The domestic cut and polished diamond (CPD) industry will be significantly hit by the coronavirus impact in China and weak demand in key markets. Consequently, ratings agency ICRA has revised the CPD industry outlook from stable to negative, in view of the ongoing shutdown in parts of China and Hong Kong.
China accounts for 14 per cent of polished diamond consumption, while a larger proportion (about 35 per cent) of exports from India is currently routed via Hong Kong.
Jay Sheth, Vice President (Corporate Ratings), ICRA, said apart from recent developments in China, the CPD industry is already hit by weak demand in key markets and pressure on gross margins due to declining processed diamond prices.
If the business shutdown continues, it could have a serious bearing, especially given the cautious lending to the sector.
The pandemic in China will also hit near-term global demand and delay demand recovery, he said.
China is a major market as it not only consumes imported diamonds locally, but also exports polished diamonds, largely through Hong Kong, which is a major global diamond trading hub alongside Belgium and the United Arab Emirates.
Retail jewellery sales in China has declined by about 70 per cent. The trickle effect is also seen on jewellery manufacturing units due to supply chain disruptions and factories operating at just 20-30 per cent capacity.
CPD export from India is already down 17.6 per cent in the first nine months of this fiscal due to subdued demand globally. And now with the adverse impact of coronavirus, exports are likely to remain weak in the current fiscal.
The cash flows of CPD companies will also be impacted with stretch in working capital cycle envisaged on the back of delay in collections and inventory build-up. Most CPD companies avail pre-shipment or post-shipment credit (export bills discounting of up to 120-150 days) from banks.
In addition, the slowdown in sales will mean increased finished stock. The situation could worsen if the Chinese shutdown sustains till April, leading to higher inventory in the industry.
In recent years, banks’ lending to the gems and jewellery sector was cautious following corporate governance and related concerns. Restrictions were placed on sectoral exposure in the light of past and recent defaults besides weak perception over transparency-related issues. In this background, the coronavirus-related blow will continue to restrict lending to the sector over next few months.