Diamantaires stare at decade-low revenue as Covid epicentre shifts to US

The revenue of India’s diamond polishing industry is set to plunge in fiscal 2021 to a 10-year low of $13-15 billion.
With the epicentre of the Covid-19 pandemic shifting from China to the US and Europe, the major export destinations of India's beleaguered diamond polishing industry, the latter's revenue in fiscal 2021 could plunge to a 10-year low, says rating agency Crisil.

Currently Diamond processing units are awaiting the financial package from banks without which they will not be in a position to reopen their units even if the lockdown is lifted. “The industry awaits stimulus from banks amid the trying scenario,” said Colin Shah, vice chairman of Gems and Jewellery Export Promotion Council (GJEPC), adding that the industry expects revenue to drop by 20-25 per cent in FY21. Despite permission to open processing units in Gujarat, they have not started production due to viability concerns,

According to Crisil, the revenue of India’s diamond polishing industry is set to plunge in fiscal 2021 to a 10-year low of $13-15 billion, from $24 billion in fiscal 2019, and an estimated $19 billion in fiscal 2020.

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 starting mid-March.

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.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel