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India Gems & Jewellery outlook 2010 - Glimmers of hope

today Feb 8, 2010
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Feb 5 - Fitch Ratings said, in a just published Special Report, that the outlook for India's gems & jewellery sector is negative to stable, with a slow improvement in liquidity and credit profiles for many issuers. This is primarily a reflection of the slow recovery in domestic and international demand, and the relatively low currency volatility, which leads to better realisation by the industry operators. India-focused players, such as BC Sen & Company Limited, are likely to show stable credit profiles, driven by correspondingly stable demand growth in the Indian market.

Fitch expects a significant recovery only towards mid-2010 for diamond polishers who are export-focused, whilst a recovery for export-oriented gold jewellery manufacturers is likely to take longer - in line with the generally expected economic recovery in the respective markets. The large inventory and receivables built-up during the downturn are also likely to ease, with many exporters having already liquidated a portion of their inventory, and an improvement in the collection periods (both of which had ballooned during the downturn). Fitch notes that performance remains contingent upon a sustained economic recovery in these key markets, and remains exposed to a "double-dip" recession in these regions.

Jewellery exports have started to fall sharply from Q4CY09, primarily due to the impact of the credit crisis on the Middle Eastern markets. The value of jewellery exports declined by 22% during September-November 2009, yoy, despite higher gold prices and a favourable exchange rate, which implies an even sharper volume decline.

Diamond polishers began to show positive growth from Q3CY09, due to the slow recovery in retail demand from key markets like the US, the EU and Asia (including China). However, part of the growth was also due to the weaker Indian rupee against the US dollar.

The agency expects that larger players - those which are geographically diversified, with higher-value addition and a more conservative forex/liquidity management policy - will exhibit more stable credit profiles (such as Suashish Diamonds Limited (SUAD.BO: Quote, Profile, Research) (BBB(ind)/Negative/F2(ind)). These companies have also demonstrated their ability to manage liquidity during the downturn during 2008-2009. However, smaller players have been severely affected, with many shutting down their operations during the downturn, as they lacked the liquidity to weather to rise through the crisis.

Fitch believes that the bigger players will continue to drive the recovery in the short-to-medium-term, while the smaller players would only really be expected to grow over the longer term.

The government continues to provide a favourable stimulus to support the industry - including interest rebates, and the extension of credit periods and export duty benefits available to the sector. The interest rate benefit will continue until March 2010.

Diamond exports from India have recovered substantially with the onset of a gradual global economic recovery, although a part of this increase is due to the weaker Indian Rupee. The favourable exchange rate, coupled with higher demand and government incentives, has resulted in improving liquidity for most diamond processors and jewellery makers.

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