MUMBAI: The leather and allied products industry will see a revenue decline of 10-12 percent year-on-year this fiscal weighed down by the 50 percent tariff imposed by the US. This tariff will hit export volumes by at least 14-16 percent to $3.9-4 billion this fiscal. Given the significant export concentration to the US market, the revenue will decline despite a moderate improvement in domestic demand following the GST rate cuts besides other favourable macro-economic factors such as lower income taxes, benign inflation, and low interest rates.
Operating profitability of the industry will also slide by 150-200 basis points primarily driven by headwinds in the export realization and the resultant muted operating performance will weaken credit profiles, Crisil Ratings said in a report, based on the analysis of 34 leather companies which comprise around 12.5 percent of the industry revenue.
The leather and allied products industry is estimated to have logged a revenue of Rs 56,000 crore in fiscal 2025 and exports accounted for a whopping 70 percent of the revenue pie. A large chunk of the exports was to the European Union (over 50%) and the US (22%).
Signs of a slowdown in the US demand were already visible with the 25 percent reciprocal tariff taking effect in the first week of August. The additional 25 percent punitive tariff, effective August 27, has placed the exporters at a further disadvantage vis-à-vis other major exporting nations such as Cambodia, Italy, Vietnam and France, where the US tariffs are lower at 15-20 percent.
Jayashree Nandakumar, a director at Crisil Ratings, “with the loss of orders from the US, the export volume is expected to drop 13-14 percent this fiscal. Revenue will be hit harder as the bulk of exports to the US is of finished products such as shoes and accessories, which fetch higher realisations. Indeed, at $14 per unit (on weighted average basis), realisation on these finished goods is 14-15 percent higher than on the overall basket. Thus, export revenue is projected to fall 14-16 percent to $3.9-4 billion this fiscal.”
Exports to US have been severely hit with orders cancelled or put on hold since the 50 percent tariff became effective. Moreover, numerous entities, particularly tanneries and small manufacturing units with significant exposure to the US were shut down in the past two months.
To combat revenue loss and declining profitability, exporters are resorting to measures such as diversifying to other markets with favourable duty structure and shifting/outsourcing production to other regions. However, these are still in nascent stages and will take time to implement and bear fruit, especially given the macro uncertainty, he added.
That said, the recently signed free trade agreement with England, sustained demand from markets apart from the US, and efforts to penetrate other export destinations may help contain the fall in export revenue.
In the domestic market, on the other hand, the reduction of GST on leather products from 18 percent to 12 percent is expected to enhance affordability and drive premiumization. Additionally, the income tax benefits announced in the Budget are likely to boost consumption.
The decline in exports, along with steady supply, may put downward pressure on raw material prices. The marginal decline seen in raw and tanned leather prices will provide some relief to exporters, but not enough to offset the tariff impact.
Lower revenue will result in weaker operating leverage, dragging down operating profitability of exporters.
Athul Sreelatha, an associate director with the agency, leather manufacturing is highly labour intensive and involves significant fixed cost of 25-30 percent 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. However, the growth in domestic revenue will restrict the decline in the operating profitability of the overall industry to 150-200 bps.
In this milieu, four key factors bear watching--the evolving tariff environment and its impact on leather demand, ability of processors to offset the revenue loss from the US by increasing sales to other markets, impact of re-export of goods exported to Europe and the potential heightened forex volatility.
