Shoemakers feel the pinch of weak rupee, closure of tanneries in UP

According to industry sources, shoe companies are contemplating increasing prices

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

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

In the past two years, about 150 tanneries have closed down in Jajmau. At present, there are about 296 units running in the region, against around 446 about two years ago, said Javed Iqbal, president, Council for Leather Exports. 

With this fresh clampdown, the Jajmau leather hub will be almost wiped out.

Shoe companies are contemplating increasing prices because of this, according to industry sources. 

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

In the past six months, leather prices have gone up by around 15 per cent, while in the past one year, the increase has been around 30 per cent, according to Ramesh Kumar Juneja, regional head, Indian Leather Product Association (ILPA).  Imports meet between 30 and 35 per cent of the leather requirement in India.

According to the data of the Council for Leather Exports, in one year, between 2016-17 and 2017-18, domestic production for 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 on to consumers.

“The direct impact of rupee devaluation is seen in the cost of imports of leather products. The 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 material, which is as good in quality as leather. We will take a call on increasing prices by the end of January,” said Singh.

For Kolkata-based shoemaker Khadim, 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 the second quarter over the same period last year to Rs 86 million.

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