Gems and Jewellery Update - CARE's Ratings
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October 11, 2018 I Industry Research
Gems and Jewellery
Overview
Update
The Gems and Jewellery industry is an important sector with a high
contribution to India’s merchandise exports and employment
Contact:
generation. It has however been impacted by a tough business
Madan Sabnavis
Chief Economist environment and tepid domestic demand during the first quarter
Madan.sabnavis@careratings.com of FY19.
+91-22- 6754 3489
In FY18, Indian gold demand met primarily through imports
increased due to jewellers’ restocking inventory and enhanced
Saurabh Bhalerao retail interest. However, for the first four months of FY19 a lower
Associate Director – Industry Research
Saurabh.bhalerao@careratings.com
than anticipated demand and a depreciating rupee have hindered
+91-22-6754 3519 imports.
Gold prices were volatile in FY18 and have been on a general
Mradul Mishra (Media Contact) downward trend and are anticipated to remain weak due to
mradul.mishra@careratings.com factors such as trade disputes, strong US dollar and a hike in the
+91-22-6754 3515
interest rates by the US Federal Reserve.
In CY17, global diamond jewellery consumer demand reached
$83bn from $62 bn in CY10, growing at a CAGR of 4% driven by
sustained growth in the US and increased demand in China
For the first four months of FY19, overall exports stood at $10.6
bn, a decline of 4% compared with $11.1 bn during the same
period last year. The growth in cut and polished diamonds, and
gold jewellery was suppressed by the drop in silver jewellery and
gold medallions exports which negatively affected overall growth.
For the Apr –Jul FY19 period, overall imports witnessed a decline
of 4% to $10.3bn. UAE, US, and Hong Kong continue to be the
biggest trading partners of the Indian gems and jewellery sector.
As a part of measures to control the current account deficit, the
government increased the basic customs duty of certain items
such as cut & polished diamonds and synthetic diamonds, but has
not imposed any additional duty on gold.
Credit exposure to the sector is depressed especially to the
diamond segment. However, according to market participants;
credit availability has eased for only the higher rated jewellery
players.
Disclaimer: This report is prepared by CARE Ratings Ltd.
CARE Ratings has taken utmost care to ensure accuracy and
objectivity while developing this report based on
information available in public domain. However, neither
the accuracy nor completeness of information contained in
this report is guaranteed. CARE Ratings is not responsible
for any errors or omissions in analysis/inferences/views or
for results obtained from the use of information contained
in this report and especially states that CARE Ratings has no
financial liability whatsoever to the user of this reportIndustry Research I Gems and Jewellery Update
Gold
Chart 1: Global Gold demand Chart 2: Domestic Gold demand
800 1,400 250 300
700 1,200
200 250
600
1,000
200
500 150
800
400 150
600 100
300 100
400
200 50 50
100 200
0 0
0 0
Q1'14
Q2'14
Q3'14
Q4'14
Q1'15
Q2'15
Q3'15
Q4'15
Q1'16
Q2'16
Q3'16
Q4'16
Q1'17
Q2'17
Q3'17
Q4'17
Q1'18
Q2'18
Q1'15
Q1'14
Q2'14
Q3'14
Q4'14
Q2'15
Q3'15
Q4'15
Q1'16
Q2'16
Q3'16
Q4'16
Q1'17
Q2'17
Q3'17
Q4'17
Q1'18
Q2'18
Jewellery Demand Bar and coin demand Consumer demand
Jewellery Demand Bar and coin demand Total demand
Source: CMIE, World Gold Council
In FY18, gold imports reached $33.7bn, an increase of over 20% compared with FY17. According to RBI, gold imports
reached 955.2 tonnes as jewellers’ replenished inventory amidst a turnaround in retail demand after demonetisation in the
preceding year. For the first four months of FY19, gold imports fell to 334.4 tonnes compared with 380 tonnes in the
preceding financial year. Lower demand and a depreciating rupee have affected imports. However, gold demand is
anticipated to increase due to an anticipated improvement in rural incomes buying power and the arrival of the primary
festival season (Diwali and Dussehra) and the wedding season. Additionally, RBI announced the purchase of 2.5 tonnes of
gold in March, following a smaller purchase of 0.3 tonnes in December 2017. These increases in gold reserves are the first
since November 2009, when the RBI purchased 200 tonnes from the IMF.
Gold Prices
Chart 3: Average Monthly Gold Price: Domestic and International
32,000 1,400
31,000 1,300
30,000 1,200
29,000 1,100
28,000 1,000
27,000 900
26,000 800
25,000 700
24,000 600
Dec-13
Mar-14
Dec-14
Mar-15
Dec-15
Mar-16
Dec-16
Mar-17
Dec-17
Mar-18
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Domestic Price in Rs per 10 gm (LHS) International $ per troy ounce (RHS)
Source: CMIE, World Gold Council
Gold prices have remained volatile in FY18 and have moved in a narrow band (up 2.5% and down 1.5%), with a high of
$1,358.46 and a low of $1,212.46. Gold prices have been falling in FY19 both internationally and domestically, (in spite of a
falling rupee). Gold has dropped primarily on account of the trade dispute between US and China. Further, this dispute has
2Industry Research I Gems and Jewellery Update
also created a safe haven demand of the dollar which has also contributed to the fall in gold prices. A seasonal drop in
demand from local jewellers and retailers has also increased the pressure on gold prices. Additionally, a stronger dollar has
also driven the divergence between US$ gold price and domestic price.
In the short term, gold prices are expected to trend downwards as the US Federal Reserve has raised the benchmark rates
and has provided a guide for future increases. This has increased bond yields and generally strengthened the dollar
demand and depressed gold prices. In the medium term, geo-political tensions in the Middle East, trade disputes with
China, increasing US government debt and rising inflation pressures, volatility and lower equity markets could support gold
prices. A weaker rupee, costlier imports, lower demand, GST issues and a preference for alternative investment avenues
such as the equity markets have continued to hamper domestic gold prices.
Progress of Sovereign Gold Bonds
Chart 4: Sovereign Gold Bolds (in Rs. Cr.)
4,000
3,470
3,500
3,000
2,500
2,000 1,873
1,500 1,319
1,000
500 203
-
FY16 FY17 FY18 FY19
Note: FY19 data till June 2018
Source: RBI
The current gold monetization scheme has had limited success, with only Rs 68.96 billion (23.5 tonnes) being raised since
its inception until June 30, 2018. This compares unfavourably with Turkey, which has been able to bring 3-4% of private
gold into circulation. To successfully implement the scheme, the government would have to incentivise banks to hold gold
deposits and offer domestic consumers a higher rate of interest and a certain leeway from tax scrutiny while depositing
gold in the banks.
3Industry Research I Gems and Jewellery Update
Global Diamond Jewellery
Chart 5: Global Diamond Jewellery Sales (in $ bn)
90 83
81 79 79
76 78
80
69
70
62
60
50
40
30
20
10
0
2010 2011 2012 2013 2014 2015 2016 2017
Source: Alrosa presentation
Global consumer demand for diamond jewellery reached $83bn in CY2017, growing at a CAGR of 4% from $62 bn in CY2010
driven by sustained growth in the US and increased demand in China. However demand for diamond jewellery in other
main markets such as India witnessed a decline. The CY2018 global outlook is positive primarily due to consumer sentiment
and a sustained marketing and brand building investment by the diamond companies. In India, inflation, higher interest
rates and a weakening rupee could negatively impact consumer demand. We expect only larger organised retailer chains to
grow at the expense of the smaller unorganised retailers.
Chart 6: Global Estimated Rough Diamond Sales (in $ bn)
18
16
16 15 15 15 15
14
14
12 12
12
10
8
6
4
2
0
2010 2011 2012 2013 2014 2015 2016 2017
Source: Alrosa presentation
In CY2017, the global rough diamond production increased by 14% to 164 million carats. Russia remained the largest
country both in carat as well as value terms. De Beers Group with a 34% share continued to remain the largest supplier of
rough diamonds, followed by ALROSA and Rio Tinto. According to De Beers, the total diamond production in CY2018 is
expected to reduce marginally as compared to CY2017.
4Industry Research I Gems and Jewellery Update
Trade
Chart 7: Gems and Jewellery Exports (in $ mn)
5,000 4,000
4,500 3,500
4,000
3,000
3,500
3,000 2,500
2,500 2,000
2,000 1,500
1,500
1,000
1,000
500 500
0 0
Cut & polished diamonds Gold jewellery Gold medallions & coins
Others Total Exports
Source: CMIE
FY18 exports stood at $32.7bn registering a drop of 7.9% over FY17. For the first five months of FY19, exports stood at
$13.2 bn, a decline of 0.9% compared with $13.3 bn during the same period last year.
Gross cut and polished diamonds exports reached $10.3bn in the Apr- Aug period of FY19 registering a growth of
11.5% over $9.2bn in the similar period of FY18. Gross gold jewellery exports also nearly doubled its growth to
$5.1bn in the Apr- Aug period of FY19 compared with FY18.
The substantial increase in exports above was offset as silver jewellery exports sharply reduced to $0.2bn,
compared with $2.0bn last year. Further, Gold medallion exports also paralleled the drop by reducing to $0.2bn
compared to $1.6bn in the Apr- Aug period of FY18. The drop can be primarily accounted by the government not
permitting the export of gold medallions and other articles above 22-carat purity to arrest round tripping.
Chart 8: YTDFY19 Diamond exports by country Chart 9: C&P Diamond exports
(In carats) (In Rs mn)
4.5 850
USA 4 800
Others
Others 10% 14% 3.5 750
22% 3 700
UAE USA
6% 34% 2.5 650
Hong Kong
2 600
26% Belgium
10% 1.5 550
UAE 1 500
22% 0.5 450
Belgium 0 400
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Dec-16
Dec-13
Dec-14
Dec-15
Dec-17
Sep-13
Jun-14
Jun-15
Sep-15
Jun-16
Jun-17
Jun-18
Sep-14
Sep-16
Sep-17
20% Hong Kong
36%
Quantity (mn carats) Realisation (USD/carat)
YTD: Apr- July
Source: CMIE
5Industry Research I Gems and Jewellery Update
In the first four months of FY19, the largest diamond export destination was Hong Kong with a 26% share by volume and
36% share by value. Also it is noticeable that USA which has a low volume share of 10% has a higher value share of 34%,
while UAE exhibits the reverse trend with a higher volume share of 22% and a lower value share of 6%. This can be
attributed to the USA receiving higher value stones and therefore better realisations and UAE offering better volumes.
Chart 10: YTDFY19 Gold Jewellery exports by country
(In kg) (In Rs mn)
Others
7%
Others Hong Kong
16% 6%
Hong Kong
4%
UK USA
5% 12%
UAE
53%
USA
22% UAE
75%
YTD: Apr- July
Source: CMIE
In the first four months of FY19, the largest gold jewellery export destination was UAE with a 53% share by volume and 75%
share by value. USA is the second largest destination by both volume and value.
Chart 11: Gems and Jewellery Imports (in $ mn)
4,000 4,000
3,500 3,500
3,000 3,000
2,500 2,500
2,000 2,000
1,500 1,500
1,000 1,000
500 500
0 0
Sep-16
Feb-17
Sep-17
Feb-18
Apr-16
May-16
Aug-16
Jan-17
Oct-16
Dec-16
Apr-17
May-17
Mar-17
Oct-17
Dec-17
Apr-18
May-18
Jun-16
Jan-18
Mar-18
Jul-16
Jun-17
Aug-17
Jun-18
Aug-18
Nov-16
Jul-17
Nov-17
Jul-18
Rough diamonds Cut & polished diamonds Gold bar Gold jewellery Others Total
Source: CMIE
6Industry Research I Gems and Jewellery Update
In FY18, imports reached $31.5bn and growth slowed to 9.7% compared with 18.6% in FY17. For the first five months of
FY19, overall gem and jewellery imports witnessed a decline of 4.5% to $11.9bn from $12.5 bn in first five months of FY18.
In FY18, rough diamonds imports increased by 10.6% to reach $18.9bn from $17bn in FY17. One reason for the increase has
been the anticipated price increase by international diamond companies. Imports of gold bar were up 34% to $5.7bn from
$4.2bn in FY17. On the other hand, import of cut & polished diamonds declined by 15.1% to reach $2.2bn in FY18 from
$2.6bn in FY17.
Chart 12: Rough Diamond Imports
25 160
140
20
120
15 100
80
10 60
40
5
20
0 0
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Mar-15
Mar-14
Mar-16
Mar-17
Mar-18
Rough diamonds (mn carats) USD/carat
Source: CMIE
Rough diamond imports for the Apr- Aug period of FY19 fell by 7.2% to reach $7.1bn from $7.7bn during the same period
last year. Rough diamond volumes also declined by 8.9% to 68.6 million carats from 75.3 million carats in same period last
year. Consequently, average per carat realisations improved from $102.2 last year to $104.2 for the Apr- Aug period of
FY19. Cut & polished diamonds also witnessed a steep fall from $1 bn in the Apr- Aug period of FY18 to $0.6 bn in the
current year. However, this sharp drop was mitigated by the significant increase in the import of gold bars from $1.3bn last
year to $3.6bn in the current year.
7Industry Research I Gems and Jewellery Update
Recent Developments
Increase in Import duty: As a part of the CAD reduction measures, the government increased the basic customs
duty of the items in the table below, but has not imposed any additional duty on gold.
Item Basic customs duty (%)
From To
Non industrial diamond (other than rough diamonds), i.e., cut and polished diamond 5 7.5
Diamonds-semi processed, half cut or broken 5 7.5
Lab grown diamonds 5 7.5
Cut and polished Coloured gemstone 5 7.5
Articles of jewellery and parts thereof, of precious metal or of metal clad with precious 15 20
metal
Articles of Goldsmith or silversmith wares and parts thereof of precious metal or of 15 20
metal clad with precious metal
Imports of cut and polished diamonds and gemstones although high in earlier years, has been generally on a
downtrend. Further, synthetic diamonds constitute a small portion of the industry. Consequently, there would not be a
material impact on the diamond portion of the industry. However, it should be noted that exporters of jewellery who
were importing cut and polished diamonds may witness cost escalation which they would not be able to pass fully on
their customers thereby impacting margins. Further, this tariff hike would not impact those importers who are sourcing
from countries which have an FTA with India.
Import of jewellery and finished products had increased significantly in FY18, however, this trend has not continued for
the first four months of FY19, which have witnessed a decrease in imports. Further, with a clear demarcation of duty
imposition on finished jewellery products, it is apparent that the government is promoting value added domestic
manufacturing. A few unique imported jewellery items may witness a marginal price increase bur demand reduction is
not anticipated as this small segment is not price-sensitive.
Other Developments
The Government of India is planning to set up a Common Facility Center (CFC) at Thrissur, Kerala.
West Bengal government has reportedly allotted land of approximately 25,000 sq ft in size for a gem and
jewellery park at Ankurhati, Domjur to Gem & Jewellery Export Promotion Council (GJEPC)
GJEPC has signed a MoU with MIDC for setting up a 25 acre Jewellery Park in Mumbai.
The Bureau of Indian Standards (BIS) has revised gold hallmarking standard. The hallmark would include a
BIS mark, purity in carat and fitness, unit’s identification and the jeweller’s identification mark.
Indian jewellery design and manufacturing firm Renaissance has acquired US based Jay Gems for about Rs
200 crore. The deal would allow Renaissance access to the Enchanted jewellery collection of the Disney
Fine Jewellery, which has an exclusive licensing agreement with Jay Gems.
Warburg Pincus-backed Kalyan Jewellers is planning to file draft papers for initial public offering (IPO) to
raise around Rs 2,500 crore
PN Gadgil has filed a DRHP to raise around Rs 500 crore
8Industry Research I Gems and Jewellery Update
Credit exposure
Share of gems & jewellery sector in the total credit exposure of banks to industries has been in the range of 2.5% to
3%. The share of exposure dipped in 2009 and 2010 post the global financial crisis in 2008. However post 2011 the
credit exposure of banks to the sector picked up; with y-o-y growth in bank credit exposure the sector continuing to be
higher than the y-o-y growth in overall bank credit to industries till FY14. In FY15 - FY17, the share of gems & jewellery
sector exhibited a dip. This was on the back of overall glut in the polished diamond market globally. At the end of
FY18, there was again an improvement in bank’s exposure to gems & jewellery sector, which was at Rs.727 billion as
against Rs.690 billion at the end of FY17. However, this improvement is only a move back to the FY16 level. In FY19,
due to Nirav Modi’s alleged financial irregularities, bank credit especially to the diamond segment has reduced and is
expected to remain depressed. However, there are reports that banks are currently lending to organized gold
jewellery companies who are expected to gain greater market share with implementation of GST.
Chart 13: Trend in Growth in Credit Exposure of Banks to Gems & Jewellery Sector vis-à-vis Other Industries:
35%
29%
30%
24% 25%
25% 23% 22%
21%
19%
20%
15% 14%
15% 14% 13%
11%
10%
6% 5%
5% 3% 3%
1% 1%
0%
-5% -2%
-5%
-10%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Y-o-Y Growth in Bank Credit to Gems & Jewellery Sector Y-o-Y Growth in Total Bank Credit to Industries
Source: RBI
Chart 14: Trend in Share of Gems & Jewellery Sector in Total Outstanding Bank Credit to Industries
3.6%
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
April 1, 2007
April 1, 2008
April 1, 2009
April 1, 2010
April 1, 2011
April 1, 2012
April 1, 2013
April 1, 2014
April 1, 2015
April 1, 2016
April 1, 2017
April 1, 2018
August 1, 2011
August 1, 2016
August 1, 2007
December 1, 2007
August 1, 2008
December 1, 2008
August 1, 2009
December 1, 2009
August 1, 2010
December 1, 2010
December 1, 2011
August 1, 2012
December 1, 2012
August 1, 2013
December 1, 2013
August 1, 2014
December 1, 2014
August 1, 2015
December 1, 2015
December 1, 2016
August 1, 2017
December 1, 2017
Source: RBI
9Industry Research I Gems and Jewellery Update
Financials
Chart 15: Margins Chart 16: Days Working Capital
12.0% 100 92
9.8% 9.8% 10.0% 90 86 84
10.0% 9.5%
9.1% 80
8.4% 73
8.0% 70 66
8.7%
60 56
6.0%
6.0% 5.7% 48
5.9% 50
5.5% 5.2%
4.0% 4.7% 40
4.6%
30
2.0%
20
0.0% 10
2012 2013 2014 2015 2016 2017 2018
-
EBITDA Margin PAT Margin 2012 2013 2014 2015 2016 2017 2018
Note: List of companies: Asian Star Co, Goldiam Internatl., Golkunda Diamonds, Kanani Industries, PC Jeweller, Pure Giftcarat, Renaissance Jewell,
Shantivijay Jewels, Thangamayil Jeweller, Titan Co, Tribhovandas Bhimji and Vaibhav Global
Source: Ace Equity
Net sales of the abovementioned 12 companies grew and margins expanded in FY18 due to an improvement in
product mix and higher sales of studded jewellery along with cost control. However, GST refunds and increasing
working capital requirements have tempered numbers to some extent. A relatively long operating cycle and working
capital intensive nature of business is an inherent characteristic of the G&J industry. However, the operating cycle
increased from 48 days at end-FY12 to 92 days at end-FY18 primarily on account of a higher collection period and
higher inventory. This affects liquidity and results in higher utilisation of bank credit.
Chart 17: MCR1 Movement for the Gems and Jewellery sector
1.3
1.23 1.24 The changes in credit rating of the rated entities
1.2 reflect improvement, stability or weakness in the
1.09 financial health of these entities. These changes are
1.1 1.14
1.07
captured in CARE Ratings’ Modified Credit Ratio
1
(MCR), and an increase in MCR denotes an increase in
0.9 0.94 upgrades vis-à-vis downgrades, whereas a decrease in
0.88 MCR shows the reverse. The MCR for Gems and
0.8
0.7
Jewellery segment witnessed a decline due to
weakening in credit quality and worsening of liquidity
0.6
FY12 FY13 FY14 FY15 FY16 FY17 FY18 position for companies operating in the diamond
segment of the Gems and Jewellery industry.
Source: CARE Ratings
1
CARE Ratings’ Modified Credit Ratio (MCR) is defined as the ratio of (upgrades and reaffirmations) to (downgrades and reaffirmations)
10Industry Research I Gems and Jewellery Update
Outlook
The overall domestic gems & jewellery demand is expected to remain tepid for FY19, although the second half is
expected to be better than the first half due to factors including 1) safe haven appeal of gold due to volatility in
equity markets, 2) decent rainfall, 3) several festivals and 4) the wedding season.
Branding would continue to gain significance. Share of national and regional organized jewellery retailers is
expected to grow.
CARE Ratings believes the pressure on the profit margins for cut & polished diamond players would continue, as
globally supply of rough diamonds is expected to continue to remain tight going ahead which could increase rough
diamond prices and slowing funding lines from banks.
11
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