Higher input cost to cut margins of cashew processors: CRISIL SME tracker

CRISIL expects a sharp increase in raw material prices to impact the profitability of small and medium enterprises (SME) in cashew processing in the current fiscal year. 

The increase in costs is due to a hike in import duty on raw cashew kernels from 45 per cent to 70 per cent, in the Union Budget for 2019-20.

The government raised the import duty to provide relief to domestic cashew growers who were impacted, as kernel prices quoted 10 per cent lower year-on-year in fiscal 2019, amid a supply glut stemming from a 29 per cent increase in imports. 

About 50-55 per cent of the industry’s raw material demand is met through imports. The share of imports is likely to remain at a similar level in fiscal years 2020 and 2021, despite government support. This is because domestic acreage and production are likely to grow slowly as cashew trees have a high gestation period. 

Given this, import of cashew kernel at higher prices will lead to higher raw material cost and low margins for processors.

Moreover, SME players will not be able to completely pass on the increase in raw material cost, as cashew demand is expected to decline by 2 per cent.

Exports, which account for about 25 per cent of processed cashew demand, are likely to drop 15-18 per cent year-on-year, as the increase in retail prices will lead to a shift of buyers from India to Vietnam. 

Domestic demand, on the other hand, is likely to log moderate growth of 3-4 per cent, driven by higher industrial (wines, cookies, jams) and direct consumption.

A majority of the SME clusters in cashew processing units in India are located in the southern states — especially Goa and Kerala — due to regional concentration of domestically produced cashew. Kerala has a higher exposure to exports and is expected to be impacted more severely in fiscal year 2020, compared with Goa, which caters mostly to domestic demand.