Sovereign Diamonds Ltd Management Discussions.

Indian Economy:

India still remains the fastest growing emerging economy in Asia and the world. The Indian economy expanded by 5.5 % in FY 2019-20. The key drivers included near-normal monsoon, benign inflation and the governments focus to reinvigorate core sectors like infrastructure, manufacturing, housing as well taking measures to increase financial inclusion.

Gems and Jewellery Industry review:

The Gems and Jewellery sector plays a significant role in the Indian economy, contributing around 7% of the countrys GDP and 15% to Indias 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 worlds 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 worlds polished diamonds, as per statistics from the Gems and Jewellery Export promotion Council (GJEPC). Indias Gems and Jewellery sector has been contributing in a big way to the Countrys 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

Indias 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 Indias 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 influencing the younger generations tastes

• Growth of lab created diamonds: Also known as synthetic diamonds, artificial diamonds, 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 2021-22. 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 stabilisation 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

The industry is highly capital intensive in nature with long working capital cycles, since the jewellery conversion from gold typically requires 15 days. Strength of the balance sheet and access to easy credit is often required to facilitate and sustain ease in operations.

Highlights of Performance:

• Total net sales for the year were Rs. 3,243.67 Lakhs as compared to Rs. 4,025.38 Lakhs in 2018-19.

• Total profit before tax for the year was Rs. 7.40 Lakhs as compared to Rs. 40.40 Lakhs in 2018-19.

Company Overview:

With a combination of skilled craftsmen, world-class manufacturing facility and technology, and technology, and strong focus on innovation, the Company manufactures unique and high quality products meeting highest quality standards.

The Company leverages its strong team of creative designers and skilled craftsmanship along with the modern research and computer-aided design to deliver products matching the latest trends and consumer preferences. The Company invests in training designers, mapping international trends and evolving global styles. Sovereign also sources designs from international market where required to compliment its own collection. This ensures designers are well informed about world trends, and local tastes and preferences before introducing new styles and continue to launch new collection ahead of the market trends, year-on-year.

As a public limited entity, the Companys focus is also on good corporate governance, infusing high levels of transparency in reporting, undertaking stakeholder focused initiatives and imbibing ethical business practices.

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:

Sr. No. Ratios FY 2019-20 FY 2018-19
1. Debtors Turnover Ratio 3.61 5.97
2. Inventory Turnover Ratio (on Cost of Goods Sold) 2.77 1.85
3. Interest Coverage Ratio 1.06 1.26
4. Current Ratio 1.59 1.68
5. Debt Equity Ratio 0.87 0.85
6. Operating Margin Ratio 0.02 4.93
7. Net Profit Margin 0.23 1.00
8. Return on Net Worth (RONW) 1.46 1.46

Note: The net profit ratio reduced from 1% to 0.23% due to increase in operating and other expenses.

For and on behalf of the Board of Directors of Sovereign Diamonds Limited

Sd/-
Ajay Gehani
Chairman &
Place: Mumbai Managing Director
Date: 27th June, 2020 DIN:00062989