Leather footwear exporters faces multiple challenges: ICRA

A cobbler makes leather shoes inside his workshop in Jammu November 14, 2008. REUTERS/Amit Gupta (INDIAN-ADMINISTERED KASHMIR) - GF2E4BL11BO01

The appreciation in the value of the rupee against major currencies, weak consumer sentiment in the European Union (EU) and significant drop in the value of the British pound (GBP) has hit footwear exporters hard and they are now focusing on domestic market to fare better, a report said.

Leather and leather footwear export has been facing significant hurdles due to a challenging internal as well as external environment.

Demand has been impacted due to the weak consumer sentiment in the European Union (EU) - the biggest destination of India's footwear exports and a significant drop in the value of the British Pound (GBP) following the vote on referendum to exit the European Union, rating agency ICRA said in its report.

The sector is also facing headwinds due to appreciation in the value of the rupee against major currencies and recent regulatory restrictions placed on slaughter of animals and on leather tanneries, impacting raw material availability. Because of these factors, the export figures show a decline for two consecutive years, by 9 per cent in FY16 and 5 per cent in FY17.

ICRA expects similar trends to continue in the near term which should impact the earnings of export focussed leather footwear players.

On the domestic front, whilst the Indian footwear industry has historically recorded a healthy growth driven by increasing footwear demand and average selling price (ASP), growth has slowed in FY16 and FY17 due to moderation in consumer sentiments, the report said.

Additionally, the demonetisation drive in November 2016 also had an impact on consumer demand for footwear during FY2017, it said.

The revenues of export-focussed leather footwear players declined by 2 per cent in FY2017, while the revenues of players focussed on the domestic market involved in leather as well as non-leather products saw a growth of 3 per cent in FY17, the report said.

Aggregate operating profitability margin of the entities focussed on exports has declined, from 14.1 per cent in FY16 to 12 per cent in FY17, while the aggregate operating profitability margin of companies focussed on the domestic market has declined modestly from 12.2 per cent to 11.9 per cent during this period.

"Though the players focussed on leather products and export markets are likely to face headwinds due to combination of internal and external factors and may see pressure on revenues; the credit risk profile is likely to remain comfortable on account of limited leverage and lower expected capex.

"On the other hand, the revenue of those entities, which are focussed on domestic market is likely to see healthy improvement, once the impact of demonetisation and GST wanes out, and these players are likely to report better credit metrics," ICRA Vice-President Shubham Jain said.