Business Financing Strategy. National Finance Olympiad 2015

Transcription

1 Business Financing Strategy National Finance Olympiad 2015 Team Members Hassaan Hamid Tariq Anis Sabih-ur-Rehman Shad

2 Contents of the Presentation Interesting Times Ahead Considering a Business Components of Financing Strategy Financing Strategies for different Sectors Conclusion

3 Pakistan Economic Outlook- Interesting Times Ahead 5 years GDP growth rate : ~4% Record KSE growth rate : 29% Inflation rate at record low Interest rates: 6.5% 5 years currency depreciation: 3.6% Significant progress on China Pakistan Economic Corridor Target growth rate of 5.5% Enhanced Credit rating Foreign exchange reserves at a high of USD ~18.5 B Favorable Demographics Although the business environment is conducive, challenges remain in the shape of the energy crisis, terrorism, political uncertainty and constantly changing tax policies

4 Pakistan Economic Outlook- Interesting Times Ahead 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 10.10% 13.50% Discount Rate and CPI 6.50% 4.80% CPI Discount Rate 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 2.60% GDP Growth Trends 3.84% 3.62% 3.65% 4.0% 4.24% Exchange Rate Trends Funds Mobilized in Equity Markets PKR B from 2009 onwards Karachi Lahore Islamabad Karachi Lahore Islamabad

5 Pakistan Economic Outlook- What the world says about us

6 Considering a Business Business Risk Political Risk Regulatory Environment Economic Viability Operational Viability Competitor Reaction Vulnerability to International markets

7 Components of Financing Strategy Gearing Ratio Hedging Project Lifecycle Other Considerations Statutory requirement Tenor Financing Strategy Islamic Debt State Bank regulation Financial flexibility Risk appetite Tax holidays and subsidies Converti ble Debt Fixed / Floating Incremental cost of debt at high leverage ratios Public Debt / Bank Loans LCY / FCY

8 Components of Financing Strategy - Gearing Ratio Optimum gearing is at the level where WACC is the lowest Source 100% Equity 25% Debt & 75% Equity 50% Debt & 50% Equity 75% Debt & 25% Equity 90% Debt Cost of Debt 8% 8.5% 9% 11% 14% COE 14% 15.4% 18.1% 26.2% 50.7% WACC 14% 13% 12.1% 12.2% 13.6% Enterprise Value PKR 273 M PKR 297 M PKR 320 M PKR 318 M PKR 284 M $330 $320 $310 $300 $290 $280 $270 $260 $250 14% $320 $318 14% $297 13% $284 $273 12% 12% D/E (0/100%) D/E (25%/75%) D/E (50%/50%) D/E (75%/25%) D/E (90%/10%) 15% 14% 14% 13% 13% 12% 12% 11% Value of Company in PKR M WACC

9 Project Financing Lifecycle of Various Sectors in Pakistan Initial / Expansion phase with the highest D/E ratio (~60%-~80%) Deleveraging is observed as project matures Stable D/E ratio for companies with recurring annual projects 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% D/E Ratio 84% 79% 81% 74% 69% 70% 63% 63% 67% 56% 52% 41% 59% 20% 19% 19% 12% 14% 16% 8% Fertilizer Power Oil & Gas Cement

10 Components of Financing Strategy - Debt Characteristics Exchange Rate Risk Country Risk Limited Local market depth Hedging Matching revenue stream LCY / FCY Currently cheaper Administrative hassle Positive attitude due to sharia compliance Only available for companies with assets backing Islamic Debt Floating rates - volatile market Option to hedge through interest rate swaps available High premium on fixed rate due to higher volatility Fixed / Floating

11 Components of Financing Strategy - Debt Characteristics More expensive than bank loans in Pakistan Can be used to adjust banks group exposure Allows for dilution in exchange for lower interest rates Public Debt Convertible Debt Can be used to change debt characteristics already locked in Should match expected life of project Local market for loans beyond 5-10 years is very limited Hedging Tenor

12 Typical Industry Characteristics Financing Strategy for Different Pakistani Industries Capital Intensive Industries Consumer goods industries Service Industry Capital Huge upfront capital Modest Capital Requirement Fixed Assets High Mid Size Low Margins Consistent margins to justify the capital cost Financing Strategy High Gearing Floating Rates Mix of LCY / FCY Bank Loans 5-10 Year Tenor Hedging to reduce FCY exposure Low Capital Requirement Fluctuating margins Consistent margins Modest - Low Gearing Floating Rates LCY Debt Bank Loans Relatively lower Tenor Modest - Low Gearing Floating Rates Bank Loans Relatively lower Tenor

13 Conclusion The shoe that fits one person pinches another; there is no recipe for living that suits all cases Carl Gustav