Whalesbook
Conflict Fuels Input Cost Crisis for India's Leather Sector
The conflict in the Middle East is directly exposing India's leather and footwear industry's heavy reliance on oil-based raw materials. Soaring crude oil prices have driven up costs for essential inputs like polyurethane (PU), ethylene vinyl acetate (EVA), and rubber by 40-60%. This jump means an estimated 30% increase in overall production costs for manufacturers. Around $200 million in exports to Gulf markets are now at risk due to suspended services and higher freight rates, which have already risen by over 25%. Shipments to Europe, making up nearly half of India's leather and footwear exports, face 8-9 day delays as ships reroute. Rising LPG costs also add to operational strain.
Industry Structure Lags Behind Global Rivals
While the conflict creates immediate financial pressures, it also highlights existing structural challenges within the sector. Rivals like Vietnam and China benefit from more integrated supply chains and diverse material sourcing. Vietnam, despite importing raw materials, has a specialized factory network and efficient logistics. China offers unmatched scale and infrastructure. India's strengths are its material knowledge and craftsmanship, but its industry is fragmented, with much of it in the unorganized sector. This fragmentation limits capacity for large orders, hindering competition for major markets like the US.
Input Costs Threaten Non-Leather Footwear Orders
The surge in oil-based input costs severely impacts the non-leather footwear segment. In key manufacturing hubs like Bahadurgarh, Haryana, raw material prices have jumped 50-70%, causing production to drop by nearly 50%. This puts around ₹500 crore in orders at risk. Beyond production, consumer demand faces risks as people might delay buying items like leather jackets due to economic uncertainty, impacting trade volumes. For Kothari Industrial Corporation Ltd., which operates in various sectors including fertilizers and footwear, this presents a complex challenge. As of April 2, 2026, the company traded at ₹158.45. Its market capitalization exceeds ₹1700 crore, but it reported a net profit of -₹16.17 crore for 2025 and a negative P/E ratio, showing financial strain that rising input costs could worsen. Its 50-day moving average is ₹192.29 and the 200-day is ₹278.87, indicating current price weakness relative to its trading history.
Government, Trade Deals Offer Some Relief
The Indian government is providing some relief, including import duty exemptions on select oil-based inputs until June 30, 2026. The broader Indian Footwear and Leather Development Programme (IFLDP) aims to boost infrastructure and offer incentives, with ₹1,700 crore allocated until March 2026. The India-EU Free Trade Agreement, effective January 2026, offers zero-duty access to the EU market, potentially helping India compete better with countries like Bangladesh and Vietnam. However, these measures address immediate issues. The industry's deep reliance on oil derivatives makes it highly sensitive to geopolitical events that historically drive oil prices higher. A sustainable future requires strategic shifts toward alternative materials and greater integration into global supply chains to build strength against external pressures.