In 5 months of FY2024, CPD exports witnessed a sharp YoY decline of 31%, led by a decline in both export volumes and polished diamond prices. While some sequential improvement in volumes is expected in the coming months, driven by the onset of the festive season, overall exports are still expected to contract by 10% YoY in the second half of the fiscal. The rating agency has revised the sector outlook to negative from stable.
Sakshi Suneja, Vice President & Sector Head, ICRA said in a statement: “The export contraction is primarily being driven by weak underlying demand conditions in key consuming nations like the US and Europe due to the inflationary pressures, leading to a shift in spending away from diamonds. Demand from China, which accounts for 10-15% of the global demand, has also not picked up meaningfully so far. In addition, competition from lab-grown diamonds, which are priced at a significant discount to natural diamonds, also accentuated the dip in volumes,
particularly for the large-sized diamonds in the range of one to three carats. The share of lab-grown diamonds within India’s total CPD exports continues to rise.”
The prices of rough diamonds remain elevated in Year to Date FY2024, with current prices hovering around the 15-year median level, despite some softening seen in the recent months. These prices had soared in the last two years, following limited supply from mining companies and robust revival in demand, post the pandemic. However, despite subsequent softening in demand, rough prices remained high due to limited availability from Russia in the market, following the US sanctions on Alrosa PJSC – the Russia-owned diamond mining entity, which supplies 30% of the rough diamonds globally.
With intensified sanctions on Russia and no major ramp-up in output of other mining entities, rough prices are expected to remain elevated. On the other hand, the prices of polished diamonds continue to be under pressure, with current prices being 15-20% below the 15-year median level. Coupled with demand pressures and limited ability to pass on the prices, this will shave off 40 bps of the OPM of diamond entities to 5.0% in FY2024. “Profitability pressures will result in moderation in the credit metrics of CPD players in FY2024. Faced with lower demand, the inventory levels are also expected to increase to an extent, while remaining lower than the pre-pandemic levels.
The CPD players have been conscious in managing their working capital cycle to control their dependence on bank debt. ICRA’s channel check suggests that players are not stockpiling roughs amidst subdued offtake of polished diamonds. Some relaxations have also been provided by miners in the form of deferment of part of the purchases to the next year. Additionally, recovery from customers has been timely so far. These factors would keep working capital borrowings of the industry under check,” Suneja added, commenting on the credit profile of the CPD entities.
Consequently, ICRA expects the interest cover of CPD entities in its sample set to moderate in the range of 3.5-4.0 times in FY2024 (vis-à-vis 4.5 times in FY2023 and 6.7 times in FY2022).
