Sovereign Diamonds Ltd Management Discussions.

Indian Economy:

The world economy and Indian economy has suffered very badly due to COVID 19 during the entire financial year 2020 21.

Gems and Jewellery Industry review:

The Gems and Jewellery sector plays a significant role in the Indian economy, contributing around 7% of the country’s GDP and 15% to India’s total merchandise exports. It also employs over 4.64 Million workers and is expected to employ 8.23 Million by 2022. One of the fastest growing sectors, it is extremely export oriented and labour intensive.

Based on its potential for growth and value addition, the Government of India has declared the Gems and Jewellery sector as a focus area for export promotion. The Government has recently undertaken various measures to promote investments and to upgrade technology and skills to promote ‘Brand India’ in the international market.

India is deemed to be the hub of the global jewellery market because of its low costs and availability of high-skilled labour. India is the world’s largest cutting and polishing centre for diamonds, with the cutting and polishing industry being well supported by government policies. Moreover, India exports 75% of the world’s polished diamonds, as per statistics from the Gems and Jewellery Export promotion Council (GJEPC). India’s Gems and Jewellery sector has been contributing in a big way to the Country’s Foreign Exchange Earnings (FEEs). The Government of India has viewed the sector as a thrust area for export promotion.

The Indian government presently allows 100% Foreign Direct Investment (FDI) in the sector through the automatic route.

Domestic Jewellery Industry updates demand: Market Size

India’s gems and jewellery exports stood at US$ 30.12 Billion between April 2019 – March 2020. During the same period, exports of cut and polished diamonds stood at US$ 21.95

Billion, thereby contributing about 76.96% of the total gems and jewellery exports in value terms.

The gems and jewellery market in India is home to more than 300,000 players, with the majority being small players. Its market size is about US$ 75 Billion as of 2017 and is expected to reach US$ 100 Billion by 2025. It contributes 29% to the global jewellery consumption.

Gems and Jewellery comprises of the following sub-sectors:

Diamonds

Gemstones

Pearl

Gold, Silver and Platinum Jewellery

India is one of the largest exporters of gems and jewellery and the industry is considered to play a vital role in the Indian economy as it contributes a major chunk to the total foreign reserves of the Country. The Goods and Services Tax (GST) and monsoon will steer India’s gold demand going forward.

Industry Trend – Diamond Jewellery:

Increasing demand for precious gem stones: Changing preferences of young people from gold to coloured gemstone, platinum and palladium jewellery

Multiple occasions for purchase: Women are buying diamond jewellery for occasions other than marriage

Focus on technology: Emergence of new manufacturing techniques

Changing demographics impacting demand: Social media is impacting buying preferences too much. Instagram, Facebook etc are influencingthe younger generations tastes

Growth of lab created diamonds: Also known as synthetic diamonds, artificialdiamonds, cultivated diamonds or cultured diamonds

Focus on Quality: Introduction of cumulative FDI (in $) in diamond and gold ornaments between April stricter quality norms and hallmarking

Opportunities and Threats: Opportunities

In the coming years, growth in Gems and Jewellery sector would be largely contributed by the development of large retailers/brands. Established brands are guiding the organized market and are opening opportunities to grow. Increasing penetration of organized players provides variety in terms of products and designs. Online sales are expected to account for 1% - 2% of the fine jewellery segment by 2022-23. Also, the relaxation of restrictions of gold import is likely to provide a fillip to the industry. The improvement in availability along with the reintroduction of low cost gold metal loans and likely stabilization of gold prices at lower levels is expected to drive volume growth for jewellers over short to medium term.

The demand for jewellery is expected to be significantly supported by the recent positive developments in the industry.

Threats

Fast-changing Fashion Trends

Jewellery being a vital fashion and lifestyle statement, demands the players to be more agile, and responsive to the constantly evolving trends and consumer preferences.

Regulatory Framework

Changes in regulation and stringent compliance may cause temporary blip in sales during the transition period.

C.V.D. Diamonds

There has been an influx of C.V.D. Diamonds in all the major markets. In the recent past few cases of undisclosed mixing of C.V.D. Diamonds with natural diamonds have been reported. With improvement in technologies year over year, it is getting increasingly difficult to differentiate between the natural and artificial diamonds. The situation is evolving into a major challenge as Consumer confidence has taken a serious blow. Various initiatives are being undertaken by major diamond producers, trade bodies and retailers to increase the awareness about C.V.D. Diamonds and its proper disclosure to boost the consumer confidence. The Gems and Jewellery Export Promotion Council has set up a Natural Diamond Monitoring Committee (NDMC) consisting of representatives from various trade bodies to address this issue. Proper disclosure of C.V.D. Diamonds has been encouraged at all the levels in the value chain. Use of technically advanced equipment for the detection of undisclosed C.V.D. Diamonds has also been increased.

Liquidity Crisis

Due to COVID 19, the liquidity crisis was very high due to lower sales and high operating expenses and the working capital cycle was badly effected. The strength of the balance sheet is due to reduction in sundry creditors, sundry debtors and less borrowing from the bank.

Highlights of Performance:

Total net sales for the year were Rs. 1496.64 Lakhs as compared to Rs. 3,243.67 Lakhs in 2019-20.

Total Profit / Loss before tax for the year was Rs. (146.27) Lakhs as compared to Profit Rs. 7.40 Lakhs in 2019-20.

The Company has suffered loss due to return of finished goods from retailers.

The Company has availed credit facilities of Rs. 2.30 crores under GECL.

The Company has reduced its employee strength from 52 employees to 32 employees.

The sundry creditors have been reduced from Rs. 651 lakhs to Rs. 131 lakhs.

The Company has reduced its bank borrowing.

Operation of the Company was affected due to lock down and COVID 19. The operations of the Company during 1st quarter and 2nd quarter of the current year are affected due to 2nd wave of COVID 19 and lockdown. During the period of lockdown the retails sales have drastically reduced.

Key Financial Ratios:

In accordance with the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2018, the Company is required to give details of significant changes (changes of 25% or more as compared to the immediately previous financial year) in key sector-specific financial ratios.

The Company has identified the following ratios as key financial ratios:

Ratios FY 2020-21 FY 2019-20
1. Debtors Turnover Ratio 2.17 3.61
2. Inventory Turnover Ratio (on Cost of Goods Sold) 1.23 2.77
3. Interest Coverage Ratio (0.52) 1.06
4. Current Ratio 1.98 1.59
5. Debt Equity Ratio 0.98 0.87
6. Operating Margin Ratio (0.08) 0.02
7. Net Profit Margin (9.77) 0.23
8. Return on Net Worth (RONW) 1.21 1.46

Note: The net profit ratio reduced from 0.23% to (9.77) due to increase in operating and other expenses.

For and on behalf of the Board of Directors
of Sovereign Diamonds Limited
Sd/-
Ajay Gehani
Place: Mumbai Chairman & Managing Director
Date: 26th June, 2021 DIN: 00062989