Drop in cut and polished diamond exports is expected in FY23

ICRA Ratings anticipates that the moderation in demand will cause India's exports of cut and polished diamonds to taper by 8–10% to $22–22.5 billion in FY2023. In the first five months of FY2023, cut and polished diamonds exports have already decreased on yearly basis by 5%, driven by a 20% decrease in export volumes, which has been partially offset by high YoY polished prices since January 2022. This, along with the stable rough prices, is anticipated to cause Indian diamantaires' operating profit margins to decrease by up to 100 basis points from FY2022 levels to 4.5% in FY2023.

India exported cut and polished diamonds worth $ 24.3 billion in FY2022, reaching a decade-high level, driven by pent-up demand and significant stimulus measures in important consumer nations like the US, and helped in part by the pandemic's restrictions on discretionary spending. Since then, demand has decreased due to the opening of new spending opportunities and constraints related to COVID-19 in some areas of China, which accounts for 10% of global demand.

The near-term demand outlook for polished diamonds remains subdued amid the inflationary pressures and the unwinding of surplus liquidity in key consumption regions of the US and Europe. While a slight increase in volume is anticipated in the upcoming months due to the start of the holiday season, overall export volumes are anticipated to be 13–15% lower in H2 FY2023. The polished diamond prices are also anticipated to remain range-bound due to a moderation in demand, resulting in an 8–10% YoY decrease in cut and polished diamond exports (in value terms) in FY2023.

Rough diamond prices increased by 23% in CY2021, as a result of mining companies' limited supply and a strong recovery in demand after the pandemic. Due to the limited supply of Russian roughs on the market as a result of US sanctions against Alrosa PJSC, a Russian-owned diamond mining company that produces 30% of the world's rough diamonds, rough prices have remained high in YTD FY2023. Prices for polished diamonds are unlikely to fully catch up to those for rough diamonds given the weak demand. As a result, Indian cut and polished diamond players' operating profit margins in FY2023 would drop by up to 100 basis points or 4.5%.

Cut and Polished Diamond players are consciously controlling their working capital cycle to limit their dependence on bank debt. Due to the limited supply of rough diamonds, even though the inventory levels of Cut and Polished Diamond entities may rise in FY2023 as a result of a slowing in demand, they will still be lower than they were before the pandemic. Additionally, customer repayment has so far been prompt. These elements would limit working capital borrowings, which would support their credit histories.

ICRA anticipates that the interest coverage of Cut and Polished diamonds entities in its sample set will remain between 3.5 and 4.0 times in FY2023 (compared to 5.7 times in FY2022 and 2.8 times in FY2020) and that the ratio of total outside liabilities to tangible net worth will be between 1 and 1.2 times as of March 2023 (as opposed to 1.4 times as of March 2022 and 1.2 times as of March 2020).