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Gems + Jewellery – Negative in Medium Term – Fitch

March 20, 2009

The Indian gems & jewellery industry is going through a difficult phase on the back of softer demand from key markets. This has resulted in significant inventory build‐up and a major postponement/cancellation of orders across the sector, and in turn has impacted liquidity.

Inventory Pileup:
Lower demand was evident in Christmas orders from the US and Europe, although the decline started towards the beginning of H208. Several developed markets – including the US, the UK, Japan and EU, which are India’s major export destinations – are in recession, clearly resulting in poor retailer sales. The Indian domestic industry has mostly stopped fresh purchases of rough diamonds and cut back on ongoing production, and many diamond and jewellery units have closed down production for a period anywhere from 15‐40 days.

Good Quality Diamonds:
Access to good‐quality rough diamonds (roughs) remains a critical success factor for the sector. Companies with strong sourcing relationships with the Diamond Trading Corporation (DTC) and other large sources of roughs benefit from having access to better‐quality stones, especially in the current scenario of production cut‐backs from diamond mines.

The sector has also been affected by the volatility in the Indian rupee / US dollar exchange rate. Fitch believes that the smaller players are more impacted by the current downturn, which could lead to consolidation in the industry. Large players with a strong operating history and track record – along with high‐quality cutting/polishing operations and better liquidity – would likely be more resilient.

The sector will be under pressure in near to mid term. Larger players which are geographically diversified with conservative forex / liquidity management policy will likely overcome the crisis.

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