This, along with continued unfavourable rough-polished price differential, is putting pressure on operating profit margins (OPM) of Indian diamantaires, the rating agency said in a report.
It expects OPMs of these players to have declined by 50 basis points to 5.5% in FY23 and by another 25-50 bps in FY24.
While this would result in a moderation in credit metrics of CPD players, controlled working capital cycles would keep the overall debt levels under check, it said.
“The exports of cut and polished diamonds from India are set to contract by 8-10% to $22 billion in FY2023, amid macroeconomic headwinds and tightening of surplus liquidity worldwide,” ICRA said.
It said firm prices of rough diamond due to “controlled and lower-than-pre-pandemic supply by mining companies” are keeping CPD players’ costs under pressure.
The demand pressures are more prominent in the large-sized diamonds as buyers downgrade to smaller sized diamonds and some shift to lab-grown diamonds due to overall inflationary pressures, it said.“Faced with lower demand, diamantaires’ ability to pass on these elevated raw material costs remains curtailed, which would adversely impact their operating profit margins,” the rating agency said.
It expects rough prices to remain firm in FY2024 as well, as no major ramp-up in mining output of rough diamonds is expected over the next two years.
The global demand slowdown, led by inflationary pressures and the recent banking crisis, are expected to exert pressure on revenues in FY2024 as well.
“While CPD entities maintained a strict control over the working capital cycle so far, which limited their dependence on working capital debt, their ability to do so going forward would remain critical from a credit perspective,” ICRA said.
Polished diamond prices softened throughout calendar 2022 amid a slowdown in demand, it said.