Diamond industry expected to cap revenue loss at 20%; to clock $15 bn this fiscal: Report

Recovery in key export markets and pent-up demand are likely to arrest the decline in revenue of the country's diamond industry to 20 per cent at $15 billion, according to a report.

Crisil Ratings in the report said that when the Covid-19 pandemic took hold, the industry was expected to see a third of its revenue shaved off this fiscal. "However, this could now get arrested at around 20 per cent."

The recent upsurge in spending on diamonds, riding on a combination of pent-up demand and recovery in retail offtake in key markets such as the US and China, is expected to help India's diamond industry contain its decline and close this fiscal with a revenue of over USD 15 billion, Crisil Ratings said in the report.

Sluggish demand and extended lockdowns globally saw exports plunge to USD 5.5 billion in the first half, almost half of the previous year's business, it said.

However, exports in the third quarter ended December 2020 rose to an estimated monthly average of USD 1.6 billion, setting the industry up for a tryst with the USD 15-billion-mark for the full year, it added.

"Trends in recent months have been encouraging. Retail sales in the US and China have grown by about 3-5 per cent, which would provide the industry sustained momentum over the medium term," Crisil Ratings Chief Ratings Officer Subodh Rai said.

He added that while there are new lockdowns in some parts of the EU, the launch of COVID-19 vaccines across the globe is expected to mitigate a massive disruption.

The report said that at the start of the financial year, the industry was grappling with significant build-up of inventory, comprising both rough and polished diamonds, over the previous seven months.

While prices of rough diamond had remained firm, weak demand meant the prices of polished diamonds were falling, thus setting the industry up for significant inventory losses, it stated.

Amid the weak demand scenario, however, the miners reduced the prices of rough diamond by almost 10 per cent around the end of the second quarter, it added.

With demand also on the rise gradually, the prices of polished diamonds increased by almost 2 per cent in the third quarter.

This helped the industry wipe out a portion of the operating losses of the first half, the report said.

With prices now stabilising, operating profitability is expected to remain intact for the full year, it added.

Crisil Ratings Director Rahul Guha said, "Added to this, cash flow challenges have receded. Following the significant reduction in sales in the peak lockdown period of the first quarter, Indian diamantaires had focused on streamlining collections and reducing inventory levels."

He added that this is borne out by the average receivables period and inventory period, which are currently just over two months and five months, compared with well over 3 months and 7 months, respectively, at the end of the first quarter.

The Indian polishers start building inventory from the end of the second quarter and into the third to keep up with the sharp sales surge starting November every fiscal with festivals across the globe also coinciding with the Chinese New Year, it said.

That has not happened this financial year, as the industry was focusing on clearing its already stocked-up inventory.

That said, intermittent liquidity challenges have been supported by timely extension of due dates on post-shipment credit by Indian banks, the report added.