Business Plan for Cashewnut Processing Unit

Unit 6, Neeru Silk Mills

Mathuradas Mill Compound,
Lower Parel
Mumbai 400013

Page 1
TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................................................ 1

1. INTRODUCTION ....................................................................................................................................... 2
2. BUSINESS PROPOSITION............................................................................................................................ 3
3. TYPICAL OWNERSHIP AND ORGANIZATIONAL STRUCTURE ................................................................................ 4
4. ANALYSIS OF MARKET POTENTIAL/OPPORTUNITY .......................................................................................... 5
5. DETAILED BUSINESS DESCRIPTION .............................................................................................................. 7
5.1. BUSINESS MODEL ........................................................................................................................................ 7
5.2. STAKEHOLDERS ........................................................................................................................................... 8
5.3. INFRASTRUCTURE REQUIRED .......................................................................................................................... 8
5.4. BACKWARD LINKAGES AND PROCUREMENT ....................................................................................................... 9
5.5. FORWARD LINKAGES AND SALES ................................................................................................................... 10
6. INVESTMENT REQUIRED AND SOURCES OF FINANCE ..................................................................................... 10
6.1. INVESTMENT REQUIRED .............................................................................................................................. 11
6.2. SOURCES OF FINANCE................................................................................................................................. 11
6.3. WORKING CAPITALRREQUIREMENTS .............................................................................................................. 12
7. FINANCIAL ANALYSIS .............................................................................................................................. 13
7.1. KEY ASSUMPTIONS .................................................................................................................................... 13
7.2. PROJECTED PROFIT & LOSS ACCOUNT ............................................................................................................ 14
7.3. PROJECTED BALANCE SHEET......................................................................................................................... 15
7.4. CRITICAL SUCCESS FACTORS ......................................................................................................................... 16
8. RISKS AND MITIGANTS ........................................................................................................................... 17
9. APPLICABILITY ACROSS VARIOUS DISTRICTS IN MAHARASHTRA....................................................................... 18
ANNEXURE 1: SPECIFICATIONS OF THE SUGGESTED EQUIPMENT AND MACHINERY................................................... 19

Page 1
1. INTRODUCTION

India is the world’s third largest producer and exporter of Cashewnut after Vietnam and Nigeria
accounting for 23% of the global production. It is also the largest consumer of cashewnut, with the
cashew kernel and Cashew Nut Shell Liquid (CNSL) being the products generated and exported through
cashewnut processing.

Maharashtra in particular is the largest producer of cashewnut across all Indian states and cashew
production occupies an important place as far as cash crops are concerned in the state.

Cashew needs to be processed before it can be converted to the edible form of the cashew kernel. Post
processing the cashew kernel is obtained and the byproducts obtained include cashew nut shells, which
are used for producing cashew nut shell liquid (CNSL) which has important industrial and commercial
applications. Cashew apples and peels are the other byproducts which also have limited potential for
monetization.

There is currently very little value addition at the farmer level as far as the cashew value chain is
concerned. Typically large farmers are also involved in sun drying post production, however farmers
with small landholdings are restricted solely to production. The business model discussed herein
envisages a cashew processing plant that is owned and operated by a Farmer Producer Organization
(FPO). The FPO will be able to operate the unit independently and can eventually sell and trade both
cashew kernel and CNSL across the country. All profits that accrue to the FPO will be distributed to its
members as a dividend.

The proposed business model has the potential to not only provide a supplementary source of income
for the members of the FPO but also improve market efficiency and price realization at the farmer level
by sourcing the raw materials locally.

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2. BUSINESS PROPOSITION

With a domestic consumption of 150,000-160,000 tonnes1, India is one of the prominent producers
and importer of both raw cashew and cashew kernels. Given that India has the largest consumption of
cashew kernels globally there is tremendous potential for a cashew processing unit. If the farmers
producing the crop are themselves involved in the processing of cashew it would naturally present
tremendous synergies for backward linkages of the unit. The member farmers would receive market
rates and assured rates even during lean periods and also preference of purchase for their produce
prior to non-members.

The ready availability of the produce would relieve the processing unit from a significant amount of
issues as far as the sourcing of raw produce is concerned, it would also place the member farmers at a
point of relative advantage as the margin accrued to the processors (which is far higher than that for
producers) shall now be distributed between them.

In addition the augmented income to farmers would be extremely beneficial considering that most
farmers are relegated to only crop production in the value chain. The member farmers would also get
the chance to be present further up the value chain by participating in trading and exporting. The
member farmers would also stand to gain a lot if the FPO decides to venture into retailing of branded
cashew in either local markets or through tie ups with organized retail chains and online retail stores.

Given the increase in imports of cashew kernels (especially in the broken/split cashew segment) it
would further embolden the cause of a domestic FPO run cashew processing facility given the relative
cost advantage it would enjoy with the other domestic processors and importers.

1
http://www.business-standard.com/article/markets/vietnam-sets-eyes-on-indian-cashew-kernel-market-
113011400030_1.html

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3. TYPICAL OWNERSHIP AND ORGANIZATIONAL STRUCTURE

The proposed business model should ideally be implemented by a Farmer Producer Organization (FPO)
with a common objective, mutually agreed plan of actions, shared responsibilities and benefits and a
mechanism of functioning where the decisions are taken by the opinions of majority. The FPO will be
fully owned and operated by its members after adequate training and support is provided.

We spoke to an existing FPO in Kolhapur District which is processing cashew. It has a total of 10
promoter farmer members who contributed a total of Rs. 10,000 each (i.e. a total of Rs. 1 lac) and 250
member farmers who contributed Rs. 1000 each (i.e. a total of Rs. 2.5 lac).

The FPO should have member farmers from a cluster wherein cashew is predominantly grown. The FPO
that we spoke to has the aforementioned 260 members who belong to 15 villages across 2 district
blocks of Gadhinglaj and Chandgad most of whom are cashew and some are banana farmers. We
recommend a similar structure i.e. FPO with 10 promoter members and 250-300 other farmer
members.

As per discussions with the various stakeholders such as cashew processors and keeping the capex
limitations of a FPO in mind we recommend a processing plant with a processing capacity of 0.5 tons
RCN per day. Based on a 0.5 ton per day plant we understand that the staff should consist of 1
supervisor who is responsible for looking after the entire cashew processing step by step, while the
maximum amount of labour i.e. 20 people in all are needed for the individual processes especially
shelling, grading and peeling of cashew. An accountant and a marketing executive will be additionally
required. We recommend the following hierarchy:

ORGANOGRAM

Owner - Farmer
Organization (10
promoters + 250
farmers)

Marketing
Accountant
Executive

Supervisor

Labour x 20

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4. ANALYSIS OF MARKET POTENTIAL/OPPORTUNITY

There has traditionally been significant consumption of cashew in India in both urban and Rural Areas.
India on its own forms the single largest cashew market. India also happens to be one of the largest
exporters of cashew kernels. Raw cashew production in India is to the tune of 400,000-550,000 MT2
and typically 750,000 MT of RCN is Imported. We export about 120,000 MT of cashew kernels while we
consume 150,000 MT of cashew kernels domestically3.

As far as Maharashtra is concerned, the state has been the largest cashew producer in the country
consistently from 2000-01 to 2009-104 and accounted for over 30% of the total production of RCN of
the country in 2009-10. The arrivals too have been on an increasing trend if one considers the three
year period from 2011-2013:

Cashew nut arrivals APMC Vashi

45000 41919
40000
35000
Arrivals in Quintals

30000
24856
25000
20000
15000
10000
5000
85
0
2011 2012 2013
Year

Source:MSAMB

Cashew in general is a product for which people aren’t brand conscious and in most cases purchase
unbranded cashew solely on the basis of visual inspection and taste. Therefore FPOs especially from
Maharashtra (as cashew kernels from the area are known to be of superior quality and are much in

2
http://www.business-standard.com/article/markets/raw-cashew-nut-prices-hit-all-time-high-by-crossing-rs-
100-per-kg-mark-115031000832_1.html
3
http://www.business-standard.com/article/markets/vietnam-sets-eyes-on-indian-cashew-kernel-market-
113011400030_1.html
4
http://dccd.gov.in/stat.htm#Area

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demand5) have a significant opportunity to both cash in on this market as well as benefit from creating
a niche brand and market directly and accrue higher margins.

Most of the Cashew production and also the processing plants are concentrated in and around the
Konkan region of the state within the districts of Ratnagiri, Sindhudurg and Kolhapur. They cater to the
domestic production of RCN, however the RCN production in the state significantly outstrips processing
capacity, as most of the units are small in scale.

As a result a lot of the RCN goes to states like Kerela, which has a large number of automated large
capacity plants. The RCN is processed there and often the cashew kernel is brought back for
consumption in the home market.

Also a lot of Micro Enterprises in Cashew which were set up by the Department of Agriculture initially
in Maharashtra have shut down or are underutilized mostly due to issues in procurement of RCN and
marketing of the processed cashew kernel6. The suggested FPO based model with a dedicated
marketing executive would be able to deal with the aforementioned issues effectively. Thus with the
increasing trend of domestic consumption of cashew kernels, the better quality of Maharashtra based
cashew and lack of in-state processing facilities there is a significant opportunity and market potential
for a FPO run cashew processing plant in the state.

5
From Primary Survey
6
clusterobservatory.in/report/Final%20report%20Sindhudurg.doc

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5. DETAILED BUSINESS DESCRIPTION

5.1. BUSINESS MODEL

The proposed business model is for a small scale cashew processing unit. The machinery and
mechanism for the unit are quite easily available.

Most of the manufacturers of the steam roasting machine are based in the Sindhudurg cluster itself
while the shell cutting machine can be sourced from Mangalore.7

The cashew unit should be based in vicinity to the cashew plantations and should have good road
connectivity. The traditional cashewnut growing districts of Ratnagiri, Sindhudurg and Kolahpur in
addition to districts like Raigad, Nashik and Thane where there is significant cultivation is increasing
substantially would be ideal for such a plant. An FPO, needs to be set up which will own and manage
the operations of this unit. There would ideally be 10 promoter farmer members and 250 odd other
farmer members. The enterprise will procure the required raw materials locally from the member
farmers and will employ local labour after providing sufficient training. The cashew kernel that is
produced will be predominantly sold to traders and wholesalers but can also be retailed to the end
consumer in branded form through sales to the local market or through tie ups with retail chains.

The following illustration depicts the proposed implementation and operating model of the cashew
processing unit:

Promoter Regular Bank

Farmer Farmer Loan
Members Members

Financing

RCN procured
at market
rates

Farmer owned Sale to

Storage Cashew Traders/
processing unit Wholesalers
To regulate supply as
procurement costs rise
dramatically post
harvest season

Retailing
Branded
cashewnut

7
http://dccd.gov.in/process.htm#about

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5.2. STAKEHOLDERS

The proposed unit FPO will require inputs and support from a wide array of stakeholders. The
illustration below presents the stakeholders in a decreasing order of importance from left to right.

Local Labour Marketing

• Run the day to day Executive
operations of the unit •Evaluating and setting
up retail opportunities
for branded cashew

Farmers Commercial Banks

•Equity and Nabard
•Raw Material Input •Provides Debt to
finance the project

FPO

5.3. INFRASTRUCTURE REQUIRED

The following is the indicative list of infrastructure requirement for a typical 500 Kg/day RCN processing
unit as obtained on inquiry from a manufacturer:
Category Particulars Value (INR Lakhs)

Physical infrastructure Land/Building (~1500 sq. ft) 18

0.8
Boiler
Cashew Processing Unit
1.2
Dryer

8
Deposit for rented premises

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 2
Automatic Cutter*2

0.6
Peeling Table*4

0.6
Grading Table *4

0.55
Packing Machine

0.4
Weighing Machine*2

0.5
Utensils, Drums etc.

7.65
Total

5.4. BACKWARD LINKAGES AND PROCUREMENT

With an area under cultivation of over 1.41 lakh hectares in 20119 Maharashtra has the second highest
area under cashew cultivation in the country. Due to the high yield in the state however it produces the
highest amount of RCN in the country. RCN is the key raw material required for cashew processing.

Although it isn’t necessary, considering the prominence of cashewnut in the district and the fact that it
is a cashew processing unit, cashewnut farmers will constitute a majority of the owners/investors in the
FPO. The raw cashew nut should be sourced from member farmers – at credit – thus saving on
intermediary, logistics and interest expenses. They should preferably enter into long term purchase
agreements with the farmers with a mutually agreeable pricing mechanism. Preference of purchase
from member farmers should also be clearly established over farmers who are not part of the FPO.
Currently the price offered to Cashew nut farmers is Rs. 90 per KG of RCN10. In most cases the produce
is brought to the processing unit by the farmers themselves, in rare cases the RCN needs to be sourced
from the farm gate.

Ideally the RCN should be purchased at the commencement of the cashew harvest season i.e. (Mid-
February to early March) wherein prices are lower. There should be storage capacity of 200 days i.e
100MT of RCN and average inventory post procurement should be for about 100 days i.e. 50 MT. This
would ensure that the prices paid for RCN overall remain low as they tend to increase significantly after
the initial harvest season finishes.

9
MSAMB Data
10
Field data

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The credit terms with the member farmers could be prepared in a manner that achieves the ideal
payables cycle for the FPO and doesn’t discomfort the farmers. Upon speaking with the FPO that has a
cashew processing facility it was found that currently member farmers are being paid for their produce
after the processing cycle gets over i.e. 4-5 days post procurement.

The procurement from non-member farmers typically involves payment at the time of procurement.

5.5. FORWARD LINKAGES AND SALES

Sale to traders and wholesalers would be the primary source of revenue and that is the case with most
of the existing cashew processing units. As mentioned earlier there is sufficient domestic demand for
cashewnut to justify the setup of additional processing units.

There are additionally a few areas wherein the business can find potential sales down the line. The FPO
could get into retailing of branded cashewnut. The FPO we interacted with is currently tying up with
internet based grocery home delivery chains to market their branded cashew offering. This method
could be an ideal starting point as retailing from such a mechanism would not entail major expenses in
terms of branding, marketing and setting up distribution networks. The additional margin accrued to
the FPO would be to the tune of 10-15% of the average price obtained from traders and wholesalers.
Considering the rapid growth in this segment this could be an ideal platform for the FPO to enter into
cashew retail.

Similarly seeking a tie-up with an existing retail supermarket chain could be explored. The margins here
would typically be lower but the demanded volume with respect to the units output would be
significant. However the produce would have branding of the supermarket chain in most cases.

In case the FPO can aggregate significant capital, it can think of setting up a retail arm as well for the
branded cashew.

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6. INVESTMENT REQUIRED AND SOURCES OF FINANCE

6.1. INVESTMENT REQUIRED

The cost to set up a typical 0.5 MT RCN/day cashew processing unit is as given below:
Total cost (INR Comments
Particulars
Lakhs)

Land and building 1 Assumed to be rented; deposit for rented premises

Cost of Plant and Machinery of Rs. 6.65 lakhs includes cost of

Plant and machinery11 6.65
entire suite of machinery required for cashew processing unit

Miscellaneous Fixed Assets includes cost of accessories,

Misc. fixed assets 1
furniture and fixtures etc.

Costs incurred in advertising, promotional activities, employee

Pre-Operative Expenses 1 training, etc., before the unit can open its doors for business.
Also called preliminary expenses or startup expenses.

Initial margin money for working capital before start of the

Working Capital Margin 3.75
operations.

Total Project Cost 12.40

6.2. SOURCES OF FINANCE

It is assumed that the total capital expenditure investment of INR 12.40 lakhs will be financed through
a mix of debt and equity. By considering debt-equity ratio of 70:30, it is proposed that an amount of
INR 8.68 Lakhs would be availed from banks/financial institutions to meet the requirement of funds to
set up the unit. The loan shall be repaid in 8 years period including a moratorium of 1 year from the
date of commercial operations. In turn Rs. 3.72 lakhs is to be raised by the FPO with the individual
contribution of member farmers depending on the number of farmers in the FPO.

Sources Share Amount (INR Lakhs)

Equity 30% 3.72

Debt 70% 8.68.

Total 100% 12.40

11
Please refer Annexure 1 for details of Plant and Machinery
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6.3. WORKING CAPITAL REQUIREMENTS

The working capital requirements for a cashew processing plant are very high primarily because of the
heavy raw material inventory. A typical unit stores about 90-100 day’s worth of inventory. For a
production unit as specified by us (i.e. 0.5 MT RCN/day), the working capital requirement in the first
year of operations based on discussions with cashew processors is expected to be about Rs. 28.18 lakhs.

Current Assets include 90 day’s worth of raw material, 4 days of finished goods and 0-1 day of
receivables.

The unit would be requiring working capital assistance of about Rs. 24.42 lakhs (i.e. 87% of working
capital requirement) from the Bank to meet their working capital requirements for the first year. The
remaining Rs. 3.75 lakhs would be taken as working capital margin with the term loan.

Page 12
7. FINANCIAL ANALYSIS

7.1. KEY ASSUMPTIONS

Particulars Unit Value

Installed Capacity of the Unit Kg/shift 500

Shifts per day # 1

Working days per year # 300

Sale price of cashew kernel Rs/kg 540

Price of RCN Rs/kg 90

Cashew Kernel produced from 1Kg RCN KG 0.23

Power requirement KwH/kg 0.12

Power tariff Rs/unit 8

Depreciation rate (SLM) % 10%

Interest rate % 13%

Moratorium period # of years 1

Debt repayment period # of years 7

Income tax rate % 30%

RCN Price CAGR (next 5 years) % 8%

Cashew Kernel Price CAGR (next 5 years) % 8%

The CAGR (Cumulative Annual Growth Rate) for RCN and Cashew Kernel is considered to be 8%
keeping in mind recent food inflation figures.

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7.2. PROJECTED PROFIT & LOSS ACCOUNT

PROJECTED PROFIT & LOSS A/C Year 1 Year 2 Year 3 Year 4 Year 5
(INR Lakhs)

Capacity utilization (%) 65% 70% 75% 80% 85%

Sale of Cashew Kernel 121.10 140.84 162.98 187.75 215.44

Total revenue 121.10 140.84 162.98 187.75 215.44

EXPENSES

Cost of raw materials 87.75 102.06 118.10 136.05 156.12

Wages and Salaries 16.20 17.01 17.86 18.75 19.69

Power & Fuel 0.40 0.42 0.45 0.47 0.50

Insurance 0.07 0.06 0.05 0.04 0.04

Rent 1.44 1.58 1.74 1.92 2.11

Packing & Freight 0.45 0.48 0.52 0.55 0.59

General & Admin expenses 1.21 1.41 1.63 1.88 2.15

Sales & Marketing expenses 0.61 0.70 0.81 0.94 1.08

EBITDA 12.97 17.11 21.82 27.14 33.17

Depreciation 1.17 0.97 0.80 0.67 0.56

Amortization 0.05 0.05 0.04 0.04 0.03

EBIT 11.75 16.10 20.97 26.44 32.58

Interest on Term Loan 1.13 1.13 1.02 0.90 0.76

Interest on WC loan 3.18 3.69 4.27 4.91 5.63

PROFIT BEFORE TAX 7.45 11.28 15.68 20.63 26.19

Tax 2.23 3.38 4.71 6.19 7.86

PROFIT AFTER TAX 5.21 7.90 10.98 14.44 18.33

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 KEY METRICS Year 1 Year 2 Year 3 Year 4 Year 5

EBITDA/Gross Revenue (%) 10.7% 12.2% 13.4% 14.5% 15.4%

EBIT/Gross Revenue (%) 6.2% 8.0% 9.6% 11.0% 12.2%

PAT/Gross Revenue (%) 4.3% 5.6% 6.7% 7.7% 8.5%

Interest Coverage ratio (x) 2.7 3.3 4.0 4.6 5.1

Return on Capital Employed (%) 81% 75% 66% 59% 53%

7.3. PROJECTED BALANCE SHEET

PROJECTED BALANCE SHEET (INR Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Lakhs)
LIABILITIES

Shareholder's Equity 3.72 3.72 3.72 3.72 3.72 3.72

Reserves and Surplus -3.18 2.04 9.94 20.91 35.35 53.68

Term Debt 8.68 8.68 7.85 6.90 5.84 4.63

Working Capital Loan 24.43 24.43 28.39 32.82 37.78 43.33

Total 33.65 38.87 49.89 64.36 82.69 105.37

ASSETS 0.00 0.00 0.00 0.00 0.00 0.00

Gross Fixed Assets 7.15 7.15 7.15 7.15 7.15 7.15

Less: Accumulated Dep 0.00 1.17 2.14 2.94 3.61 4.17

Net Block 7.15 5.98 5.01 4.21 3.54 2.98

Current Assets 1.00 29.18 33.74 38.86 44.58 50.98

Pre-operative exp (Capitalized) 0.50 0.45 0.41 0.36 0.33 0.30

Cash & Bank Balance 25.00 3.26 10.73 20.93 34.25 51.12

Total 33.65 38.87 49.89 64.36 82.69 105.37

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 KEY METRICS Year 1 Year 2 Year 3 Year 4 Year 5

Debt / Equity 8.90 9.74 10.68 11.73 12.89

Total Debt / Equity 2.33 2.11 1.86 1.57 1.25

Current Ratio 1.33 1.57 1.82 2.09 2.36

7.4. CRITICAL SUCCESS FACTORS

For the success of the business, the following factors are very critical:
 Raising adequate working capital finance for running the business.
 Having significant inventory to run operations through a major part of the year
 Market development for branded cashew nut and being able to supply good quality
consistently.

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8. RISKS AND MITIGANTS

Key Risks Mitigants

If the input costs of Raw cashewnut increases directly impacts the
output costs and can affect profitability directly. Such a situation can
High RCN Cost be prevented by ensuring that most of the RCN is purchased from
member farmers at the commencement of the harvest season and
by ensuring that there is significant storage space and inventory.

Cheaper Imports from Vietnam and Africa could be an issue,

especially as far as the sale of split and broken cashew is concerned.
The FPO will be at a better position to compete if sourcing and
inventory management can be done effectively. The FPO could go
Cheaper Cashewnut
Imports into retail to ensure sustained demand for their end product.

Ensuring that the cashew kernels post processing are intact usually
depends on the quality of labor and therefore either training or
employing better quality workforce would be crucial.

Developing and establishing a branded cashewnut product would be

imperative to gain higher margins and provide sustained demand
over time. Poor marketing efforts might prove to be detrimental.
Poor marketing Ideally tying up organized retail chains and with emerging online
performance players (e.g. big basket, local banya etc.) will be a good way to enter
into the urban market and establish brand presence without
incurring a significant expense on branding, marketing and
distribution networks.

Page 17
9. APPLICABILITY ACROSS VARIOUS DISTRICTS IN MAHARASHTRA

Apart from traditional Cashewnut producing and trading hubs like Ratnagiri, Sindhudurg and Kolhapur
districts like Raigad, Nashik and Thane which have significant cashewnut production would be ideal for
such a business model as the existing units present in the state are short on processing capacity relative
to production.

The FPO can focus on increasing margins via direct retail initiatives through tie-ups with organized retail
chains and internet based grocery delivery services.

Securing trained labour and finding adequate trading linkages though would be something that these
units would need help with initially. However they will have an advantage due to locational proximity
to large cashew consumption markets like Mumbai and Pune.

Page 18
ANNEXURE 1: SPECIFICATIONS OF THE SUGGESTED
EQUIPMENT AND MACHINERY

Particulars Amount (INR)

Boiler 80,000
Dryer 1,20,000
Automatic Cutter*2 2,00,000
Peeling Table*4 60,000
Grading Table *4 60,000
Packing Machine 55,000
Weighing Machine*2 40,000
Utensils Drums etc. 50,000

Total 6,65,000

Page 19