 "US tariffs may dent Indian leather industry revenue by up to 12%: Crisil")
India’s leather and allied products industry is expected to see a sharp revenue decline of 10-12 per cent this financial year, following steep 50 per cent tariffs imposed by the United States, according to a Crisil Ratings report. The new duties are likely to dent export volumes and weaken the financial health of exporters, despite steady domestic demand.
The US imposed a 25 per cent reciprocal tariff and an additional 25 per cent penalty for India’s purchase of Russian oil. Together, these have hit India’s export competitiveness, especially when compared to other leather-exporting countries such as Vietnam, Italy, Cambodia and France, where US tariffs remain lower at 15-20 per cent, the report said.
Exports make up around 70 per cent ofIndia’s ₹56,000 crore leather industry revenue, with the US accounting for 22 per cent and the European Union over 50 per cent. The new tariffs have already led to order cancellations and production shutdowns, particularly among small tanneries and units focused on the US market.
“With loss of orders from the US, the export volume is expected to drop 13-14 per cent this fiscal. Revenue will be hit harder as the bulk of exports to the US is of finished leather products such as shoes and leather accessories, which fetch higher realisations,” said Jayashree Nandakumar, director, Crisil Ratings.
“Indeed, at ~$14 per unit (on weighted average basis), realisation on these finished goods is 14-15 per cent higher than on the overall basket. Thus, export revenue is projected to fall 14-16 per cent to $3.9-4 billion this fiscal,” she added.
Domestic market offers some relief
Crisil said that while exports suffer, domestic demand may bring some relief. The Goods and Services Tax (GST) on leather products has been cut from 18 per cent to 12 per cent, making products more affordable and driving premiumisation. Lower income taxes, reduced interest rates and stable inflation are expected to boost local consumption.
The recently signed Free Trade Agreement (FTA) with the United Kingdom and efforts to explore new export markets could also help limit losses, Crisil said. However, these benefits are expected to take time to materialise.
Profitability under pressure
Crisil expects operating margins for the leather industry to shrink by 150-200 basis points (bps) this financial year. Exporters could see a sharper decline of 250-300 bps, owing to lower volumes and high fixed costs.
Athul Sreelatha, associate director, Crisil Ratings, said, “Leather manufacturing is highly labour intensive and involves significant fixed cost of 25-30 per cent by way of salary, leases and maintenance, among other expenses. Lower revenue and weak fixed cost absorption will compress the operating profitability of exporters by 250-300 bps this fiscal."
The weaker profitability will hit debt protection metrics. The net cash accrual to total debt ratio is expected to drop to 0.1 times from 0.2 times last financial year, and interest coverage is seen falling to 2.5 times from 3.7 times. However, overall leverage levels should remain stable due to lower working capital needs and limited new borrowing.
What's the outlook?
Crisil identified four key factors to watch going forward, including the evolving global tariff environment, success in market diversification, the impact of re-exports via Europe and potential foreign exchange volatility.