Commercial Engineers & Body Builders Co Ltd: Valuation of New Plant Using Real Options Technique

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Case Details:

Case Code : FINC066
Case Length : 14 Pages
Period : 2005-2009
Pub. Date : 2011
Teaching Note : Available (23 Pages)
Organization : Commercial Engineers and Body Builders Co. Ltd (CEBBCO)
Industry : Manufacturing (Railway and Engineering)
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Commercial Engineers & Body Builders Co Ltd: Valuation of New Plant Using Real Options Technique cont...

On September 30, 2010, CEBBCO came up with an Initial Public offering (IPO) to raise Rs. 1.72⁴ billion in the price band Rs. 125 to Rs. 127. The company planned to utilize Rs. 1303.6 million of the money raised to establish its sixth factory, which was to come up in Gram Imlai, Jabalpur, Madhya Pradesh. The annual capacity of the plant was expected to be 1,200 railway wagons⁵ and 150 coaches with an expected revenue of Rs. 1.7 million from one wagon. The price of a wagon was expected to rise by 3% per annum. The company planned to set up this plant in anticipation of the good profit margin in this segment. The revenue from this project was expected to be about Rs. 400-500 million from

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the financial year 2011-2012⁶. However, analysts were divided in their opinion about the feasibility of the plant.

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4] Rs. 44.7223 = 1US$, www.x-rates.com, December 31, 2010.
5] Mamuni Das, "Railways Finalizes Wagon Order Worth Rs 1,000 cr," The Hindu Business Line, September 9,2010.
6] Ajay Gupta, "We Expect Revenue from New Project by Mar 12," The Economics Times, October 8, 2010.

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