Exports to these two geographies, which together account for over 45 per cent of India’s polished diamond exports, fell a staggering 41 per cent on-year in February as the pandemic intensified, and have plunged further since then, especially with the nationwide lockdown
Exports to other markets suffered, too. In Hong Kong and China, which account for about 45 per cent of the exports, demand for luxury goods such as diamonds, jewellery and watches is estimated to have nosedived by 79 per cent in February and even further since then.
Assuming the pandemic starts subsiding by June and trade channels normalise over the next quarter, CRISIL expects a revival in demand to be pushed into the second half of the fiscal. The analysis factors inputs from its rated portfolio of 114 diamond exporters, which represent more than 30% of the industry. The reduction in sales, coupled with potential inventory losses, cannot but impact the profitability of Indian diamantaires in fiscal 2021.
"The inventory levels are estimated to have increased 15- 20 per cent over the March quarter. With the pandemic hitting all major global markets, prices fell by an average seven per cent across various cuts of polished diamonds in March 2020, which means likely inventory losses," said Subodh Rai, Senior Director, CRISIL Ratings.
As a result, cash-flow challenges will continue to test the liquidity profile of Indian exporters. According to Crisil, importers from Hong Kong and mainland China buy polished diamonds from India on 120 days’ credit compared with 45-60 days by importers from the US and the EU.
In February, even as payments from China started tapering, those from the US and the EU were regular. However, since March, payments from across geographies have reduced to about 25-30 per cent of the actual monthly dues. This could test the ability of the Indian exporters to clear the maturing post shipment credit on time.
While awaiting stimulus from banks, diamantaires are in no position to resume operations under current circumstances, say industry sources.
"The government has allowed industries to open albeit at a reduced capacity of around 30 per cent. However, for an industry like diamond polishing, unless it operates at 100 per cent, the cost of production will increase substantially. Currently, when there is no demand for such precious gems, until industries are allowed to operate at 100 per cent capacity, production will not be feasible. Moreover, loan instalments continue to get deducted for the months of March and April even as the industry awaits some kind of relief or stimulus from banks," said Dinesh Navadia, regional chairman - GJEPC and former president of Surat Diamond Association (SDA).
Meanwhile, Indian banks have been extending the due dates on such post-shipment credit bills by 60-90 days on a case-to-case basis.
"There are several monitorables in the road ahead. In the immediate term, the crucial one would be the frequency and quantum of payments by importers. Over the near to medium term, the credit risk profiles of Indian diamond polishers will be tested given declining scale of operations, pressure on profitability and elongated working capital cycle," said Rahul Guha, Director, Crisil Ratings.