"Apart from recent developments in China, the cut and polished diamond (CPD) industry had been going through weak demand conditions in key markets and pressure on gross margins due to declining finished prices. If the business lockdown continues in C&HK, industry pressure will aggravate and impact cash flows," Icra Vice President, Corporate Ratings, Jay Sheth said.
This can have a serious bearing, especially given the cautious lending to the sector and potential impact CPD players' credit profile, he added.
"The pandemic in China will also hit near-term global demand for CPD and the widespread economic shutdown in C&HK region which will further delay demand recovery. The industry is already bearing the brunt of on-going US-China trade and political tensions," he opined. The C&HK region, accounts for 14-15 per cent of the global demand for CPDs, the report said.
China is a major market as it not only consumes imported diamonds locally, but also to produce diamond studded jewellery and export the same to the US, South East Asia and other markets in a big way.
The export of polished diamonds to China is largely routed through Hong Kong, which is a major global diamond trading hub alongside Belgium and the United Arab Emirates. Industry estimates C&HK to be currently accounting for 35 per cent of India's overall CPD exports, which is slightly ahead of the US.
Therefore, Icra estimates the domestic industry to be majorly impacted due to its considerable exposure in C&HK.
In addition, the report said the slowdown in sales will mean increased finished stock.
However, it said that on the positive side, lockdown in C&HK will also mean more opportunities for Indian CPD companies to cater to diamond studded jewellery demand in the US and other key markets.
With Chinese factories operating at low capacity utilisation, such manufacturing can be diverted to India for a short period of time.
"However, the situation could worsen if the Chinese shutdown sustains for two more months (say until April 2020), Then it could lead to elevated inventory levels for the industry. Exceptions will be companies which have been prudent in their rough diamond procurement; such companies would be able to manage their liquidity better," the report added.
Further, Icra said that in recent years, banks' lending to the gems and jewellery sector has been cautious following corporate governance and related concerns. Restrictions were placed towards sectoral exposure in the light of past and recent defaults and weak perception over transparency related issues.
"Given the aforementioned impacts, we revised the credit outlook on the CPD segment of the Gems and Jewellery industry to 'negative'. We expect the balance sheet and profitability of the companies to remain under pressure until the threat from coronavirus recedes and business returns to normalcy," Sheth added.