ICRA, an Indian ratings and investor information agency that is in alliance with Moody’s Investor’s Service, has revised the outlook on the cut and polished diamond (CPD) industry in India to Negative. The change was in view of the near-term impact of the widespread shutdown of the economy in China and Hong Kong region on account of the Coronavirus outbreak.
The current situation is likely to further delay the demand recovery of the industry which was already reeling under the impact of trade and political tensions and was expecting some revival post the signing of Phase 1 of the US-China trade deal, a report from the agency said.
It noted that while China accounts for ~14% of polished diamond consumption, a larger proportion (~35%) of the exports from India are currently routed via Hong Kong.
Further, the agency pointed out that the shutdown has occurred during the busiest period for jewellery sales in China – the peak of the festive Lunar New Year extending from January 25 to February 08, 2020, which has compounded the challenge.
The report states that “like to like retail jewellery sales in the China/Hong Kong region may decline by as much 70% during the first quarter” and “apart from the direct impact on retail sales, the supply chain has also been disrupted with jewellery manufacturing factories operating at 20-30% capacity”.
An immediate outcome will be the impact on cash flow due to the stretch in working capital cycle envisaged on the back of delay in collections and inventory build-up, ICRA noted.
In the agency’s assessment, “As more bills become overdue during second half of current and next month and if the amount associated with such bills is significant then it could lead to a liquidity crunch for the companies who have availed post shipment credit against such bills.”
It also noted that the slowdown in sales is likely to result in increased inventory levels as replenishment by customers gets delayed.
Margins in the manufacturing sector are also likely to be hit, ICRA said. The slight improvement seen in Q3 FY2020 in what was already a difficult market environment may be nullified by the sales decline during Q4 FY2020 on account of the Coronavirus impact.
ICRA believes that “lower sales will not be enough to cover the fixed overhead costs”, while “a supply glut in the 30 cents to 1/ 1.5 carat category of polished diamonds meant for China/ Hong Kong region could lead to correction in polished prices and consequently lower gross margins”.
Finally, ICRA notes that “the Corona virus related impact shall continue to restrict (bank) lending to the sector over next few months”, but adds, “The extent of impact on Indian CPD companies is likely to vary depending upon their exposure to China/Hong Kong.”
Source: GJPEC 21-2-2020
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