The credit risk profiles of India's diamond and diamond jewellery players will remain stable over the medium term, on the back of steady demand expected in key markets, and improved prices of polished diamond in 2010-11, according to an analysis by CRISIL.

The players are also likely to maintain a prudent approach to working capital management, a measure they adopted to cope with the recent slowdown in the global economy. This outlook for the gems and jewellery industry is based on a CRISIL study of the credit risk profiles of the 142 players from the industry in its rated portfolio.

In the second half of 2009-10, India's gems and jewellery exports increased by 46 per cent over the corresponding period of the previous year, backed by buoyant demand and restocking by retailers.

Gems and jewellery exports exceeded USD28.0 billion in terms of value in 2009-10, up from USD24.4 billion for 2008-09. CRISIL believes that demand from the US market, which accounts for more than half of India's gems and jewellery exports, will be steady, backed by a stable economy, and will result in moderate buoyancy in exports by Indian players over the medium term. However, deterioration in recessionary conditions prevailing in the European Monetary Union (Eurozone), which accounts for around a fifth of the global demand for diamond jewellery, can impact the export of gems and jewellery from India.

Says Mr. Gurpreet Chhatwal, Director, CRISIL Ratings, In addition to an increase in actual consumption, restocking by retailers also drove a sharp turnaround in demand in the second half of 2009-10. Most retailers maintained minimal inventory during the second half of 2008-09 and the first half of 2009-10, expecting the slump in demand to continue. However, the trend was reversed in the second half of 2009-10, with demand increasing, prompting retailers to begin restocking of diamond jewellery. Adds Mr. Chhatwal, By now, most retailers have completed the process of restocking.

Demand growth will, therefore, now be driven largely by actual consumption. Export growth will, therefore, moderate from the high levels witnessed in the second half of 2009-10, and yet, remain healthy over the medium term.

With improvement in global demand, the prices of cut and polished diamonds rebounded in the second half of 2009-10 from the weak levels seen in the second half of 2008-09. However, the prices lag the increase in the prices set for rough diamonds by miners during the period. CRISIL believes that the prices of polished diamonds will remain firm over the medium term, with exporters passing on, to customers, increases in the costs of procuring rough diamond.

Says Mr. Subodh Rai, Head, CRISIL Ratings, Over the medium term, gems and jewellery players are expected to maintain the prudent working capital management practices they adopted during the recent slowdown in the economy. These cautious practices include restricting dealings to only customers with track record of timely payment, adoption of short credit periods, and maintaining leaner inventories. Players adhering to prudent working capital management policies are more likely than other players to maintain healthy liquidity, and thus, to benefit from the uptrend in demand, adds Mr. Rai.

India