Indian Gems & Jewellery Industry: An ICRA Perspective

ICRA Limited
An Associate of Moodys Investor Services

Mumbai July 12, 2012

Presentation Flow
1 2 3 4 5 6 7 8 9 Indian Gems and Jewellery (G&J) Industry Structure & Overview Indian Cut and Polished Diamond (CPD) Industry Structure & Overview Indian CPD Industry Key Credit Risks & Mitigating Factors Indian CPD Industry Key Figures and Trends Indian Jewellery Industry Structure & Overview Indian Jewellery Industry Key Credit Risks & Mitigating Factors ICRAs Rating Category Profile ICRA Rated CPD Companies Key Financial Trends Key Credit Metrics for G&J industry

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

1. Indian G&J Industry: Structure & Overview

Structure & Overview G&J industry comprises of diamonds, precious and semi-precious stones, gold, silver, studded costume jewellery Mostly unorganized and employs around 3.5 million people G&J industry contributed around 14% of Indias total exports in FY12 Main 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 stones The total G&J industry exports were recorded at USD 42.8 billion in FY12 as compared to USD 42.9 billion in FY11; though in dollar terms there was a marginal drop of 0.36%, the exports marked an increase of 4.6% in rupee value CPD witnessed a decline of 16.3% with exports decreasing from USD 27.7 billion in FY11 to USD 23.2 billion in FY12 Gold jewellery exports registered an increase of 30% with exports growing from USD 12.7 billion in FY11 to USD 16.5 billion in FY12
Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

ICRA Limited
An Associate of Moodys Investor Services

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

Suppliers: De Beers / DTC (South Africa & Botswana), Alrosa (Russia), Rio Tinto (Australia), BHP Billiton (Canada); De Beers and Alrosa account for 70% of worlds annual production Rough Nature of Contracts: Long Term Contracts, Auctions and Spot Sales Procurement Pricing: Driven by supply and level of dealer speculation Skilled Manpower: Focus on Asia, primarily India and China Latest Machinery: Rough Planners and Laser Cutting Machines Cutting and Systems and Processes: IT back-up to track the entire business process Polishing 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, Clarity and Carat

Polished Diamond Sales

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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 miners leading to diversification of supply side risks

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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 by incumbents

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

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 & clientwise Rising use of online sales mode
ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

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 and established track record of operations Professional management set-up in some companies Limited capital withdrawals Natural hedging mechanism
ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

4. Indian CPD Industry: Key Figures & Trends

Exports CPD Exports (USD billion) Growth (%) CPD Export volumes (in lakh carats) Growth (%) Average CPD Realisation (USD) Growth (%) Imports Rough Imports (USD billion) Growth (%) Rough Import volumes (in lakh carats) Growth (%) Average rough cost (USD) Growth (%) Source: GJEPC and ICRA Research
Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

FY10 15.8 485.9 324.3 FY10 8.8 1492.2 59.6 -

FY11 27.7 74.8% 647.4 33.2% 426.7 31.6% FY11 11.9 34.4% 1539.8 3.2% 77.9 30.6%

FY12 23.2 -16.3% 517.3 -20.1% 449.7 5.4% FY12 15.0 26.3% 1308.1 -15.1% 118.0 51.5%

ICRA Limited
An Associate of Moodys Investor Services

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

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

4,500 4,000

600

500 3,500 3,000 2,500 300 2,000 400

1,500
1,000

200

100 500 0 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 0

FY09

FY10

FY11

FY12

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

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

2,000 1,800 1,600 1,400 1,200

180 160 140 120 100

1,000 80 800 600 400 200 60 40 20

0
Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

FY09

FY10

FY11

FY12

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

5. Indian Jewellery Industry: Structure & Overview

Suppliers: MMTC, Banks and Bullion Traders Nature of contracts: Spot and Metal gold loan Pricing: Market driven Gold procurement Processing of Gold into Jewellery Type of Jewellery: Standard and Studded Process: Machine-made and Hand-made

Sales Channel: Online and Retail Pricing: Ruling gold prices plus making charges

Jewellery Sales to final customers

Jewellery Sales to Intermediaries

Key Customers: Wholesalers and Retailers Key Destinations: Domestic and Export markets

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

6. Indian Jewellery Industry: Key Credit Risks and Mitigating Factors

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 leads to high inventory carrying costs

Gold Procurement Stage Key Mitigants:

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

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

Manufacturing Stage Key Credit Risks:
Ability to manufacture varied designs in response to fast evolving market trends

Manufacturing Stage Key Mitigants:

Strong team of designers backed by latest machinery

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

Sales Stage
Key Credit Risks:
Highly unorganised competition High rentals industry leading to stiff

Sales Stage Key Mitigants:

Widening of product portfolio through innovative offerings; focus on branding and hallmarking Increasing presence through expansion of retail stores, majorly targeting tier 2 and 3 cities

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

7. ICRAs Rating Category Profile

Rating Category Profile: CPD + Jewellery entities

C D 1% 3% A 4%

B 7%

BBB 28%

ICRA Rates over 180 companies in the gems and jewellery sector with a healthy mix of CPD and jewellery companies Within the CPD space we rate both traders as well as manufacturers; on the jewellery front, we cover manufacturers, wholesalers as well as retailers In India, most of the leading jewellery retail companies are backward integrated into manufacturing which gives cost advantage in a highly competitive market At the wholesaler level, typically margins are extremely low at 1-3% at operating level At the retail level, margins at the operating level could be upwards of 12-15%

BB 58%

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

8. ICRA Rated CPD Companies Key Financial Trends

ICRA Rated CPD Companies - Trend of Revenues, OPM & NPM
6.0% 5.5% 5.0% 5.0% 147.2 4.0% 4.6% 4.3% 100.0 3.0% 92.0 92.4 80.0 60.0 2.0% 64.6 1.5% 1.5% 1.5% 20.0 0.5% 0.0% 0.0 1.9% 40.0 120.0 4.9% 160.0 140.0

84.5

1.0%

Operating Income (Rs. crore)

Operating Margin (%)

Net Margin (%)

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

ICRA Rated CPD Companies: Trend in OPBDITA/Interest and Finance Charges
2.5 2.0 1.5 1.0 0.5 0.0 FY07 FY08 FY09 FY10 FY11 1.8 1.7 1.5 2.0 2.0

OPBDITA / Interest and Finance Charges

ICRA Rated CPD Companies: Trend in NCA/Total Debt

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% FY07 FY08 FY09 FY10 FY11 2.4% NCA/Total Debt 5.0% 6.3% 6.6% 8.4%

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

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

ICRA Rated CPD Companies: Trend in Capital Structure and Interest Coverage
3.0 2.5 1.9 1.9

2.5
1.8 1.8 1.2

2.0
Gearing

2.0
1.5 1.0 0.5 0.0

1.8

1.5

1.6

PBIT / Interest and Finance Charges

FY07

FY08

FY09

FY10

FY11

ICRA Rated CPD Companies: Trend in Working Capital Intensity

60% 50% 40% 30% 20% 10% 0% FY07 FY08 FY09 FY10 FY11 NWC/OI 51%

45%

48%

43%

41%

ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

9. Key Credit Metrics for G&J Industry

Strengths Rising disposable income in India acting as a partial counterbalance to demand slump in key export markets Promoters experience and track record of business operations Gradual shift into higher caratage diamonds leading to increase in the margins Long association of Indian CPD manufacturers with DTC and other miners as sightholders Forward integration through foray in jewellery retail; scaling up of retail business remains a challenge Challenges Current demand slowdown in the largest export markets US and EU Supply-side pressures due to rising rough prices; high gold prices could lead to curb in demand of gold jewellery Inherently low margins; significant competition and low entry barriers High working capital intensity Adverse capital structure and modest coverage indicators Business constitution as partnership; risk of capital withdrawals
ICRA Limited
An Associate of Moodys Investor Services

Indian Gems and Jewellery Industry: An ICRA Perspective Mumbai - July 12, 2012

Thank You

Indian Gems and Jewellery Industry: An ICRA Perspective

21