasons:
- The 500 MT project is a single, lumpy asset with a DSCR of 1.05 and break-even at 68.4% utilisation; a prestige-led build has no room for a bad season.
- The buy-back contract at ₹7/kg for Grade A covers 60% of volume and reduces price risk; the cold store only helps if the product is graded and marketable.
- A 200 MT modular room can be expanded if utilisation proves above 80% for two seasons; it also avoids stranding subsidy and debt in unused capacity.
- Grading tackles the 22% unmarketable share directly, while cold storage only delays sale.
Awarding the full loan now would be a judgement based on the board's preference, not on cash flow. Phasing is the credit decision that protects both the FPO and the bank.
3. List the conditions you would attach to any sanction.
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- Utilisation covenant of at least 65% in year 1 and 75% in year 2, tested quarterly from fee receipts.
- Assignment of buy-back proceeds and storage-fee receivables to an escrow account.
- Grading line commissioned before the first storage season; the 22% unmarketable share to be reduced to below 12% in the first year.
- Backup power (solar plus diesel generator) sized for at least 8 hours, with the capital cost included before sanction.
- Board resolution that no further expansion is taken without a fresh appraisal.
- Monthly stock, fee and power-cost statements, with a right to inspect.
- Personal guarantee or FPO asset charge, given the thin own contribution of ₹0.20 crore.
These conditions convert the main risks - utilisation, power and price - into monitorable covenants rather than assumptions.