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June 2010
Executive summary 1
Background 2
Industry risk parameters 3
Demand-supply 3
Government policies 3
Input-related risk 3
Extent of competition 4
Financial risk 5
Annexure 6
Contents
Gems and Jewellery
Industry Risk Score
Introduction
Industry Risk Score (IRS) reflects the impact of industry variables on the cash flows and debt repayment ability ofthe companies in the industry over a 3-4 year period. Therisk score for an industry is arrived at by aggregating thescores assigned to the relevant parameters for the industry.
Industry parameters include variables such as demand-supply outlook, cost structures, competition and financialperformance. Parameters are selected based on the extent towhich they affect the debt servicing ability of the companiesoperating in the industry. Scores on these parameters reflectthe extent of positive/negative impact on cash flows, andthe degree of variability in cash flows of the companies.
The industry risk scores have been graded on a ten-pointscale, with 1 indicating high risk and 10 indicating low risk.
Risk score Risk factors
1 Extremely negative
2 Extremely negative
3 Negative
4 Marginally negative
5 Neutral
6 Marginally positive
7 Positive
8 Positive
9 Highly positive
10 Highly positive
BANK OF BARODA
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Industry Risk Scores
Industry Risk Scores (available on 135 industries) capture the influence of industry variables and the extent of
positive/negative impact on the cash flows and debt repayment ability of companies in an industry over a 3-4 year horizon. The
risk score for an industry is arrived at by aggregating the scores assigned to the relevant parameters like demand supplyoutlook, cost structures, competition and financial performance.
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CRISIL RESEARCH GEMS AND JEWELLERY 1 JUNE 2010
Executive summary
IndustryIndia's gems and jewellery sector can be classified into gemstones, jewellery and pearls based on
characteristics, manufacturing processes and position in the value chain. Gemstones include diamonds,
precious, semi-precious and synthetic coloured stones while jewellery consists of plain gold, studded, silver
and costume jewellery.
The share of cut and polished diamonds in gems and jewellery exports has been declining steadily over the
years; their share has fallen from 71 per cent of total exports in 2004-05 to 62 per cent of total exports in 2009-
10. However, diamonds remain the main constituent of exports.
India leads in cutting and polishing diamonds and accounts for around 55 per cent of the global polished
diamonds market in terms of value, 80 per cent in terms of carats and 92 per cent in terms of number of
pieces (cut and polished). India mainly exports to the US, Hong Kong, Belgium and UAE, who account for 75-
80 per cent of total exports.
The diamond polishing industry is highly fragmented and largely present in the unorganised sector. The
industry is concentrated in the Surat and Navsari regions of Gujarat. Other major diamond manufacturing
centres across the world are Israel, Belgium and New York. Apart from these, cutting and polishing are also
done in South Africa, Botswana, Russia, China, Sri Lanka, Thailand, Vietnam and Mauritius.
Parameter Weightage Score
Gems and jewellery - Industry risk score 3.2
Industry characteristics 85 3.5
Demand-supply gap 30 3.0
Government policy 15 7.0
Input-related risk 40 2.0
Extent of competition 15 5.0
Industry financials 15 1.3
Operating margin of industry 35 1.9
RoCE of industry 65 1.0
Source: CRISIL Research
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JUNE 2010 2 CRISIL RESEARCH GEMS AND JEWELLERY
Background
Gems and jewellery exports grew by 16 per cent to $28.4 billion in financial year 2009-10 from $24.5 billion in2008-09. The growth in exports occurred due to a revival in global demand post the global economic crisis
and large consignments of recycled diamonds entering the market (re-cutting and re-polishing).
Low labour costs and availability of skilled labour has led India to become the global leader in diamond
cutting and polishing business. China, Russia and South Africa are its main competitors.
The industry depends on import of rough diamonds and gold; raw materials account for approximately 90 per
cent of net sales. Margins of players are, therefore, sensitive to prices of raw materials. As a result of
dependence on exports, the industry is also very sensitive to fluctuations in the exchange rate; an appreciatingdollar has a significant negative impact on player margins.
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CRISIL RESEARCH GEMS AND JEWELLERY 3 JUNE 2010
Industry risk parameters
Demand-supply
Gems and jewellery exports have grown at a CAGR of 12.6 per cent over the past 5 years (2004-05 to 2009-10,
with the cut and polished diamonds and the gold jewellery segment growing at 9 per cent and 20 per cent,
respectively. The share of cut and polished diamonds in total exports is decreasing, while that of gold
jewellery has been increasing.
Imports of rough diamond increased in terms of value by 13 per cent to $9 billion in 2009-10 from $7.9 billion
in 2008-09. However, diamond imports in value terms are still below 2007-08 levels of $9.8 billion. During the
same period, import of gold bars increased by 70 per cent in terms of value to $6.9 billion in from $4.1 billion
in 2008-09.
Gems and jewellery exports have increased by 16 per cent y-o-y in dollar terms to $28.4 billion in 2009-10.
This growth was driven by a revival in global demand in line with improving macroeconomic conditions post
the economic crisis. In addition, a large number of used diamonds which were sold during the global
recession were imported and recycled, the majority of these used diamonds emerged from the US market.
Government policies
As a part of the Foreign Trade Policy for the period 2009-14, a number of incentives have been announced for
the sector:Duty drawback on gems and jewellery exports have been allowed
Value limits of personal carriage have been increased to US$ 5 million from US$ 2 million in case of
participation in overseas exhibitions.
The value limit in case of personal carriage, as samples, for export promotion tours, has been increased to US$
1 million from US$ 0.1 million.
Fiscal stimulus package:
As a measure aimed at the revival of the economy from the global economic downturn, the government
announced a stimulus package on December 7, 2008. Some of the measures announced in the package for thegems and jewellery sector include:
Increasing the post shipment rupee export credit period from 90 days to 180 days and pre-shipment rupee
export credit period from 180 days to 270 days
Providing an interest subvention of 2 per cent up to December 31, 2009 subject to a minimum rate of interest
of 7 per cent per annum
Input-related risk
The gems and jewellery industry relies heavily on imports, which makes it vulnerable to currency fluctuations.
The key raw materials are rough diamonds, recycled gold and gold bars, which account for more than 65 percent of total imports. Of these, rough diamonds and gold bars are imported, while recycled gold is obtained
from the domestic market. During 2009-10, the rupee has appreciated significantly against the dollar, resulting
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JUNE 2010 4 CRISIL RESEARCH GEMS AND JEWELLERY
in an improvement in the net margins of players, which stood at 2 per cent for the period April-December
2009-10 as compared to -1% for the same period in 2008-09. However, exchange rate fluctuations continue to
be one of the main risk factors for the industry.
Globally, only five companies - De Beers (South Africa), Alrosa (Russia), Argyle (Australia), Ekati (Canada) and
MIBA (Congo) mine diamonds and exercise control the supply of rough diamonds. Of these, De Beers is the
largest, with a market share of around 40 per cent in rough diamonds by value.
De Beers functions as a market regulator through the Central Selling Organisation (CSO) and its marketing
arm, Diamond Trading Company (DTC). In India, rough diamonds (smaller variety) are largely imported from
De Beers through DTC. The companys influence on diamond supply increases the risk substantially for
players in India. For example, in the beginning of 2008, DeBeers cut down the number of players it supplied
to in India and the availability of rough diamonds became a cause for concern.
Extent of competition
The domestic gems and jewellery industry is highly fragmented and largely dominated by the unorganised
sector as it is not capital intensive. Family jewellers account for 96 per cent of the overall domestic market.
Gujarat accounts for an estimated 80 per cent of the jewellery market, which is mostly concentrated in the
Ahmedabad, Bhavnagar, Bhuj, Navsari and Surat areas. However, it is difficult for new players to enter the
market and compete with existing players, as the industry is based on trust and there is limited supply of
rough diamonds.
India, China, Israel and Belgium lead the global diamond cutting and polishing industry. However, over the
long term, India`s position in international markets could be threatened with the entry of other Asian countries
such as China, Sri Lanka and Thailand, who have targeted the small diamonds market, where India is the
dominant player.
Though India remains highly competitive in cutting and polishing of diamonds, it lags behind in fields such as
jewellery design, which provide opportunities for earning higher margins.
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Financial risk
Gems and Jewellery: Financial parameters
Select financial parameters unit 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Aggregate turnover Rs mil lion 30,618 34,882 36,135 42,473 44,835 51,168 60,317 71,274 73,044
Operating profit margin Per cent 9.3 5.8 6.0 4.3 4.6 5.9 5.9 5.3 1.4
Return on capital employed Per cent 9.6 6.4 5.3 4.6 6.2 7.2 7.1 8.2 2.5
Net profit margin Per cent 4.2 -0.1 0.5 -0.7 1.1 1.2 3.7 0.6 -1.5
Return on equity Per cent 8.2 -0.2 1.1 -2.1 3.2 2.9 10.0 1.8 -4.8
Interest coverage ratio Times 1.90 1.09 1.12 0.96 1.52 1.57 2.52 1.58 0.57
Debt-equity ratio Times 0.81 0.87 1.05 1.18 1.26 1.20 1.27 1.55 1.77
Current ratio Times 4.36 4.41 4.64 2.95 5.16 2.73 2.62 2.90 2.72
Assets turnover ratio Times 7.96 8.60 8.09 8.93 7.77 9.58 10.50 10.36 10.02
Raw materials days Days 58 56 85 89 81 84 63 48 46
WIP holding days Days 11 12 9 1 1 1 1 1 0
Finished goods days Days 92 74 60 53 40 46 45 46 59Debtors days Days 150 136 145 166 165 167 174 165 185
Creditors days Days 38 28 23 70 59 80 97 97 114
No. of companies No 11 11 11 11 11 11 11 11 11
Source: CRISIL Research
Gems and Jewellery: Cost aggregates
Cost structure (% of net sales) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Raw material cost Per cent 83.3 86.9 86.1 87.6 88.5 87.1 86.6 88.2 89.2
Power and fuel cost Per cent 0.2 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Other operating costs Per cent 6.2 6.3 6.8 6.8 5.4 5.0 5.2 4.4 7.5
Employee cost Per cent 0.8 0.7 0.8 0.8 1.0 1.2 1.5 1.5 1.3
Selling cost Per cent 0.2 0.2 0.2 0.4 0.4 0.6 0.6 0.5 0.4
No. of companies No 11 11 11 11 11 11 11 11 11
Source: CRISIL Research
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JUNE 2010 6 CRISIL RESEARCH GEMS AND JEWELLERY
Annexure
Companies used for calculating sector aggregatesAsian Star Co. Ltd.
Classic Diamonds (India) Ltd.
Flawless Diamond (India) Ltd.
Goldiam International Ltd.
Parekh Platinum Ltd.
Shantivijay Jewels Ltd.
Shrenuj & Co. Ltd.
Su-Raj Diamonds & Jewellery Ltd.
Suashish Diamonds Ltd.
Vaibhav Gems Ltd.
Zodiac-Jrd-Mkj Ltd.
Note:-
The total sales of the above industries is estimated to be
60 percent in 2006-07 based on Sales value.
Gems and Jewellery - Sector Aggregate - Interim results
Jan-Mar % of Jan-Mar % of Apr-Mar % of Apr-Mar % of
(Figures in Rs. Million) 2010 net 2009 net 2010 net 2009 net
sales sales sales sales
Net sales 23,884.5 100% 16,428.7 100% 82,230.1 100% 69,325.3 100%
Total Operating exp 22,802.2 95% 15,888.9 97% 78,408.2 95% 67,047.6 97%
Raw materials, stores, spares & 17,602.0 74% 13,649.2 83% 64,335.2 78% 60,288.4 87%
purchase of finished goods
Purchase of finished goods 2,888.0 12% 1,898.5 12% 9,693.3 12% 5,571.4 8%
Change in stock 1,505.0 6% -607.0 -4% 1,410.2 2% -3,688.4 -5%
Salaries and wages 185.8 1% 163.0 1% 719.4 1% 865.8 1%
Other expenses 621.4 3% 785.2 5% 2,250.1 3% 4,010.4 6%
OPBDIT 1,082.3 5% 539.8 3% 3,821.9 5% 2,277.7 3%
Depreciation 80.3 0% 96.5 1% 322.2 0% 375.2 1%
OPBIT 1,002.0 4% 443.3 3% 3,499.7 4% 1,902.5 3%
Interest 346.5 1% 569.0 3% 1,808.3 2% 1,834.8 3%
OPBT 655.5 3% -125.7 -1% 1,691.4 2% 67.7 0%
Other income 37.4 0% 87.8 1% 167.9 0% 681.8 1%
Non-Op Income -4.6 0% -195.0 -1% 610.8 1% -624.6 -1%Extra Income/Exp 300.3 1% -1,533.3 -9% 310.0 0% -2,397.5 -3%
PBT 988.6 4% -1,766.2 -11% 2,780.1 3% -2,272.6 -3%
Total tax 138.7 1% 82.9 1% 470.0 1% 220.7 0%
Current tax 139.5 1% 85.9 1% 406.9 0% 265.5 0%
Deferred tax -0.8 0% -4.6 0% 63.1 0% -54.2 0%
Fbt 0.0 0% 1.6 0% 0.0 0% 9.4 0%
Net profit 849.9 4% -1,849.1 -11% 2,310.1 3% -2,493.3 -4%
Nos. of companies 11 11 11 11
Companies included in interim sector aggregate
Asian Star Co. Ltd., Classic Diamonds (India) Ltd., Flawless Diamond (India) Ltd., Goldiam International Ltd.,
Parekh Platinum Ltd., Shantivijay Jewels Ltd., Shrenuj & Co. Ltd., Su-Raj Diamonds & Jewellery Ltd.,
Suashish Diamonds Ltd., Vaibhav Gems Ltd., Zodiac-Jrd-Mkj Ltd.
Source: CRISIL Research
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CRISIL RESEARCH GEMS AND JEWELLERY 7 JUNE 2010
Gems and Jewellery: Business risk evaluation
Risk entity name Weightages
Business risk 100
Operating efficiency 70
Access to cost-effective technology -
Capacity utilisation -
Availability of raw materials 40
Energy cost -
Raw material usage -
Management of price volatility 20
Product design and development 20
Adherence to environmental regulation -
R&D activities -
FCA/MDA approved plants -
Efficiency of beneficiation process -
Availability of skilled labourers 20
Hygienic processing facility -
Indigenisation level -
Integration of operations -
Multi-locational advantage -
Selling cost -
Employee attrition rate -
Vulnerability to event risk -
Bargaining power with suppliers -
Proximity to customers -
Market position 30
Brand equity -
Customisation of product -
Project-management skills -
Size-related pricing advantages -
Diversified markets 50
Replacement markets -
After-sales service -
Proximity to market -
Long-term contracts/assured offtake 20
Distribution set-up 10
Financial ability to withstand price competition -
Access to patents -
Consistency of quality 20
Product range -
Deficit region -
Value addition -
Consolidation of markets -
Support service facilities -
Other promotional ventures -
Source: CRISIL Research
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NOTES
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NOTES
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NOTES