Global Diamond Industry: 2015-16
The Bain & Co. report on diamond industry suggests that retail sales of diamond
jewelry grew 3% at constant exchange rates but declined about 2% in US dollar terms. The
US remained the sales growth engine of the global diamond jewelry market, as the
same-store revenues of mainstream US jewelry retailers improved, reflecting strong
middle-class consumption. Europe and Japan in 2015 benefited from the shift of spending by
Chinese consumers from Hong Kong and Macao. This shift was reflected in positive
consumption growth in euro and yen terms. Strong macro-demographic trends powered positive
consumption dynamics in India. The strong US dollar nonetheless pushed growth in those
markets into negative territory in dollar terms.
Major rough-diamond producers in 2015 reacted to the challenging circumstances of their
customers by reducing output, increasing their own inventory levels and providing more
flexible purchasing terms while cutting rough-diamond prices. As a result, rough- diamond
sales fell 24% in 2015.
Strong rough-diamond sales in 2016 may again lead to swollen midstream inventories if
retail demand does not strengthen proportionately. Declining sales at major jewelry
retailers in the first half of 2016 indicate a possible demand slowdown in the US and
China. The final growth trajectory for 2016 and the strength of midstream and
rough-diamond sales in the beginning of 2017 will be determined by the performance of the
diamond jewelry retail segment during the year-end holiday season.
A new generation of consumers—the millennials—represents a compelling
opportunity for the diamond industry. The population of millennials in China, India and
the US totaled roughly 900 million in 2015, and their combined gross income amounted to
approximately $8 trillion. Millennials appear to resemble other age groups in their
preferences for diamond jewelry but not in their shopping behaviors. To fully capture
millennials demand over the longer term, industry players need to invest in both category
marketing and brand-building efforts and redefine the customer experience in the retail
environment.
The key challenges facing the diamond industry remain the same as in previous years.
The midstream sector still needs to secure access to financing and continue to improve its
business model to sustain profitability amid potential price volatility. Over the longer
term, consumption may continue to slow in China, and there is a risk of a cyclical
recession in the US. Synthetic diamonds as an emerging competing category to diamonds
remain a risk, but diamond industry participants are determined to reduce the threat from
synthetics by marketing the emotional attributes of natural stones. The recently formed
Diamond Producers Association (DPA) is reviving industry-wide generic marketing efforts.
The long-term outlook for the diamond market remains moderately positive. The supply of
rough diamonds is expected to decline annually by 1% to 2% in value terms through 2030.
Recent developments in the diamond industry
The year 2015 was a challenging one for the diamond industry. Weaker-than-expected
consumer demand affected polished-diamond sales as retailers reduced purchases of polished
diamonds. The slowdown extended to midstream companies as they built up inventories and
reduced purchases of rough diamonds.
Global diamond jewelry demand grew 3% in local currencies in 2015 but declined 2% in US
dollar terms. Sluggish demand in China offset positive trends in the US. Currency
depreciation drove revenue declines in Europe, India and Japan despite sales growth in
local currency terms. The industry is stepping up its marketing efforts in generic and
targeted programs to boost consumer demand for diamond jewelry.
The diamond industry in 2016 is on the road to a recovery. Rough-diamond suppliers
posted strong sales in the first half of 2016, mostly due to restocking by cutters and
polishers following their inventory sell-off at the end of 2015. Despite the positive
indicators, the 2016 outlook for global diamond jewelry demand remains uncertain, with
retailers reporting minimal sales growth in key markets.
The medium-term outlook remains challenging, as new supply is expected to come online
and uncertainties cloud the social, political and economic environments in key markets. In
the long run, the positive macroeconomic outlook is expected to work in the industrys
favor—as long as diamond producers behave responsibly and industry players sustain
marketing efforts to support diamond jewelry demand, especially among millennials.
OPERATIONAL PERFORMANCE:
The revenue and margins of the Company have faced tremendous pressure from stagnant
global markets, rising costs and declining margins. The tightening of banking norms has
led to a reduced availability of working capital against a backdrop of rising competition
from Chinese and South East Asian companies.
The income of the company reduced to 1,789.96 crores from 2,712.18 crores in the
corresponding period last year. The finance costs during the period increased from 103
crores to 111 crores, with a reduced availability of finance from the banks. This was on
account of finance limits being constrained due to late receipt of payments from clients,
resulting in a few accounts being classified as NPA. The year ended with a net loss of
40.12 crores as against a profit of 20.5 crores last year.
The jewellery operations of the company have come to a stand still towards the end of
the year, while the diamond manufacturing operations were operational on a minimal scale.
The company had focused on trading of cut and polished diamonds during the second half of
the year.
Compliance with the Best Practices in the industry
Shrenuj Group remains committed to compliance with global best practices, statutory as
well as voluntary. As a De Beers sightholder, we follow the Best Practices Principles
(BPP) Guidelines of De Beers and Forevermark, including but not limited to periodic third
party audit of our systems and procedures by internationally accredited independent
agencies. We also follow the World Diamond Councils System of Warranties for polished
diamonds and studded jewellery. The jewellery division of the Company has also committed
to comply with the Responsible Jewellery Councils requirements from 2015 onwards.
We source our diamonds solely from KYS compliant suppliers and do not buy diamonds from
any sources involved in conflict, terrorism and illicit trade activity. Our suppliers
issue us a warranty that the diamonds/ gold sold to us is conflict free. The diamond
procurement is always from verifiable sources, not engaged in money laundering activity.
We comply with the Kimberly Process Certification norms in this regard, for all our
imports and exports of rough diamonds. We also undertake scheduled internal audits for
tracking our products through the operating value chain.
We have built a team of qualified professionals to ensure complete compliance with
statutory norms and adoption of international best practices. Also, we have installed
systems and procedures to ensure the pipeline integrity.
Commitment
We continue to remain very fair employer and do not discriminate between employees on
the basis of caste, religion, sex, color or creed. The Company ensures the health and
welfare of all its employees by providing a safe and healthy working environment. Shrenuj
recognizes that human capital is vital to its long-term business sustainability and
accordingly, has adopted employee selection and performance appraisal criteria based on
objectivity and merit.
FINANCIAL PERFORMANCE:
Overview
The financial statements have been prepared in compliance with the requirements of the
Companies Act, 2013 and Generally Accepted Accounting Principles (GAAP) in India. The
management accepts responsibility for the integrity and objectivity of these financial
statements, as well as for various estimates and judgments used therein. The estimates and
judgments relating to the financial statements have been made on a prudent and reasonable
basis, in order that the financial statements reflect in a true and fair manner the form
and substance of the transactions, and reasonably present the Companys state of affairs,
profits and cash flows.
Outlook, Opportunities and Threats Outlook
The decline in consumer demand and shrinkage in availability of finance will have a
bearing on the sales of gems and jewellery. Opportunities
The prices of rough diamonds fell sharply in the fourth quarter of FY 2015-16. This
will positively impact the profit margins of the diamond segment and return the focus on
manufacturing with sustainable margins. Alongside the bridals, the solitaire segment and
platinum jewellery are expected to outpace the growth vis-a-vis other segments. As in the
previous year, Forevermark continues to record good growth in core markets as well as
licensee markets.
Threats
Shrenuj continues to be subject to various risks in the economic environment, including
but not limited to product, marketing, competition, economic downturns, financial risks,
consumer demand etc. However, in this fast changing business environment, competitive
risks have become predominant.
The management has put in place adequate mechanisms to manage these risks across the
various business segments and geographies in which the Company operates. There are clearly
defined policies and processes to hedge the purchase of precious metals, foreign currency
exposures, and sources of supply of rough diamonds. Presence across various geographies
and across business segments also helps in containing the risk of weakening demand in a
single market or segment.
We have priced our products at a premium over competitors. This premium is accepted by
our customers on account of our superior product and service quality. We have constantly
endeavored to stay at the top of product and service quality grid to ensure this. Shrenuj
nurtures, encourages and promotes research and development as well as innovation towards
this end.
Internal Controls and their adequacy
We have adequate systems and processes to safeguard and protect our data and knowledge
resources. The systems are updated and monitored on a continuous basis so as to ensure
complete alignment with evolving technological requirements. The Company has a
well-documented data security policy with pre-defined levels of access authorizations. To
ensure safety and security of its strategic locations, the Company employs a comprehensive
system of electronic surveillance and physical controls.
The products manufactured and dealt in by the Company, as well as major production
inputs are of high value in nature. To ensure physical security of such products, the
Company has multi-tier security and tracking mechanisms. Regular internal audit is
conducted to ensure that all systems and procedures are in place and are followed
regularly. We maintain adequate insurance against unforeseeable and predictable risks,
given the nature of our products/business.
Talent and People Management
Employees are our most valuable asset and stakeholder. With hundreds of years of total
work experience, we have been able to stay ahead of our competition and be the first
choice of our customers for all their diamonds and jewellery needs. We train our employees
to enhance their professional knowledge and skills. The staff strength is monitored by all
HODs and HR Department and it ensures that our staff is not only optimally utilized but
also ensures that the quality staff is retained and no vacuum is created in any
departments. The performance appraisal systems are an ongoing process and we offer
feedback to all our employees on their strengths and areas for improvement on a regular
basis. We have a dedicated People Management team to ensure employee motivation,
productivity, innovative spirit and total involvement.
The Company is driven by a professional and experienced team of functional heads. The
Company has illustrious members on the Board. During the year under review Industrial
Relations were harmonious. All the statutory provisions have been fully complied with. The
Company achieved all planned targets in terms of production as well as productivity.
The impact of slowdown in the manufacturing activities has led to a higher rate of
attrition amongst employees. The challenge is to control costs while retaining key
personnel to be able to revive the business as and when the opportunities present
themselves.
Human Resource department has been coping with an immense challenge of sustaining the
morale of the employees despite severe headwinds in the business. It is equally
challenging to keep them involved during the periods of low work load and declining
revenue and profitability. HR department has been constantly engaged during the year to
rationalize manpower and manage cost efficiencies in the manpower costs.
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