Credit quality of gems and jewellery sector improving: Crisil

The downward pressure on sales faced by gems and jewellery manufacturers in India since the onset of the global credit crisis in 2008 has begun to ease in the second half of 2009-10 (refers to financial year, 1 April to 31 March).

The demand for diamond jewellery from the US, which accounts for more than half of the global sales, has improved; export of polished diamonds (in volume terms) increased by 44 per cent between October 2009 and January 2010 (provisional numbers), compared with that in the corresponding period of the previous year (source: Gems and Jewellery Export Promotion Council).

The rebound in demand, which is also supported by restocking by retailers that were operating with minimal inventory in 2008-09, is sharper than CRISIL's earlier estimates. CRISIL believes that the increasing demand, and efficient capital utilisation by gems and jewellery players in India, will strengthen their balance sheets over the medium term.

The weak economic environment in the second half of 2008-09 (October 2008 to March 2009) had led to depressed global demand for gems and jewellery, resulting in a 20 per cent decline in prices of polished diamonds. During the same period, export volumes of polished diamonds dropped sharply, by 38 per cent (provisional numbers), compared with that in the corresponding period of the previous year (source: Gems and Jewellery Export Promotion Council).

In addition to the weak economic environment, maintenance of low inventory levels by retailers in anticipation of a further demand slowdown added to a sharp fall in exports. This led to large inventory holdings and stretched receivables, and, in turn, stressed liquidity for most players in the polished diamonds industry.

The players in the gems and jewellery industry responded to these pressures by dealing only with customers with track records of timely payment. Also, rather than offering long credit periods, many companies adopted the cash-on-delivery model.