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 sectors while in 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.

Leather industry witnessed notable performance during Q4FY2012

The aggregate of 13 leather /leather products companies reported aggregate net sales of Rs 1228 crore, high by 7% during the quarter ended March 2012 on y-o-y basis. On increased sales on one hand and reduction in raw material costs which constitutes on an average of 40-42% of total adjusted sales and ease in other expenditure heads led the OPM to improve by 200 bps to 13.4%. As a result, the operating profit rose by 25% to Rs 165 crore. PBIDT grew by 24% on flat other income of Rs 8 crore. The PBT increased by 27% to Rs 104 crore restricted on increased interest and depreciation costs. Interest costs increased by 15% to Rs 38 crore while provision for depreciation rose by 24% to Rs 31 crore. Finally PAT grew by 28% to Rs 73 crore though moderated on increase in provision for taxation by 24% to Rs 31 crore.

Bata India continues aggressive expansion, opens 67 new stores

Bata India in the quarter ended March 2012 registered 31% rise in total operating revenues to Rs 408.01 crore on increased sales volumes. Increased sales, flat consumption of raw material costs, reduction in purchases costs of finished goods, ease in employee expenses and other expenses lifted up the operating profit margins by 150 bps to 15.2% though moderated by rise in selling & administrative expenses. As a result, operating profit grew by 45% to Rs 61.85 crore. Raw material costs as % of adjusted net sales remained flat at 16.6%, purchases costs of finished goods declined by 220 bps to 33.8%, employee expenses eased by 160 bps to 10.9% and other expenses eased by 41 bps to 14.4%. Only selling& administrative costs rose by 200 bps to 33.8%. But, crash in other income by 97 % to Rs 3.97 crore led PBIDT to decline by 58% to Rs 65.65 crore. In March 2011 quarter, the company witnessed one time gain of Rs 109.36 crore on the back of sale of Bata Nagger project).

Further spike in interest costs and depreciation costs led net profit decline by 67% to Rs 36 crore limited by ease in provision for taxation by 47% to Rs 19.59 crore. The net profit in March 2012 quarter might have increased by 41% to Rs 36 crore without considering gains of Rs 83.76 crore (net off tax) from Bata Nagar Project in March 2011 quarter.

Bata opened 61 new stores during March 2012 quarter. The expansion drive saw stores opening across metros like Delhi, Mumbai, Chennai, Hyderabad and Bangalore. It also increased brand penetration in mini metros cities. Besides, Hush Puppies brand also saw expansion with the opening of 4 exclusive new stores and 2 shop-in shops in leading department stores during the period.

Apart from this, the company launched its Spring Summer collection for 2012 that is crafted with forever-fun spirit. The collection had an array of footwear in vibrant colors and vivid pattern to suit individual styles for men, women and children.

The company is focusing on its offerings for the younger audience by bringing new designs with bright and trendy colors through its brands like Northstar for youth, Weinbrenner for outdoor & lifestyle footwear etc. Bata India has launched a wide rage of ladies handbags with contemporary designs and colors, which were received very well by the customers.

In the quarter ended March 2012, Relaxo Footwear reported total operating revenues at Rs 242.73 crore, up by 21% on increased production and sales volumes. Of total sales, exports contributed Rs 30 crore, high by 36% while domestic markets contributed Rs 211.69 crore, up by 20% on y-o-y basis. During the period, the company increased production capacity by 25,000 pairs per day in existing / new plants.

Increased sales amidst reduction in raw material costs and other expenses though restrained by rise in purchases costs of finished goods and employee expenses led OPM to improve by 570 bps to 14.1%. Thus, operating profit rose by whopping 103% to Rs 34.21 crore. Raw material costs as % of adjusted net sales declined by whopping 1020 bps to 38%, other expenses eased by 100 bps to 23.6% while the purchases costs of finished goods increased by 220 bps to 10.8% and employee costs rose by 240 bps to 12.7%. Therefore, it settled with net profit of Rs 18.79 crore, up by whopping 234% supported by ease in provision for depreciation by 2% to Rs 5.86 crore though moderated by spike in interest costs by 4% to Rs 4.43 crore and increase in provision for taxation by whopping 234% to Rs 18.79 crore.

The retail outlets of the company crossed 149 covering NCR, Punjab, Haryana, Uttaranchal, Gujarat, Rajasthan and Jammu & Kashmir. Retail division has been creating awareness of company's products by contributing approx. 7% of total revenues.

Besides, the company has launched " Flite PU –Fashion " a new category of footwear with PU technology and expects that this will substantially contribute to the growth of the company in coming years. The company has engaged Mr. Salman Khan for its " Relaxo " brand covering Hawai as new brand ambassador and it is likely to take company's image to new heights.

Liberty shoes clocked 18% rise in net sales at Rs 97.04 crore during March 2012 quarter. Increased sales coupled with the decline in raw material costs, ease in purchases costs of finished goods and employee expenses led OPM to improve by 50 bps to 7.3%. Thus operating profit rose by 27% to Rs 7.08 crore. Raw material costs as % of adjusted net sales declined by 340 bps to 41.5%, purchases costs of finished goods eased by 130 bps to 7.8% and employee costs gone down by 17 bps to 10.3. But only other expenses rose by 360 bps to 32.6%. Finally, net profit was up by 33% to Rs 1.82 crore with a tax gain of Rs 0.12 crore against tax expenses of Rs 0.03 crore in March 2011 quarter. However, the net profit growth was constrained by rise in interest costs by 20% to Rs 2.97 crore and increase in provision for depreciation by flat 5% to Rs 1.93 crore.

Bharatiya International reported net sales at Rs 39.68 crore, up by 46% during quarter ended March 2012. The OPM improved by 240 bps to 7.4% as raw material costs as % of adjusted net sales declined by 860 bps to 42.2%, purchases costs of finished goods eased by 86 bps to 8.8%, other expenses fell by whopping 1160 bps to 33.2% though moderated on increase in employee expenses by 510 bps to 8.2%. As a result operating profit increased by whopping 114% to Rs 2.96 crore. Finally, company reported net profit of Rs 0.57 crore, high by whopping 284% restrained on rise in interest costs by 11% to Rs 1.17 crore and increase in provision for depreciation and taxation by 3% to Rs 0.31 crore and 158% to Rs 1.11 crore respectively.

On a sequential basis, the company's net profit has been coming down from Rs 3.38 crore in the quarter ended September 2011 to Rs 1.77 crore in the quarter ended December 2011, which further tumbled down to Rs 0.57 crore in the quarter ended March 2012. Based on the trend in the past five years, we find that this is partly due to the nature of the company's business, as it records maximum revenues and profits in the second quarter ending September of the fiscal.

Leather industry exports increased 29% in USD terms while 31% in rupee terms

As per officially notified DGCI&S monthly export data, the leather and leather products exports for the first ten months ended FY12, i.e., April-January 2012 touched USD 4106.63 million as against the export of USD 3162.46 million in the corresponding period last year, registering a positive growth of around 30%. In rupee terms, the exports touched Rs 195306.53 million during April-November 2011 against the previous year's performance of Rs 144310.46 million, registering a positive growth of around 35%.

In the ten months ended FY2012 Germany topped with 15% of the India's leather product exports, followed by UK 11.17% and Italy 11.07%. These three countries together accounts for nearly 38% of India's total leather products. Among the major countries, except Germany, Russia and China the other countries lost their market share in the Indian leather exports. U.S.A lost its market share by 15 bps, U.K by almost 160 bps, Italy by 40 bps, France by 71 bps, Hong Kong by almost 135 bps and Spain by 9 bps compared to the corresponding period of last year due to Euro zone debt crisis and gloomy global economic outlook.

The data for the above graph is culled by taking the daily RBI reference rate from January 2010 to February 2012 and averaged it for the whole month.

Indian leather industry exports grew by almost 30 % in USD terms and 35% in rupee terms led by the Indian rupee depreciation sequentially as well on y-o-y basis since September 2011. The exports realization growth in rupee terms is likely to go up in the future with the continuous fall in rupee.

However, the healthy demand from Germany and easing of monetary policy in China are showing some positive signs to the Indian leather industry exports

The sound growth in exports of Indian leather industry was attributed by zoom in exports of leather garments and non-leather footwear segments.

During April'11-Jan 2012 period, the exports of leather garments increased by 54% to Rs 23848.76 million while non-leather footwear exports rose by 46% to Rs 3034.46 million. Subsequently leather goods exports rose by 39% to Rs 42664.96 million, saddlery & harness exports grew by 38% to Rs 4377.67 million. Similarly, exports of footwear components section grew by 38% to Rs 11626 million. Both Leather garments and leather goods & saddlery products form significant segments of the leather industry India.

Amidst, finished leather and leather footwear exports grew by 30% to Rs 40407.64 million and to Rs 69347.04 million respectively. 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, the leather footwear segment topped with 36% of the Indian leather industry exports, followed by leather goods 22% and finished leather 21%. Thus, three of these segments occupy 78% to the total leather sector exports. While, leather garments segment contributed 12% and footwear components contribute 6% and the rest is contributed by saddlery & harness and non –leather footwear segments 2% each to the total Indian exports market.

Production of leather dropped on m-o-m basis during April 2012

During April, the production of leather, leather shoes, leather shoes uppers, and leather gloves dropped on sequential front. On year on year basis, leather garments, shoes, leather shoes uppers production declined while the leather garments, leather bags, purses, wallets, leather gloves, leather footwear rose on low base effect.

On sequential front, the leather garments production rose by 22% in April 2012 on low base effect. However, on y-o-y basis, the growth in production of leather garments declined by 33% in March and then by 15% in April.

The production of tanned or chrome skins and leathers remained flat at Rs 79.3 crore on y-o-basis while dropped by 3% on monthly basis during April 2012 due to summer season. The availability of leather will be meager in summer season compared to rainy season as most of the animals depart their life because of heavy rains.

The production of major leather items such as bags, purses and wallets rose by 27% to 7,75,582 in numbers on yearly basis and rose 2% on sequential basis during April 2012. Leather shoes production dropped by 22% on yearly basis while on sequential front it slipped by 7% to 2501.4 thousand pairs. Leather shoes uppers production dented by 11% on y-o-y basis and fell by 3% on m-o-m basis to 1507 thousand pairs. While, leather gloves production increased by 73% on yearly basis but slipped by 2% on monthly basis accounting to 1834.5 thousand pairs. Whilst, the footwear expect leather production inched up by 3% on yearly front and rose by 2% on monthly basis to 7583.2 thousand pairs.

In the fiscal year ended 2012, the production of tanned skins & leathers improved by 15%, leather garments by 9%, leather bags, purses and wallets by 22%, leather gloves by 2% while leather shoes and footwear (except leather) production remained flat amidst shoe uppers production dropped by 10% when compared to the corresponding period of last year.

Price index of leather sequentially rose in April 2012

Based on type of tanning, leather is classified into different types. They are 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.

Next 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 tawed leather.

The leather price index continued to ease from Jan 2011 to remain flat during April 2012 on y-o-y basis. But sequentially it rose by 1% in April 2012 on ease in production. Similarly, vegetable tanned leather price index too continued to decline from Jan 2011 to remain flat during April 2012 on y-o-y basis. In contrast, the price index of chrome-tanned leather continued to be in upward trend from Sept 2010 to increase by 1.42% on y-o-y basis in April after falling by 4.3% in March. While on sequential basis it rose by 3% in April on increased demand.

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 scarcity of leather in quality as well in quantity terms. Therefore, the leather prices remained stable till the early March 2012 and moved north side during the summer season.

The price index of leather & leather products continued to be in upward trend from June 2011 on y-o-y basis. But, the pace of growth has been reduced from 6.6 % in Jan 2012 to 4.18% in April 2012. However, the leather & leather products rose by 1% in April on m-o-m basis on easing of supply.

On the other side, leather footwear price index continued to be on positive trend since Jan 2011. However the pace of growth has been subdued from 8% in Jan 2012 to 5.09% in April 2012.While on sequential front, it rose by flat 1% during April 2012.

The price index of other leather products precede to be in positive trend from March 2011 to increase by 6% in April, however the pace of growth has been moderated from 10% in Jan 2012 and remained flat on sequential basis.

The different raw materials used for manufacturing leather products by the industry are -rubber, PU chemicals, Elvar Ethylene Vinyl Acetate (EVA) / EVA resin, Synaprin, PVC compounds, polyurethane and other chemicals etc

The rubber prices continued to downfall since November 2011 on year on year basis to decline by 13% in June 2012 to Rs 195 per kg. During Q4FY12, the prices of rubber were low by 15% to Rs 188 per kg. In Q1FY13, the prices declined by 11% to Rs 195 Kg though increased by 4% on sequential front. PVC is widely used in clothing to either create leather like material or at times simply for the effect of PVC. PVC fabric is used as waterproof and used in coats, shoes, jackets etc. The prices of PVC continued to fall since October on year on year basis to decline by 13% to USD 1056.67 per tonne.

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. The demand is contingent to the disposable income of the individuals in the country. Players that regularly review their product range and adapt to changing requirements of the customers are better placed. Value engineering, improving productivity & capacity besides reducing operating cost are the key.

The on going sovereign debt crisis in EU in general and Spain, Greece etc can depress the growth of the Indian leather exports into these regions in the short to medium term. But thanks to sharp depreciation of Indian rupee, the damage can be contained. The sector is poised for medium term growth, considering its initiatives to move up the value chain, and its plans to expand its geographical reach.