In FY23, operating margin will crimp by about 150 basis points (bps) year-on-year (YoY), especially as cost remains elevated due to supply constraints in the sector.

About 85-90 per cent of the country’s leather apparel and accessories production is exported, and Europe and North America account for approximately 75 per cent of it.

Declining demand has meant the ability to pass on increased cost is restricted. Realisation for leather garments shrank 9 per cent on-year in the first half of this fiscal. However, raw material cost—especially hide and chemicals—has surged 400-500 bps 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 majority of raw materials are procured domestically. Operating margins are expected to remain rangebound at 6-6.5 per cent over the medium term.

Given increased raw material cost, inventory holding has become costlier. Additionally, due to lower cash generation, working capital requirement at the sector level could be 15-20 per cent higher in the near term. However, demand being sluggish, capacity expansion will be on the backburner. Consequently, long-term debt addition should also be low.

“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,” said Rahul Guha, director, CRISIL Ratings.

Fibre2Fashion News Desk (DP)