Diamond polishers facing a revenue drop!

Oct 19, 2023

According to the CRISIL Ratings, dull demand to cut revenues of diamond polishers by a third! High inventory amid falling prices to impact profitability; lab grown diamonds pose threat! The Indian diamond polishing industry will see revenue drop 30-35% on-year to $14-15 billion this fiscal as an economic slowdown in its main markets – the US, the European Union (EU) and China – cuts demand. These three geographies account for ~75% of India’s polished diamond exports (US ~35%, China ~30% and the EU ~10%).

High inventory of polished diamonds amid falling retail prices will put the profitability of polishers under the pump. The silver lining is that a shrinking business translates to reduced debt, which will offer some offset against the pressure on credit risk profiles of diamond polishers.

A study of 46 of them rated by CRISIL Ratings, accounting for over a fifth of the ~Rs 180,000 crore industry by revenues last fiscal, indicates as much. Demand for polished diamonds had started weakening since last fiscal amid slowing economic activity leading to a volumetric drop of ~25%.

But worries about supply of rough diamonds following western sanctions on Russian mining major Alrosa supported prices. Polished diamond prices on average were up nearly 10% last fiscal on-year. This helped arrest the decline in India’s polished diamonds exports to $22 billion last fiscal from $24.2 billion in fiscal 2022.

This fiscal, not only has demand fallen further in major markets, but also there has been no disruption in the supply of roughs. Consequently, prices of roughs have corrected, leading to polished diamonds getting cheaper by 10-15%.

Another flank of trouble is lab-grown diamonds (LGDs), which have more than doubled their market share to ~15% on-year, despite prices halving. LGDs are 20-40% cheaper than natural diamonds yet have quite similar characteristics, thus posing a threat to the natural stones.

Says Rahul Guha, Director-CRISIL Ratings, “Israel imports ~$1.25 billion worth of polished diamonds annually from India. With the country now declaring a war on the Palestinian militant group Hamas, this number could be at risk.

To be sure, there is some bump-up in demand in the second half of every fiscal from festivities such as Thanksgiving, Christmas and the Chinese New Year, but this is unlikely to provide a significant offset. Consequently, we see the Indian diamond industry shrinking by over a third on an annualised basis this fiscal.”

With the inventory of higher-cost polished diamonds piling up to over 4 months of sales, profitability of polishers will be chiseled 50-100 basis points amid lower retail prices.

Says Rushabh Borkar, Associate Director-CRISIL Ratings, “The overall working capital of the diamond polishers will reduce 30-40% this fiscal on a diminished scale of business. Though their receivables cycle currently is under control at ~90 days, some polishers could face a stretch depending on their position in the value chain and their counterparties. This remains a monitorable.”

Reduced working capital borrowings will bring the overall indebtedness, or the ratio of total outside liabilities to tangible net worth, down to ~1 time as on March 31, 2024, from 1.3 times a year back. However, a dip in profitability will reduce the interest coverage to ~ 3 times this fiscal from over 4 times last fiscal. This will exert pressure on credit risk profiles.

All said, the effect of sanctions on Russia and the ongoing conflict in the Middle East will bear watching.

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