G&J Industry - An ICRA Perspective - July 2012

7/31/2019 G&J Industry - An ICRA Perspective - July 2012

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Indian Gems & Jewellery Industry: An ICRA Perspective

Mumbai July 12, 2012ICRA Limited An Associate of Moodys Investor Services


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Presentation Flow

Indian Gems and Jewellery Industry: An ICRA PerspectiveMumbai - July 12, 2012ICRA Limited

An Associate of Moodys Investor Services

1 Indian Gems and Jewellery (G&J) Industry Structure & Overview

2 Indian Cut and Polished Diamond (CPD) Industry Structure & Overview

3 Indian CPD Industry Key Credit Risks & Mitigating Factors

4 Indian CPD Industry Key Figures and Trends

5 Indian Jewellery Industry Structure & Overview

6 Indian Jewellery Industry Key Credit Risks & Mitigating Factors

9 Key Credit Metrics for G&J industry

8 ICRA Rated CPD Companies Key Financial Trends

7 ICRAs Rating Category Profile


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1. Indian G&J Industry: Structure & OverviewStructure & Overview

G&J industry comprises of diamonds, precious and semi-precious stones,gold, silver, studded costume jewelleryMostly unorganized and employs around 3.5 million peopleG&J industry contributed around 14% of Indias total exports in FY12Main component of Indias G&J exports is cut and polished diamonds (CPDs);contribute around 70% of the countrys G&J exports

Jewellery contributes approximately 20-25%; balance from precious stonesThe total G&J industry exports were recorded at USD 42.8 billion in FY12 ascompared to USD 42.9 billion in FY11; though in dollar terms there was amarginal drop of 0.36%, the exports marked an increase of 4.6% in rupeevalue

CPD witnessed a decline of 16.3% with exports decreasing from USD 27.7billion in FY11 to USD 23.2 billion in FY12Gold jewellery exports registered an increase of 30% with exports growingfrom USD 12.7 billion in FY11 to USD 16.5 billion in FY12




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2. Indian CPD Industry: Structure & Overview (Contd )



RoughProcurement

Suppliers: De Beers / DTC (South Africa & Botswana), Alrosa (Russia), RioTinto (Australia), BHP Billiton (Canada); De Beers and Alrosa account for 70%of worlds annual production

Nature of Contracts: Long Term Contracts, Auctions and Spot Sales Pricing: Driven by supply and level of dealer speculation

Cutting andPolishing

Skilled Manpower: Focus on Asia, primarily India and China Latest Machinery: Rough Planners and Laser Cutting Machines Systems and Processes: IT back-up to track the entire business process

PolishedDiamond

Sales

Key Customers: CPD Traders, Jewellery Manufacturers, Retail Chains Key Destinations: US, Israel, Belgium, Hong Kong, EU, UAE and India

Sales Channels: Direct Sales, Online Sales, Marketing Associates Pricing: Driven by consumer demand as well as four Cs - Cut, Color, Clarityand Carat


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3. Indian CPD Industry: Key Credit Risks and Mitigating Factors



Rough Procurement Stage

Key Credit Risks: Access to quality and consistent

rough supply High bargaining power of

suppliers

Rough Procurement Stage

Key Mitigants: Reduced dominance of DTC with emergence

of alternative suppliers Sightholder Status (esp. supplier of choice)

with DTC; tie-ups with multiple minersleading to diversification of supply side risks


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3. Indian CPD Industry: Key Credit Risks .(Contd)



Cutting and Polishing Stage

Key Credit Risks: Low technology absorption

Cutting and Polishing Stage

Key Mitigants:

Increasing use of latest technology byincumbents


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Polished Sales Stage

Key Credit Risks: Demand and Pricing Stiff Competitive Pressures Geographic Concentration Client Concentration Low debtor and inventory turnover

Polished Sales Stage

Key Mitigants:

Responsiveness to the market conditions Product diversification with focus on value based

manufacturing Diversification of revenues - geography-wise & client-

wise Rising use of online sales mode


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Others

Key Credit Risks: Lack of professional management set-up Business constitution as a partnership; risk of

capital withdrawals Revenues and profitability susceptible to

adverse movements in foreign exchange rates

Others

Key Mitigants:

Long experience of promoters andestablished track record of operations

Professional management set-up in somecompanies

Limited capital withdrawals Natural hedging mechanism


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4. Indian CPD Industry: Key Figures & Trends



Exports FY10 FY11 FY12

CPD Exports (USD billion) 15.8 27.7 23.2

Growth (%) - 74.8% -16.3%

CPD Export volumes (in lakh carats) 485.9 647.4 517.3

Growth (%) - 33.2% -20.1%

Average CPD Realisation (USD) 324.3 426.7 449.7

Growth (%) - 31.6% 5.4%

Imports FY10 FY11 FY12

Rough Imports (USD billion) 8.8 11.9 15.0

Growth (%) - 34.4% 26.3%

Rough Import volumes (in lakh carats) 1492.2 1539.8 1308.1

Growth (%) - 3.2% -15.1%

Average rough cost (USD) 59.6 77.9 118.0

Growth (%) - 30.6% 51.5%

Source: GJEPC and ICRA Research


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4. Indian CPD Industry: Key Figures & Trends (contd)



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Exports US$ million LHS Avg. realisation US$ RHS Linear (Avg. realisation US$ RHS)

FY09 FY10 FY11 FY12


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4. Indian CPD Industry: Key Figures & Trends (contd)



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Imports US$ million LHS Avg. cost US$ RHS Linear (Avg. cost US$ RHS)

FY09 FY11FY10 FY12


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5. Indian Jewellery Industry: Structure & Overview

Indian Gems and Jewellery Industry: An ICRA PerspectiveMumbai - July 12, 2012ICRA Limited An Associate of Moodys Investor Services

Key Customers:

Wholesalers andRetailers Key Destinations:

Domestic and Exportmarkets

Sales Channel:

Online and Retail Pricing: Ruling gold

prices plus makingcharges

Type of Jewellery: Standard and Studded

Process: Machine-madeand Hand-made

Suppliers: MMTC, Banksand Bullion Traders

Nature of contracts: Spot and Metal gold loan

Pricing: Market driven

Goldprocurement

Processing of Gold intoJewellery

Jewellery Salesto

Intermediaries

Jewellery Salesto final

customers


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6. Indian Jewellery Industry: Key Credit Risks and MitigatingFactors


Gold Procurement Stage

Key Credit Risks: High volatility in gold prices Adverse foreign exchange fluctuations Major raw material requirements need to be

imported; stocking of huge quantities of gold leadsto high inventory carrying costs

Gold Procurement Stage

Key Mitigants:

Back-to-back contracts Hedging against exchange risks Flexible manufacturing process


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6. Indian Jewellery Industry: Key Credit Risks and MitigatingFactors .(Contd)


Manufacturing StageKey Credit Risks:

Ability to manufacture varied designs in response tofast evolving market trends

Manufacturing Stage

Key Mitigants:

Strong team of designers backed by latestmachinery


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6. Indian Jewellery Industry: Key Credit Risks and MitigatingFactors .(Contd)


Sales StageKey Credit Risks: Highly unorganised industry leading to stiff

competition High rentals

Sales Stage

Key Mitigants:

Widening of product portfolio through innovativeofferings; focus on branding and hallmarking Increasing presence through expansion of retail stores,

majorly targeting tier 2 and 3 cities


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7. ICRAs Rating Category Profile


ICRA Rates over 180 companies in the gems and jewellery sector with a healthy mix of CPD and

jewellery companiesWithin the CPD space we rate both traders as well asmanufacturers; on the jewellery front, we covermanufacturers, wholesalers as well as retailersIn India, most of the leading jewellery retail companiesare backward integrated into manufacturing whichgives cost advantage in a highly competitive market

At the wholesaler level, typically margins are extremelylow at 1-3% at operating levelAt the retail level, margins at the operating level couldbe upwards of 12-15%

A4% BBB

28%

BB58%

B7%

C1%

D3%

Rating Category Profile:

CPD + Jewellery entities


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8. ICRA Rated CPD Companies Key Financial Trends


64.6

84.592.0

92.4

147.2

5.5%5.0% 4.9%

4.6% 4.3%

1.5% 1.5%

0.5%

1.5%

1.9%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Operating Income (Rs. crore) Operating Margin (%) Net Margin (%)

ICRA Rated CPD Companies - Trend of Revenues, OPM & NPM


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8. ICRA Rated CPD Companies Key Financial Trends .(contd)


1.8

1.71.5

2.0 2.0

0.0

0.5

1.0

1.5

2.0

2.5

FY07 FY08 FY09 FY10 FY11

ICRA Rated CPD Companies: Trend in OPBDITA/Interest andFinance Charges

OPBDITA / Interest andFinance Charges

5.0%6.3%

2.4%

6.6%

8.4%

0.0%

1.0%

2.0%

3.0%4.0%

5.0%

6.0%7.0%

8.0%

9.0%


ICRA Rated CPD Companies: Trend in NCA/Total Debt

NCA/Total Debt


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8. ICRA Rated CPD Companies Key Financial Trends .(contd)


1.9 1.8 1.9

1.5 1.61.8 1.8

1.2

2.02.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


ICRA Rated CPD Companies: Trend in Capital Structure andInterest Coverage

Gearing

PBIT / Interest andFinance Charges

51%45% 48%

43% 41%

0%

10%

20%

30%

40%

50%

60%


ICRA Rated CPD Companies: Trend in Working CapitalIntensity

NWC/OI


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