Indian diamond industry to witness margin moderation in FY2023 amidst elevated rough prices and softening in demand: ICRA

22 Mar 2022 , 04:18 PM

ICRA expects India’s diamantaires to witness a demand moderation in FY2023, after a sparkling performance in FY2022, which coupled with firm rough prices would keep their margins under check. As per ratings agency’s recent note on the sector, the Indian cut and polished diamond (CPD) exports are expected to moderate to $22.5-23.0 billion in FY2023, reflecting a Y-o-Y degrowth of ~5-6%. Coupled with elevated rough prices, this is expected to trim their operating profit margins (OPM) by upto 50 bps from FY2022 levels to ~4.5%.

Giving more information, Ms. Sakshi Suneja, Assistant Vice President and Sector Head, ICRA says, “India is estimated to export $23-24 billion worth of CPDs in FY2022, reverting to its pre-pandemic levels, led by a pent-up demand on the back of improving economic outlook of key geographies including US and China and partly aided by muted spends on travelling and other luxury items. Demand for CPD is however, expected to moderate in FY2023 driven by the high base, opening up of other spending avenues like travel/hospitality due to better vaccination coverage, unwinding of surplus liquidity globally and inflationary pressures.”

The prices of rough diamonds had sky-rocketed by 23% in CY2021, amid controlled supply by mining companies (with rough diamond production remaining 16% lower than pre-Covid levels) and robust revival in demand following the pandemic. Rally in polished diamond prices, however, lagged the spurt in rough prices and witnessed an increase of 16% in CY2021. Nevertheless, aided by increased demand (especially from the US), CPD entities have been able to largely offset the pressure on their operating profit margins (OPM) till now.

Rough prices are expected to remain firm in FY2023 with no major ramp-up in mining output (of rough diamonds) expected over the next two years. Faced with lower demand, the ability of CPD entities to pass on these elevated raw material costs would be restricted, which would adversely impact their OPMs in FY2023.

CPD entities are currently operating at multi-year low inventory levels of around three months. Amid slowdown in demand, inventory levels of CPD entities might increase in FY2023, though shall remain lower than pre-pandemic levels on account of constrained supply of roughs. This will limit their dependence on working capital debt, thereby mitigating the impact on their credit profiles. ICRA expects the interest cover of CPD entities to remain in the range of 3.5-4.0 times in FY2023 (vis-à-vis 4.8 times in FY2022 and 2.7 times in FY2020), with total outside liabilities to tangible networth ratio (TOL/TNW) in the range of 1-1.1 times as on March 2023 (vis-à-vis 1.2 times as on March 2022 and March 2020).

Adds Ms. Suneja, “Trade disruptions and further slowdown in demand, if any, as a fallout of the Russia-Ukraine conflict remain key monitorables in the near term. Alrosa, Russia-owned diamond mining entity, supplies ~30% of the rough diamonds globally and is an important source of rough imports for India. ICRA’s channel checks suggest that Indian CPD entities are not facing any major logistics hurdles at present and are procuring roughs from Alrosa in euros vis-à-vis US dollars earlier. Entities are further expecting an alternative rupee-ruble payment mechanism to facilitate trade in the near term. However, any stringent restrictions on imports would lead to shortage, leading to increase in rough prices. Another important thing to watch out for would be resistance from retailers and consumers based in the US and Europe to purchase polished diamonds of Russian origin. This, if materialised, could potentially push up the prices on non-Russia based roughs further.”