Vida Gas: Village Reach – The Mozambican Foundation for Community Development Joint Venture Harvard Case Solution & Analysis

Vida Gas: Village Reach – The Mozambican Foundation for Community Development Joint Venture Case Study Solution

Business Strategy

In order to achieve organizational goals, initially, the operations of the company were centralized but, after the success of the pilot project, the strategy shifted towards decentralization. The company has shown great strides in its initial five years, not in terms of profitability rather in terms of sustainability and growth. The company hasincreased its customer base and providing better services to its customers than competitors. The company business strategy is to focus on the point of diffraction that is the installation of equipment, maintenance, andafter-sales services. No other LPG company provides all these services to its customers. Therefore, despite loses, the company is focusing on expansion for further growth and sustainable profit.

Growth Opportunities:

VidaGas has various growth opportunities through which it can expand its business such as complete expansion in Nampula, expansion of operations into Zambezia and Nissa, strengthen its equipment sales, installation and services and expansion of household customer market. The company has an opportunity to strengthen its management capacity by recruiting filed and operations staff and energy executives. The company needs to expand its business because the Ministry of Health, FDC and VillageReach want to expand its immunization program in other rural areas and it is not possible without LPG. Therefore, the company needs to expand its business into other provinces as well.

Potential Investors

VidaGas needs financing for its expansion plan and four investors are willing to provide funds including Palm Finance, Afritrade, REAS Funds, and International Finance Corporation.

Palm Finance:

Palm Finance’s mission is the betterment of the society therefore, it provides funding to the enterprises which create a direct positive impact on society. The company pools capital from potential investors and provides funds to the companies which could provide financial, provincial and environmental sustainability in return. The company provides investments to the companies which cover multiple sectors and have strong diversification.

Afritrade:

Afritrade, a successful trading company has a very good relationship with VidaGas as it’s used to import domestic LPG refrigerators. The company has its operation in four countries and working as the sole distributor of Honda in Mozambique. In order to help drive equipment sales, the company is interested to invest in LPG.

REAS Funds:

REAS funds provide financing to high growth potential local enterprises. The company invests 1-2 million in earlier rounds and up to 5 million dollars in later rounds. The company invests through structured equity participation with senior management and local entrepreneurs. The company might acquire International Finance Corporation and is willing to invest in VidaGas.

International Finance Corporation:

International Finance Corporation, private sector arm of the World Bank, aims to work for various he social and developmental causes. The company provides funds to the companies that are able to generate profits, benefits to the economy, socially and environmentally sound and satisfy social standards. The company has a broad portfolio of finances.

DCF Valuation

Discounted Cash Flow valuation method has been used to calculate the net present value of the project. Projections of the income statement have been done on the basis of data provided in the case. The revenue growth is 10% which is calculated through the compounded annual growth rate formula. According to the projections, the company will incur a loss in the fiscal year 2009, 2010 and 2011. Froom 2012 onwards the company will earn profits. In order to calculate cash flows, depreciation has been added back to the net income.

DCF valuation of the company has been performed on the basis of the projected income statement. The cost of capital is 12% which is provided in the case, whereas the growth rate is 10%. The terminal value of the company is $451379. The net present of the company is $2,037,417 which shows that the company would earn positive returns on its investment in the future. The positive present value of an expansion project indicates that investors should invest in this project as the value of revenue would be higher than the cost.

Note: See Exhibit-1

Recommendation

On the basis of the above analysis, the company must expand its business as the future projections indicate that the company would earn profit in the future. Although, both the NGOs have limited financing resources, therefore, they should ask potential investors to invest in this project. The company is suggested to take investment from International Finance Corporation because it promotes social and economic development both. The company would be able to provide its products and services to health care in rural areas without any restrictions. Moreover, other potential investors could affect the primary goal of VidaGas that is a social benefit.

Conclusion

VidaGas wants to expand its business but it has limited resources to finance its business for further growth. On the basis of the internal analysis, it could be said that the company has the potential to grow. Although the company is not earning profits, it has shown sustainability in the last five years. VidaGas has various options for expansion as well as for potential investors. The DCF valuation of the company indicates that expansion would provide financial benefits to the company. Therefore, the company is suggested to expand its business and to take investment from the International Finance Corporation.

Exhibit

Exhibit-1 DCF Valuation

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