INTRODUCTION
The Claybyrd Group Inc., a private equity firm involves investing primarily in the real estate and infrastructure sectors in the Indian sub-continent. Claybyrd in now considering the investment in the CPIL in its OneSouth Park by acquiring 26% stake. OneSouth Park, the only asset of CPIL is centrally located in Chennai, India. The CPIL has three promoters. All of them have a strong business background and have previous experience with real estate development.
ANALYSIS
The OneSouth project seems to be a feasible, suitable and acceptable project. Investing in this project has tax advantages such as CPIL is entitled to a 100% deduction of income for tax purposes for the ten consecutive years. In addition, the region of Chennai has a large industrial area near to it and highly educated and dedicated workforce and the Government there has begun to upgrade major infrastructure in the city.The OneSouth Park is located centrally in the Chennai and also extremely well connected to the roads, rail and air, near the Meridian hotel. It has considerable frontage on the MK Karunanidhi road (a wide 100 ft. road), and is only 3.5 kms from airport. Thus the site is critically situated along with growth vector of Chennai.
OneSouth can also enjoy the facility as it is very near to the airport and the five star hotels. However, CPIL share in this Park is 1.27 Million FS out of 1.34 Million SF, so it is quite possible that a resistant may create from CPIL as the major shareholders in this Park.
Claybyrd has also got the guarantee to earn a minimum of 16.5% of return on its equity investment over the life of the investment and named it as Downside risk protection. The project has a pre-tax IRR is 21.45% and a post-tax IRR is 20.31% which is considered to be a well percentage and it also crosses the initial capitalization rate of 9.5%. However, a risk of general economic slowdown cannot be eliminated and thus any economic slowdown can negatively effect on the project valuation and on the market capitalization of the project.
Currently, the company is bearing a huge interest cost as it has $ 82 million of debt. A rise in the interest rate can negatively impact on the cash flows of the project and even can be turned from the positive to the negative one. However, the terms on loan will be reviewed after 2 years and there is a chance to get the optimal interest rate. This factor must be considered before any investment.
Currently, the valuation is based upon the assumption that the Park is ready for its operation whereas its 85% complete, the remaining 15% construction will be completed soon but the valuation has incorporated all such cash flows in advance. However, any delays in the construction or the increment of cost can negatively affect the projections. Again this factor should also be seen before investment.
Right away, the park is managed by the three promoters who are specialist in their tasks, as they have a previous of construction. Any change in the management whether a top-level or day-to-day, can adversely affect the valuation of the project.
Recommendation on the Feasibility of Icarus Investment project Case Solution
There is an attractive option of exit is available within the project that is a soft-put option. This option is exercisable between 36-60 months and Claybyrd can sell and exit from this project. However, Claybyrd is currently negotiating the American option such that the option can be exercisable only at the end of 36 months or at the end of 60 months.
Chennai has made a recent appearance in the IT / ITES sector with several large foreign and domestic companies such as TCL, HCL, Verizon, HP, Infosys, and Microsoft. Indian city services Attractiveness Index 2005 has benchmark its cities because of three main factors such as financial costs, people skill and the business environment. These factors can be beneficial for the future success of the project and the Government there is keener to invite the foreign investors.
DUE DILIGENCE PROCESS
In order to process the due diligence of the OneSouth project, the following process must be carried out.
The capitalization of the company helps to form the picture of the targeted company and it will provide the size that how big the targeted company is. The volatility in the revenues can also be judged through the capitalization.................................
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