Global Detergents (A)/FM-II/001

Global Detergents (A)

It was February 02, 2009, 11.30 A.M. Mr. Rakesh Reddy Managing Director of Global Detergents
Ltd (GDL) is sitting with his fingers crossed in the visitors’ lounge of the National Beauty Care
Ltd.(NBCL)’s corporate office in Mumbai. He was there to negotiate a 10 year contract with the
NBCL for annual supply of 100 lakh units of fully packed ready to sell toilet soaps at a unit price of
Rs. 20.

About GDL
Rakesh Reddy an MBA, started GDL along with four of his class mates- Easwar Rao (Easwar),
Bindu Madhavi (Bindu), Raghunath Yadav(Raghunath) and Arjun Saha(Arjun). GDL started in a
rented accommodation in Jeedimetla industrial area, suburbs of Hyderabad, has grown over last ten
years to become a supplier of wide range of quality detergent products using relevant technology
(Annexure 1) to key national players, who in turn marketed them under their own brand names. The
five member team had prefect understanding of their roles (Annexure 2) and sailed in harmony.

The NBCL Offer

In January 2009, the NBCL has invited GDL for a discussion regarding supply of about 100 lakh
units ready to sell premier toilet soaps annually for a period of ten years (2011-2020) at about Rs. 20
a unit

The GDL team has thoroughly analyzed the NBCL’s offer and requirements for serving this order. It
was estimated that GDL would need a building(s) of about 50,000 sft to house the proposed
plant(about 40,000 sft) and an administrative office(about 10,000 sft).

Dr. Lokanandha Reddy Irala, IBS, Hyderabad prepared this case intended to be used as the basis for class room
discussion rather than to illustrate either effective or ineffective handling of a management situation.

© 2009, Irala.

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Global Detergents (A)/FM-II/001

The land requirement was estimated to be 1 acre and the GDL has an option to purchase a suitable
tract of land for Rs. 1000 lakhs. The land is estimated to have a market value of Rs. 1500 lakhs at the
end of project life of 10 years. A local builder has been identified to begin the constriction in April
2009 and complete it by Feb 2010. The builder has agreed to develop the land, erect the structures,
do the finishing and fully furnish the buildings according to the GDL’s plan at an all inclusive cost
of Rs. 1000 per sft. The buildings are estimated to have a salvage value of Rs. 200 lakhs at end of 10
years.

The necessary equipment would be ordered to Super Soap Equipments Pvt. Ltd(SSEL)- a Chennai
based company. The equipment would cost Rs. 190 lakhs plus another Rs. 10 lakhs for installation.
The equipment would last 10 years with a scrap value of Rs. 50 lakhs. The SSEL required 15 days to
erect the equipment and do a trial run

It was also estimated that the GDL would require another Rs. 100 lakhs as the investment in Net
Working Capital. The NWC was expected to be fully recovered at the end of 10 years.

Arjun, the Director-Operations worked out the details of the Initial Cash Outlay and prepared a
summary (exhibit 1)

Exhibit 1
The details o the Initial Cash Outlay

Rs. Lakhs

1) Land 1000
2) Building(s) 500
3) Equipment 200
4) Total Fixed Assets(1+2+3) 1700
5) Net Working Capital 100
6) Total Outlay(4+5) 1800

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Global Detergents (A)/FM-II/001

He then discussed this with Ms. Bindu, the director-Finance and both of them made a note of other
important variables in the project (Exhibit 2)

Exhibit 2
Other important Variables
1. Annual Fixed Costs : Rs. 100 lakhs
2. Variable Cost Ratio : 60%
3. Depreciation Method : Written Down Value
4. Depreciation Rates
Building : 10%
Equipment : 15%
5. Applicable tax rate : 30%

Ms. Bindu prepared the detailed cash flow projections (Annexure 3) and prepared a summary in the
form of a cash flow table (Exhibit 3)

Exhibit 3
Summary of Cash Flows

EOY 0 1 2 3 4 5 6 7 8 9 10
ICO -1800
OCF 514.0 511.1 508.6 506.4 504.5 502.8 501.3 500.0 498.9 497.90
TCF 1689.11
NCFAT -1800 514.0 511.1 508.6 506.4 504.5 502.8 501.3 500.0 498.9 2187.01

ICO: Initial Cash Outlay; OCF: Operating Cash Flow;

TCF: Terminal Cash Flow; NCFAT: Net Cash Flow After Taxes

As the proposed project was in the similar lines of GDL’s Business, she has used the GDLs’ existing
cost of capital (18%) to arrive at the NPV of the project. As the NPV was positive, GDL felt that the
project may be accepted.

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Global Detergents (A)/FM-II/001

Annexure 1
Products & Processes of GDL
• Washing Powders (Detergents, Soaps, Surface Active Agents) :
The free-flowing, non-dusty, non-caking products are produced in counter-current flow
dryers. Nozzle atomization is the preferred layout for high-bulk-density detergents. Feeds are
homogenized and fine-filtered prior to passing to nozzles operating at high pressure. Hot air
from direct-fired air heaters enters at the base of the cylindrical part of the tower with slight
rotary motion. The exhaust air is drawn from the top of the tower. Inlet temperatures vary
according to product.

• Soda Products :
Detergent formulations consist basically of (a) an active ingredient , (b) silicates, (c) sodium
tripolyphosphate, and (d) sodium sulphate. Normally the active ingredients are fatty alcohol
sulphates, primary and secondary alkyl sulphonates and alkyl aryl sulphonates. Formulations
vary as decided by each company.

• Detergent Allied Products

Ddetergent allied products include Sodium Lauryl Sulphate (SLS), Alfa Olefin Sulphonate
(AOS), Optical Brightening Agents (OBA), Linear Alkyl Benzyl Sulphonate (LABSA),
Sodium Silicate, Sodium Tri-polyphosphate (STPP)

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Global Detergents (A)/FM-II/001

Annexure 2
The top management of GDL
Mr. Rakesh Reddy Managing Director
Mr. Easwar Rao Executive Director
Ms. Bindu Director-Finance
Mr. Raghunath Director-Strategic Initiatives
Mr. Arjun Saha Director-Operations

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Annexure 3
Detailed Cash flows
EOY 0 1 2 3 4 5 6 7 8 9 10

ICO -1800

Details to be
tried by students
as assignment
NCFAT -1800 514.00 511.15 508.65 506.46 504.54 502.85 501.37 500.06 498.91 2187

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