According to Crisil, among the demand dampeners, a surge in Covid-19 cases has led to lockdowns in several regions in China, which is one of the largest consumers of Indian polished diamonds.
The revenue of the Indian diamond industry is expected to decline 15-20% to $19-20 billion this financial year FY23 compared to a decadal high last fiscal, as per a Crisil report. The revenue is expected to face a double blow from falling demand and rising prices of roughs across the globe. However, the industry's credit profiles are likely to be steady due to dull demand and controlled debt.
According to Crisil, among the demand dampeners, a surge in Covid-19 cases has led to lockdowns in several regions in China, which is one of the largest consumers of Indian polished diamonds. Additionally, inflation and the opening up of other avenues of discretionary spending, such as travel and hospitality, will dampen demand growth in the US and Europe in the near term.
Meanwhile, in terms of prices, the US sanctions on Russian diamond mining company Alrosa following the invasion of Ukraine have cut supplies of rough diamonds by almost 30%. The state-owned company is the largest diamond producer in the world and the supply constraint will continue amid sanctions on Russia.
Also, Crisil pointed out that key buyers in the US and EU have been insisting on certificates of origin. As a result, the prices of roughs have shot up almost 30% since the start of this fiscal.
Subodh Rai, Chief Ratings Officer, CRISIL Ratings, “While volatility in rough diamond prices is typically passed on to the polished diamond prices — albeit with a lag due to the long operating cycle in the trade — tepid demand has kept polished prices from fully catching up with rough prices this time around. This could squeeze the operating profitability of Indian diamond polishers by 75-100 basis points to 4-4.25% this fiscal. Accordingly, interest coverage may weaken marginally."
On the positive side, payments from customers have been timely which along with reduced inventory -- will control reliance on external debt. Thereby, Crisil said, the total outside liabilities to tangible net worth ratio will remain under 1.5 times for the industry, keeping the credit risk profiles of players steady.
Rahul Guha, Director, CRISIL Ratings, “The increasing prices and short supply of natural diamonds has also meant a growing shift in consumer interest towards lab-grown diamonds, which resemble natural diamonds and are 50-60% cheaper to boot, offering growth opportunities in a price sensitive market. The market share of lab-grown diamonds is estimated to have expanded to about 8% presently from less than 3% two years ago."
Crisil's report highlighted that the pent-up demand and the strong festive season saw Indian diamantaires stocking up on rough diamonds in the second half of last fiscal. While polished exports grew ~48% on-year last fiscal, rough diamond imports were up ~74%, with almost 40% of the imports being in the closing quarter.
In the first quarter of FY23, the huge inventory build-up was corrected following the onset of the Russia-Ukraine war at the fag-end of last fiscal and disruptions in the Chinese market because of new variants of Covid-19.
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