Haryana Leather Chemicals Ltd Management Discussions.

1. Industry Structure:

The leather and leather products industry is one of the oldest manufacturing industries in India. The Indian leather industry provides employment to about 2.5 million people. India is the second largest producer of footwear in the world; second largest exporter of leather garments and third largest exporter of Saddlery & Harness in the world (leatherindia.org). Backed by a strong raw-material base and a large reservoir of traditionally skilled and competitive labour force, the Indian leather industry has made a prominent presence in world leather map. Govt of India considers leather as a thrust area and the industry in the past has consistently received Govt. Institutional support.

Leather Industrys increasing commitment to international environmental and safety standards, has made it a reputed player in the world market. The industry is known for its consistency in high export earnings and it is among the top ten foreign exchange earners for the country. Though export of finished leather and leather garments contracted in rupee terms in FY19, the industry was able to achieve overall positive growth due to good growth levels shown by other segments such as leather footwear, leather goods, saddlery and harness and footwear components. (thehindu.com).

2. Opportunities & Threats:

Opportunities:

Leather Industry holds immense potential for employment generation and exports. Footwear sector has been identified by Indian Govt. as an area of extreme focus. India is already the second largest producer of footwear and leather garment in the world. This ancient Industry enjoys affluence of raw materials with the added strength of skilled manpower and govt. institutional support. These factors provide a huge opportunity for growth to its allied sectors like leather chemicals. Govt. of India is implementing various schemes for integrated development and modernization of major segments of leather industry viz. tanneries, footwear, footwear components and leather goods & garments. In such a background the long term prospects of Indian leather chemical industry are extremely promising.

Threats:

There are few challenges that leather and its allied sectors have to overcome to be able to realize its full potential. (1) The politics relating to animal trade and slaughter houses have had serious impact on availability of raw hides. (2) The environmental policies that are under implementation have displaced many small leather producers in Kanpur, Kolkatta and Ranipet. These small producers need to be relocated in tannery or footwear clusters. Their reluctance to relocate is causing temporary disruption in the leather industry and deterring the foreign buyers. (3) Internationally, there are factors like trade war between China and US, removal of GSP and REACH regulations of EU are also causing short term disruptions.

3. Segment-wise or product-wise performance:

In terms of market segment –wise analyses, the company registered growth in domestic sector but could not achieve export guidance. The major reason for slippage in export has been loss of customers in Europe who are opting to buy from their European neighbors due to complexity and cost of REACH registration procedure. The company is also struggling to maintain its customer base in China as the leather industry in China is facing severe depression due to trade war with US. However company has identified new B 2 B opportunities in exports and hopes to regain its export earnings.

In terms of product-wise analyses, the companys "Fatliquor" range of products contributed most to the revenue, while the "Finishing" segment has remained subdued. This shift is also attributed to change of fashion and the scope of finishing chemicals is on decline as the new fashion trends revolve around a "raw and rustic" look requiring minimal finishing operations. The company enjoys a high reputation and market share in Fatliquor sections and the new research is focused to consolidate this position.

4. Outlook:

Export of leather and leather products, which was on the decline for the last two years, is seeing signs of revival as per Council of Leather exports (CLE). While the EU is the largest market for leather goods, the focus has shifted to other markets such as the US. The CLE has tied up with Footwear Distributors and Retailers of America to further increase its market share. Russia, which is the 12th largest global importer of leather and leather products, is another focus area. Four mega clusters that will house tanneries, leather goods and footwear manufacturing units and training centres are coming up in Andhra Pradesh, Haryana, West Bengal and Uttar Pradesh.

5. Risks & Concerns

There are some risks and concerns industry and political leadership needs to address: The challenges that leather and leather chemical sectors need to overcome to realize its full potential are: (1) The politics relating to animal trade and slaughter houses have had serious impact on availability of raw hides. (2) The environmental policies that are under implementation have displaced many small leather producers in Kanpur, Kolkatta and Ranipet. These small producers need to be relocated in tannery or footwear clusters. Their reluctance to relocate is causing temporary disruption in the leather industry and deterring the foreign buyers. (3) Internationally, there are factors like trade war between China and US, removal of GSP and REACH regulations of EU are also causing short term disruptions.

6. Internal control systems and their adequacy

The directors confirm that there are adequate internal control systems that follow basic principles of: (1) reliable financial reporting, (2) compliance with laws, regulations and policies, (3) transparency in accounting and auditing on operational efficiency. The top management has enforced strict rules on purchasing, production, sales and receivables resulting in improved cash flow. Regular updating of SAP based MIS system integrating production and finance has immensely helped improved decision making and faster turnaround of materials. International consultants DEKRA were hired to improve warehousing and safety policies after the fire accident and their suggestions have been fully implemented.

7. Discussion on financial performance with respect to operational performance

There are promising signs of sales growth in domestic market. Reduction in net profit as compared to last year is mainly due to loss during the fire accident. The cash flow remains stable due to stricter credit controls and faster production cycles and deliveries. There is no long term loan that needs servicing and repayment to DSIR – research funding has begun to be completed in five yearly instalments

8. Material developments in Human Resources / Industrial Relation front, including number of People employed

The Companys human resources including key technical and financial managers remain deeply committed to Companys growth. Various department heads coordinate independently with their subordinates to mitigate day to day challenges. There is no attrition at the level of senior technical and management professionals. The management structure permits senior managers to focus on complex areas of environment and safety. The Company has maintained the payment of bonus and increments aligned with market trends across all levels of employees.

Number of employees as on 31.03.2019 was 87