Ceylon Leather Products head office, factory to be relocated

Ceylon Leather Products Ltd (CLPL) will relocate its head office and factory to Balummahara in the Gampaha district by investing Rs 50 million, according to a report by Lanka Orix Securities Ltd. It is estimated that the cost of relocation and refurbishment of the new premises will cost approximately Rs 20 million. CLPL recently purchased a closed toy factory building to relocate the premises.

The new factory layout will be planned with the assistance of expert foreign consultants. The factory is to be constructed according to international standards with the consultant expected to be resident in Sri Lanka to oversee operations, the report said.

According to the report considerable importance will be placed on improving the brand value and increasing the distribution network. An aggressive marketing policy is to be implemented with the help of foreign consultants which is expected to increase the local and international demand for CLPL products.

Suitable location

The management plans to re-locate the tannery once the factory re-location is completed. A suitable location is currently under evaluation. The government will offer free land and building and other concessions if the tannery is to be shifted to the Eastern province.

Discussions are under way with the government to obtain concessionary funding amounting to Rs 100 million through a donor agency for this purpose.

The Lanka Orix Securities report said that the shifting of the tannery will free the 4.75 acre (760 perches) land at a prime location in Mattakkuliya enabling the management to look at options of development.

At a prudent market value of Rs. 750,000 the total value of the land is approximately Rs. 570 million. The value of this land is expected to considerably appreciate in light of the proposed new Colombo-Wattala-Negombo four lane highway. We are of the opinion that once the highway is developed the land could fetch over Rs 1 million per perch.

Further, CLPL may also look at the possibility of developing the tannery land as a low cost housing complex. The company sold the 3.4-acre land at Church Road, Mattakkuliya recently.

This sale was done for a consideration of Rs. 307 million. This property has buildings with a floor area of 88,148 sq ft which houses the shoe factory, leather goods factory, stores and the company's head office.

According to the report the sale of land is expected to generate a substantial capital gain for the Company. This capital gain will be in the range of Rs 263 million and would be reflected in the 3Q FY 2007/08 financial statements.

The company has set aside Rs. 93 million in a security deposit under the agreement of vacating this property within nine months of the sale date. Once CLPL vacates this premises the security deposit will be repaid to the company.

The nine month time period will be utilised to relocate the factories and the office complex at the premises at present.

Operations revitalised

The cash inflow from the land sale is expected to strengthen the balance sheet.

Inadequate working capital was the main limiting factor for the company. The land sale has brought in essential working capital to the company helping to re-vitalise its operations.

The main focus of this re-structuring was to make the company debt free while providing vital working capital. The company has settled a major portion of the non-current borrowing which will help in reducing the finance cost significantly.

The company is expected to utilise Rs 93 million currently held in security deposit to satisfy future working capital requirements. The management has identified fresh funding lines which will further support the growth plans of the company.

The report said that CLPL manufactures and trades in Leather, Leather Footwear and Leather Goods. It has three production facilities; a tannery where leather is made from raw hides and skins, a shoe factory which produces mainly leather footwear and a leather goods factory which manufactures leather products other than footwear.

The tannery in Mattakkuliya is the largest in Sri Lanka and produces chrome and vegetable tanned leather. The installed capacity of the tannery is 250,000 sq ft of leather per month.

The tannery uses locally available cow and buffalo hides and goat skins. The product range includes several types of full grain, corrected grain and finished splits. While 40%-50% of the output of the tannery is utilised by the leather goods and shoe production units the remainder is sold in the domestic market or exported. The company exports leather to the UK, China and India.

The current production at the shoe factory in Mattakkuliya is 40,000 to 50,000 pairs of footwear per month. The management said that production can be expanded through infusion of additional working capital. Its leather footwear is marketed under the brand name DI. CLPL exports shoes to Japan and the European Union.

While 90% of value addition is local a small component for shoe production is imported. These imports are sourced from Germany, Italy and India.

The leather goods factory produces a range of leather products. The company aims to be a niche player, focusing on high value addition and premium pricing.CLPL has a network of 17 sales outlets and 600 dealers through whom it markets its DI range of shoes.

Dumping of cheap shoes from countries such as China, Thailand and Vietnam has ceased to be a concern after the government imposed a cess of Rs. 400 to Rs. 450 per pair of shoes. However, severe price competition prevails in the local market in the face of which CLPL attempts to differentiate its product which is leather based from synthetic variants sold in the market.

Export markets

The main export markets for the company are Japan and EU. The company manufactures only for specific buyers and about 70% of the exports are for KOOS brand. The designs are provided by the buyers.

CLPL has a market share of an estimated 15% of the domestic shoe market. However, CLPL is the main supplier of footwear for the Security Forces with an estimated 90% share. Product development for the domestic market is carried out in-house by the company.

The company has traditionally supplied the Security Forces and 20% to 30% of revenue continues to be derived from this market. However, there is an increased focus on the domestic consumer market and the exports market as these markets have potentially higher margins.

With its origins dating back to 1939 Ceylon Leather Products got off the ground when the British Government founded the business to produce boots, shoes and accessories for the British Armed Forces.

After the second world war the factory diversified its production to shoes and leather accessories for the local market while maintaining its position as the largest supplier to the Armed Forces and Police. The Department of Industries took over the management of the company and its products were sold under the "DI" brand.

The factory was subsequently incorporated under the State Industrial Corporations Act of 1955 and 1957 and underwent a name change to Ceylon Leather Products Corporation.

In 1962 a new shoe factory was set up in Sri Lanka and a new tannery was established in 1970. A production line manufacturing leather goods such as travel and office bags and belts was set up in 1972.

SG

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Break-up of sales

Exports 6,000 to 10,000 pairs per month

Defence Tenders 15,000 to 25,000 pairs per month

Domestic Sales 10,000 to 15,000 pairs per month