UP tannery clampdown, rupee slide pinch shoemakers; price rise on cards

Rising leather prices, on account of closure of tanneries in the UP, coupled with increasing cost of imports due to rupee devaluation, is hurting the margins of shoemakers.

On Monday, the UP Pollution Control Board ordered closure of 296 tanneries in Jajmau, Kanpur, one of the largest leather hubs in the country.

In the last two years, about 150 tanneries have been closed down in Jajmau. At present, there are about 296 units running in the region, what used to be around 446 about two years back, said Javed Iqbal, president, Council For Leather Exports. With this fresh clampdown, the Jajmau leather hub will be almost wiped out.

Shoe companies are already contemplating increasing prices in the next few months, as leather prices have been consistently going up over the last one year, according to industry sources.

A significant part raw materials for non-leather alternatives, including rubber for shoes are also imported. Hence, on account of rupee devaluation, the cost of producing all types of non-leather shoes are also on the rise.

In the last six months, leather prices have gone up by around 15 per cent, while in the last one year, the increase has been around 30 per cent, according to Ramesh Kumar Juneja, regional head, Indian Leather Product Association (ILPA). About 30-35 per cent of the leather requirement in India is met through imports.

According to data from Council For Leather Exports, in one year, between financial year 2016-17 and 2017-18, the domestic production of exports in terms of value fell by Rs 50 billion.

For Woodland, in the last one year, margins have shrunk by 8-10 per cent due to rise in raw material costs, according to Harkirat Singh, Managing Director, Woodland. However, the price rise has not yet been passed to consumers.

“The direct impact of rupee devaluation is seen on the cost of imports of leather products. Closure of tanneries has added to the cost. For Woodland, we have our own tannery in Punjab, which has, to an extent helped us meet the demand. We generally try to absorb the rise in cost for a year, but after that we need to take a call if we need to pass on the cost to customers. We are increasingly using alternative materials, which are as good in quality as leather. We will take a call on increasing prices by January end,” said Singh.

For Kolkata-based shoemaker, Khadim, too the impact of increased raw material costs led to fall in margins. According to a recent research report by Anand Rathi, high raw material costs and subdued retail demand had contracted margins for the company.

“Khadim’s revenue rose about 31 per cent in Q2 FY19 to Rs 2,264 million, slightly lower than we estimated. The gross margin fell 392 bps year-on-year due to high raw material prices (not passed onto consumers) and to the 7 per cent year-on-year subdued retail growth. The EBITDA margin declined 390bps year-on-year to 8.3 per cent,” according to research report by Anand Rathi.

Khadim’s profit after tax fell by around 25 per cent in Q2 over the same period last year to Rs 86 million.

For Bata India, the expenditure on account of consumption of raw materials increased from Rs 616 million in Q2 of FY18 to about Rs 794 million in Q2 of FY19, according to data available with BSE. Bata India could not be contacted for comments.

Last financial year, the domestic production of leather was worth about Rs 150 billion, while the exports were worth Rs 60 billion. In the previous financial year, 2016-17, the domestic production was valued at Rs 200 billion, while the exports were valued at Rs 90 billion.
Source:https://www.business-standard.com/article/companies/up-tannery-clampdown-rupee-slide-pinch-shoemakers-price-rise-on-cards-118112000968_1.html

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