The Indian leather apparel and accessories (comprising bags, belts, and harnesses) sector is set to take a hit, with revenues predicted to decline 7–8% in fiscal 2024.
- The reason for this drop is the slowdown in consumer demand in Europe and the United States, despite benefits from a depreciating rupee, CRISIL Ratings has said.
The Drop: Revenue is expected to be "flattish" in the current fiscal, after the robust performance last fiscal, riding on a strong demand-rebound, which had taken it beyond the pre-pandemic level.
- Operating margin will shrink by ~150 basis points (bps) on-year this fiscal, especially as costs remain elevated due to supply constraints in the sector.
- Credit profiles of the rated companies will, however, be stable on low debt levels and limited expansion plans.
- The prediction is based on an analysis of 23 companies rated by CRISIL Ratings, which account for 11% of industry revenue.
- About 85–90% of the production by the $2.25 billion Indian leather apparel and accessories industry is exported. Europe and North America account for ~75% of this amount.
What's Playing Out: Declining demand has meant the ability to pass on increased costs is restricted.
- Realisation for leather garments shrank 9% (in $/kg terms) on-year in the first half of this fiscal.
- Raw material cost — especially hide and chemicals — has surged 400–500 basis points and remains sticky as hide availability has remained constrained over the years, due to curbs on unlicensed and smaller suppliers.
- The overall impact on profitability would have been bigger but for the depreciating rupee, given that sales are export-oriented, while the majority of raw materials are procured domestically.
- Operating margins are expected to fall ~150 bps this fiscal and will remain rangebound at 6–6.5% over the medium term. Given increased raw material cost, inventory holding has become costlier.
- Due to lower cash generation, working capital requirement at the sector level could be 15-20% higher in the near term. Demand being sluggish, capacity expansion will be on the backburner. Consequently, long-term debt addition should also be low.
What They Said:
Demand for discretionary goods in key export markets — essentially the advanced western economies — has been shrinking because of pinching inflation and rising recession fears. Though domestic demand for the leather apparels and accessories segment remains resilient, the overall sectoral revenue is seen declining in the medium term.
— Rahul Guha