Leather Industry is categorized into segments such as finished leather, Footwear, Leather Garments, and Goods & Accessories Sector including Saddlery & Harness. India is second largest producer in both leather footwear and leather garments segments. In terms of exports the Country stands third in leather garments and fifth in leather goods & accessories sectors.

India continues to stand at eighth place in the world leather exports with 3% of part in the total export earnings. China and Italy enjoys the largest market share of about 28% and 14% in world exports respectively followed by Hong Kong, Germany, France, Brazil and Belgium.

Background

The leather manufacturing process is divided into three fundamental sub processes, preparatory stages, tanning and crusting.

The preparatory stages are when the skin is prepared for tanning. It may include preservation, soaking, liming, unhairing, fleshing, splitting frizzing and pickling etc.

Tanning is the process, which converts the protein of the skin into a stable material, which will not putrefy and is suitable for a wide variety of end applications. Several tanning processes transform skins into leather.

Crusting is the process by which skin is thinned, retanned and lubricated. Often a coloring operation is included in the crusting sub process.

In general leather is sold in four forms. They are: Full grain, top grain, corrected grain and split leather. Full grain leather refers to hides that have not been sanded, buffed to remove imperfections on the surface of the hide. High quality leather furniture and footwear are often made from full-grain leather. The top-grain and corrected grain where both are sanded off, these are second highest quality of leather. While split leather, which is created from the fibrous part of the skin left once the top grain of the rawhide has been separated from the hide.

Healthy leather exports in the seven months ended October 2011

During the first seven months of the current FY 2012, export of leather & leather products have registered a positive growth in rupee as well as in dollar terms. Further, exports of different categories of leather products have also recorded positive exports growth.

Indian leather products sector witnessed a growth of 27.32% in their exports accounting to Rs 125604.91 million for the period April-Oct 2011 while in USD terms it has shown a 27.33% growth aggregating to USD 2741.48 million.

The data for the above graph is culled from Ministry of Finance up to October 2011. For December 2011, we have taken the daily RBI reference rate of November and December 2011 and averaged it for the whole month.

Despite of rupee depreciation in September –October 2011, the leather exports exhibited an equal growth in both rupee as well in dollar terms as the Indian rupee previously appreciated since April-August 2011 period and moreover, the exports are generally booked before one month at that month's rupee value. As rupee started depreciating from September it self and September exports would have been already booked in August and the only one-month exports benefits i.e., of October has not been captured much in the rupee realizations.

But the exports are likely to show a sizeable growth in rupee terms compared to USD realizations in the December quarter 2011 attributed by strong rupee depreciation.

Leather footwear segment by and large occupied the highest market share in the total exports accounting to 35% followed by leather goods 22% and finished leather constituted about 21% amid leather garments accounted to 12%, footwear components such as shoe uppers, soles, etc constituted about 6% and both non leather footwear & saddler and harness segments accounted about 2% share each to the total exports.

Leather garments form significant segments of the leather industry India. The exports of leather garments grew by 52% in rupee as well in USD terms. Whilst, footwear components exports grew by 37% in rupee and also in USD terms in the seven months ended FY 2012.

Leather goods segment exports grew 30% in rupee terms in USD value terms too while saddler and harness exports jumped up by 27% in rupee as well USD value terms. Non-leather footwear sector exports enhanced by 36% in rupee and USD terms.

Leather footwear, the engine of growth for the entire sector has shown a growth in its exports by 22% in rupee and in USD value terms. Finally, the finished leather segment exports grew by 19% in rupee as well in USD terms.

The major production centers for footwear in India are Chennai, Ranipet, and Ambur in Tamil Nadu, Mumbai in Maharashtra, Kanpur in U.P, Jalandhar in Punjab, Agra, Delhi, Karnal, Ludhiana, Sonepar, Faridabad, Pune, Kolkota, Calicut and Ernakulam.

During the period April-Oct 2011,in the total exports, Germany topped with 15.55% of the India's leather product exports, followed by Italy 11.6% and U.K.11.5%. These three countries together accounts for nearly 39% of India's total leather products.

The other major markets for Indian leather products are USA with a share of 8.87%, Hong Kong 7.26%, France 5.81 %, Spain 6.14%, Nether lands 3.99%, Belgium 2.36%, U.A.E 2.16%, Australia 1.29 %.

The share of Germany in India's exports increased by 231 bps while the other major countries like U.S.A, U.K, Italy, France, Hong Kong, Spain share has declined by 37 bps, 143 bps, 4bps, 83 bps, 187 bps and 10bps respectively during the period under review against previous year.

Leather & leather products output rose except shoe uppers in Nov 2011 on y-o-y basis

During November 2011, in value terms the growth in production of tanned or chrome skins and leathers accelerated from 13% in October to 27% on y-o-y basis while increased by 10% to Rs 84.7 crore on monthly basis in November after declining by 2% in previous month.

Like wise, the growth in leather garments production improved from 35% in October to 36% in November on yearly basis but declined by 8% sequentially to Rs 30.3 crore in November after growing at 8% in previous month.

The production of major leather items such as bags, purses and wallets improved by 18% to 6,71,613 in numbers in November followed by 10% rise in October on yearly basis and remained almost flat on sequential basis from last three months.

Leather shoes production grew by 2% in November on both sequential and yearly basis accounting to 2680.6 thousand pairs after declining by 10% and 11% on yearly and monthly basis respectively.

However, the production of few other leather items such as Shoe uppers and leather gloves showed a falling trend in November 2011. Leather shoes uppers production dented by 8% on y-o-y basis and reduced by 7% on m-o-m basis after falling drastically by 18% and 19% on yearly and monthly basis.

Similarly, leather gloves production depleted by 15% on monthly basis accounting to 1278.7 thousand pairs followed by 8% rise in October but inched up by 1% on yearly basis after 4% rise in October 2011.

Whilst, the footwear (except leather) production grew by flat 1% on sequential front in November 2011 followed by a downfall of 5% in previous month while increased by 2% on yearly basis after falling by 2% in October 2011.

During the eleven months ended 2011 on yearly basis, the cumulative production of tanned skins & leathers improved by 21% to Rs 834 crore, the leather garments production increased by 20% to Rs 334 crore, leather bags, purses and wallets production advanced by 39% to 6, 782,826 in numbers terms amidst, the production of leather gloves has given a modest growth of 5% to 17,072 Thousand pairs, leather shoes production improved by meager 3% to 32,699 thousand pairs and similarly shoe uppers production bent up by 3% to 17,055 thousand pairs.

Leather prices are stable on improved availability

Leather is classified into different types based on the type of tanning the skin/hide undergoes. One is Vegetable tanned leather, where the skin is tanned using tannin and other ingredients found in vegetable matter, such as tree bark prepared in bark mills.

Second is Chrome –tanned leather, where the skin is tanned using chromium sulfate and other salt s of chromium. It is most supple and pliable than vegetable –tanned leather and doesn't discolor or lose shape as drastically in water as vegetable –tanned. Similarly, we have formaldehyde, brain tanned, Chamois leather which all comes under category of aldehyde tanned leather and others like synthetic tanned leather, alum tanned leather.

Despite of reasonable demand for the leather, the growth in chrome tanned leather prices have been moderated from almost 3% in November to 1% in December 2011 on y-o-y basis. Sequentially, the prices continued to remain stable since September 2011 on the back of improved availability of leather.

Usually, the leather availability is less during the summer season when compared to the rainy and winter seasons. As a result, the leather prices during the summer season generally picks up due to less availability as well high quality of leather amid the leather prices gets corrected and remains stable in the rest of the seasons.

Therefore, the leather prices are expected to remain stable till the early March 2012 and are likely to move north side from mid of March 2012 with the beginning of summer season.

Leather products prices improved on increase in demand and costs of raw material

During December 2011, Leather products prices increased by 3% on y-o-y basis while by 1% on m-o-m basis. All the Leather products including leather footwear prices continued to show a positive trend since June 2011. Leather footwear prices (leather shoe upper, chappals /sandals, leather sole) were up by 8% on y-o-y basis and 1% on m-o-m basis in December. Similarly, the other leather products (leather garments & jackets, bags, handbags /wallets, gloves, harness goods) grew by 7% on y-o-y basis and by 2% on monthly basis during December 2011.

The significant rise in Leather products was mainly due to cost-push assisted by the notable demand in domestic as well overseas markets.

Bata India

Footwear major, Bata India which has nearly 1200 retail stores across different locations in the Country is planning to expand its presence in the online sphere through its virtual retail channel such that to make easy for customer to order online for shoes that are not available in the stores. The company which now sells nearly 1000 pairs a week, through its ten-month old online format, is targeting to triple sales (to 3,000 pairs per week) within a year or so. The Company gets nearly 50% of the orders from the web and is looking forward to exponential growth in this format.

The company is planning to tie up with a lot e-commerce sites and new brands once the policy prescription on multi –brand retailing and other legal hurdles are cleared.

The company will invest Rs 25 crore to upgrade its production facilities in the city at Patina and in Bangalore in order to meet the increasing demand in the Country. The Company is also spending Rs 100 crore in West Bengal alone to expand its small and medium enterprise activity, which include job work and component supplies. The Company is currently looking at moderate investments in increasing volumes and improvements in quality coupled with enhancing its outsourcing rather than an aggressive margin growth.

The company also planning to relocate and upgrade 83 of its smaller stores (of less than 1000 square feet each), into large format ones of over 3000 square feet each. The new larger stores will be located in the same market area. The process of relocation is expected to be over in the next 4-5 years. Of the 83 smaller stores that the company has across the country, it has already relocated 33 of them last year. Further the company plans to open 120 large format retails stores across the country. Another 30 Hush Puppies concept stores are also being planned in 2012.

The Company is planning to set up its largest retail store of nearly 20,000 square feet in Mumbai and has signed on the space. At present, it has largest retail store in the country is in Borivilli, Mumbai, which is spread across 10,000 square feet.

Liberty Shoes

Liberty shoes which is into manufacturing leather shoes, non leather shoes and leather shoe uppers has reported net profits at Rs 2.89 crore lower by 51% on y-o-y basis for the half year ended FY2012 despite of increase in net sales by 14% to Rs 151.49 crore.

The profits of the company since Q4 FY11 are under stress on y-o-y basis on the back of increase in certain expenses meant for investing in various activities such as structuring of the employee strength at management level and along with the gradual emphasize on advertisement, brand promotion and other expenses. On the other hand, the other certain factors which adversely impacted the profitability are consistent abnormal increase in raw material prices not in commensurate with the increase in selling prices and also due to persistent hardening of interest rates.

The company has taken the suitable steps to pass on the increased costs of consumers wherever possible, however considering the nature of trade as well as other implications, the company expects about 5-6 months to get the effective benefit of such increase.

Outlook

The Indian leather & leather products is in demand for its quality, finish and designs. Further, the demand is expected to grow considering the change in life style and affordability for the Indian leather industry. Players that regularly review their product range and adapt to changing requirements of the customers are better placed. Value engineering and improving productivity besides reducing operating cost are the key.

The on going sovereign debt crisis in UK, Spain and Italy (accounting about 30% to the total exports) can depress the growth of the Indian leather exports into these regions in the short to medium term. But, thanks to the recovery in US economy, which might show some positive impact in the industry. Moreover, the strong dollar appreciation and sensible prices would help the industry to realize better earnings for their products. Relatively, the domestic demand is fairly good, though there is risks to the pace of growth, considering sharp deceleration of the economy.