The Business Bytes
TBB BUREAU
NEW DELHI, OCT 18, 2023
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.
“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,” said Rahul Guha, Director, CRISIL Ratings.
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.
“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,” said Rushabh Borkar, Associate Director, CRISIL Ratings.
Reduced working capital borrowings will bring the overall indebtedness, or the ratio of total outside liabilities to tangible networth, 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.
