Hit by fall in demand, revenue of the natural diamond polishing industry may drop to decadal low after expected fall of 27 per cent to $12 billion this fiscal.
The muted demand in the US and China has led to fall in exports even as diamond prices have dipped 10-15 per cent amid oversupply. This apart, lab-grown diamonds (LGDs) have gained market share due to their affordability and high resemblance to the natural ones, said Crisil Ratings.
Declining for the third fiscal in a row, the industry’s revenue contracted 29 per cent in the previous fiscal and 9 per cent in FY23.
In a bid to arrest the steep fall in prices both the diamond polishers and miners have cut their production. With the steady drop in polished diamond prices halted to an extent, operating margins are expected to stabilise at 4.7 per cent in this fiscal. Overall, lower working capital requirement will limit reliance on external debt and support credit profiles over the medium term.
Slack demand
An analysis of 40 companies rated by Crisil Ratings, accounting for nearly one-fourth of the industry, has revealed that the sluggish demand from the US to drag India’s diamond exports by 43 per cent in value terms over the past two fiscals, with the share of US in India’s diamond exports reducing to 35 per cent last fiscal from over 40 per cent two years back.
On the other hand, demand for gold jewelry is rising in China, which makes up 28 per cent of India’s exports, as gold is seen as a safer investment with better returns during economic uncertainty. A sharp decline in diamond prices over the past 2-3 fiscals has hindered the revival of demand for natural diamonds.
Furthermore, the youth in these key export markets is increasingly embracing LGDs as limited disposable incomes are constraining discretionary spends. This is further eating into the share of natural diamonds.
Rahul Guha, Director, Crisil Ratings, said the market share of LGDs, which are 90 per cent cheaper, has increased to about 25 per cent by value in the US from 8 per cent two years ago.
As miners and polishers prepare for continued sluggishness, they are focusing on reducing inventory and costs this fiscal, which will lower working capital requirements, he added.