MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW The Global economy witnessed divergent trends among various economies across the globe. Growth in most economies of the world still remains protracted, recovery is subdued and prospects remain challenging. The year 2014 saw the world output maintained at 3.4 per cent, similar to 2013, according to World Economic Outlook released in April 2015 by the International Monetary Fund(IMF. According to the Global Economic Prospects published by the World Bank (WB in January 2015, the global real GDP grew marginally to 2.6 per cent in 2014, compared to 2.4 per cent in the brvious year. Overall, there is a glimmer of optimism in the air as global growth appears to be turning for the better. While there was a marked pickup in growth in the advanced economies, growth slowed down in the emerging markets and developing economies. However, despite this slowdown, emerging markets and developing economies still accounted for around seventy-five per cent of global growth in 2014. In the USA, there was a stronger than expected growth, driven by increase in consumption, which was in turn, driven by steady rise in job creation and low oil prices, particularly in the latter half of the year. According to IMF, the output of US increased to 2.4 per cent in 2014, compared to 2.2 per cent in 2013. The ongoing geo-political crisis in Ukraine and uncertainty over whether Greece would opt out of the EU was the key factors contributing to weakness in growth in Europe. However, there was a ray of optimism during the fourth quarter as low oil prices triggered higher consumption. For the two engines of growth in Asia, namely China and India, the year 2014 was a contrasting year : in China, growth slowed down to its lowest in the last twenty four year, while in India, the new government ushered in bold structural reforms. The Chinese economy grew at 7.4 per cent in 2014, its lowest since 1990, missing the government's target of 7.5 per cent. After three decades of double digit growth, this has been termed as a natural slowdown. India's economy is poised for recovery and may return to its high growth path. India's macro-economic environment has improved across various parameters compared to the brvious fiscal 2014, with low stable inflation, benign commodity prices, lower fiscal and current account deficit, higher foreign exchange reserves and a stable currency. As per revised methodology adopted by Central Statistical Organisation, India's GDP for 2014-15 grew at 7.3 per cent compared to 6.9 per cent in 2013-14. Also, this is the first time that India's GDP crossed US$ 2.1 trillion in absolute terms. The new government with strong political mandate has initiated reforms in core sectors like banking, insurance, infrastructure and defence. The monetary policy has been overhauled. The Reserve Bank of India has also changed its stance and has reduced repo rate by 0.50% in the last quarter. With more clarity in government policies, relaxation in various procedures and fast project clearances, there is a rejuvenated optimism among corporates and industrialists amid improved sentiments and confidence level among bankers and investors. INDUSTRY OVERVIEW Global Gems and Jewellery Industry The year 2014-15 was yet another challenging year for the global Gems and Jewellery Industry as it continued to be affected by the over-arching macro factors - economic and geopolitical. The industry has been facing liquidity crunch like never before. With increasing cases of default, banks worldwide have become more careful about lending to the industry. They have been forced to become stricter and more selective in extending credit. Many reputed banks have withdrawn/curtailed their exposure to the industry creating upheaval in the market, with far-reaching consequences. The USA continues to be a key market with largest market share. The past year was a record one for the US jewellery market, with the demand touching a record $78.08 billion. With continued improvement in the US economy, consumers are more confident and are willing to spend more on jewellery. Growth in Euro zone remained subdued with continued uncertainty, particularly due to crises in Ukraine and Greece. This had a huge impact on consumer sentiments. This was, to an extent, balanced out with growth in Asia-Pacific and the Middle East. India and China continue to be chief drivers of growth in the Asia-Pacific region with steady rise in demand in line with the growing incomes, particularly of the middle-class. Another factor driving demand in this region is the rapid growth in urban population that is increasingly being exposed to, and becoming aware of, variety of jewellery and latest trends in the market leading to an overall rise in spend. This trend is expected to continue in the near and mid-term. According to "Global Gems & Jewellery Market Forecast & Opportunities, 2019", The global Gems and Jewellery market is expected to grow at a CAGR of about 6 per cent during 2014-19. The Indian Gems and Jewellery Industry India has a rich history and legacy of gems and jewellery. Over centuries, the country has developed a special niche in diamond-cutting and polishing, with an expertise and skill pool stretch across centuries and generations. Today, the Gems and Jewellery industry is a critical part of the Indian economy with a contribution of 6-7 per cent to the national GDP. The industry also contributes significantly to the foreign exchange earnings of the country, besides being a key employment generator. According to Gems & Jewellery Export Promotion Council (GJEPC, Gems and Jewellery account for nearly 13 per cent of India's merchandise exports. The overall value of Gems and Jewellery exports for 2014-15 was US$ 39.89 billion against US$ 40.14 billion in the brvious year falling marginally by 0.6 per cent. However, in Rupee terms, exports rose by 0.4 per cent to Rs. 243,885 crores against Rs. 242,837 crores in the brvious year. This is a commendable performance, considering the challenging global economic environment. Cut and Polished Diamonds India enjoys unique advantages in this field owing to its long tradition and continued expertise. It is the largest centre for cutting and polishing diamonds in the world. Over the last few years, the industry has steadily moved up, building upon its capacities and capabilities. It has successfully made a transition from smaller cuts to specialised cuts. Today, it offers the unique advantage of cost effectiveness, assured quality, fine make and quick turn-around times. During the year 2014-15, exports of cut and polished diamonds fell by 5.46 per cent to US$ 23.16 billion compared to US$ 24.49 billion in the brvious year. In volume terms, 345.35 lakh carat were exported in FY2014 against 365.99 lakh carat in the brvious year, a decline of 5.64 per cent. Against this, the import of rough diamonds during the period April-March 2015 increased nominally by 0.15 per cent to US$ 16.74 billion compared to US$ 16.71 billion in the brvious year. In terms of volume, however, there was a decline of 9.06 per cent in 2014-15 with a total of 1473.41 lakh carats imported compared to 1620.17 lakh carats in FY2014. Jewellery Jewellery has been one of the most exciting segment of the Gems and Jewellery industry. The segment witnessed imbrssive growth during the year. According to GJEPC, exports of gold jewellery during the year 2014-15 was US$ 9.85 billion compared to US$ 8.36 billion in the brvious year, registering a rise of 17.7 per cent. This spectacular performance is a reflection of the sustained marketing, branding and promotional efforts by the industry, not to mention its ever-improving design and manufacturing excellence. According to a report by Research and Markets, the Jewelry Market in India is expected to grow at a CAGR of 15.95 per cent over the period 2014-2019. The sector is witnessing changes in consumer brferences and buying habits. The industry is going through a transformation from being an 'investment buy' to a 'fashion statement' with increasing brference for branded jewellery. Growing population of youth, working women and middle class with increasing disposable income is driving the demand for diamond jewellery. COMPANY OVERVIEW Established in 1971 and headquartered in Mumbai, Asian Star Company Limited is one of the world's leading integrated diamanataires. The Company straddles the entire value chain and has a formidable brsence in diamond manufacturing, jewellery manufacturing and retailing. It is one of the few companies which have contractual rough supply from major miners in the world. The Company has always focussed on its core-competencies of maintaining and building upon its manufacturing prowess. With its consistent fine make and excellence in quality, the Company has been a brferred supplier to some of the top international brands and retailer chains. Manufacturing Facility for Polished Diamonds The Company has developed a unique expertise in diamond manufacturing that combines economies of scale and scope, value-added marketing support and highly skilled workmanship. It has a world class manufacturing facility in Surat with state of the art machines and equipments. Sbrad across 1 lac square feet, this facility employs more than 1600 employees and has specialised in delivering customised proprietary cuts. The Company has been known for the consistency in its quality and cut which is known as 'Asian Star Make' in the industry. Manufacturing Facility for Jewellery The Company has three diamond jewellery manufacturing units located at Mumbai and Hosur. One unit at Mumbai is dedicated for the international markets, while the other two cater to the fast growing domestic market. These units equipped with latest technology and advance machinery are sbrad over 50,000 sq.ft. and employ over 500 workers. They create customised products to suit specific market needs by blending exquisite diamonds with a variety of brcious metals and combining innovative designs with superb craftsmanship. With 'Lean Manufacturing Process' these units deliver highest quality at compelling costs. The Company has expertise and capacity to cater to international, domestic and regional markets with a product range from mass produced jewellery to exclusive couture jewellery. Distribution Some of the world's top and best known brands and retailers have been Asian Star's customers for many years. The Company has always strived to deliver highest levels of customer satisfaction, and has therefore, expanded its reach to be at a close proximity to its customers. Today, the Company has a brsence in all the important trading and consuming centres sbrad across the continents of Asia, Europe and America. The Company has aligned its global brsence over the years through focused marketing and expansion into newer geographies and emerging hotspots of consumptions. Presently, the Company has a strong brsence in the Far East, the Middle East and India - all important and emerging markets. The Company is also strengthening its brsence in the CIS, BRIC and MIST regions. Retail The Company has a niche retail brsence through its couture boutique catering to HNI customers. The boutique specialises in customised jewellery as well as in jewellery design consultancy. It offers an imbrssive range of brt diamond jewellery. The jewellery designs of the boutique are simple yet elegant, harmoniously blending the best of modern and classic styles. FINANCIAL OVERVIEW Notwithstanding the fact that there were significant challenges both in the international markets as well as domestically, the Company has performed satisfactorily during the year. While the difficult operating environment brssurized the top-line, the Company has done well to improve its margins. This has been achieved with the Company's approach, strategy and mind-set of DOING RIGHT THINGS RIGHT. By strategically focussing on the top success factors and channelling unrelenting efforts on each of these, the Company has been able to sustain its financial performance. The Company's consolidated turnover for the year 2014-15 was Rs. 3,225 crores compared to Rs. 3,250 crores in the brvious year, indicating a marginal decline of 0.77 per cent. The diamond business for the year was Rs.2,749 crores against Rs. 2,768 crores in the brvious year, declining by 0.69 per cent, and the diamond jewellery business for the year was Rs. 467 crores compared to Rs. 476 crores in the brvious year, dropping by 1.89 per cent. In spite of stress on the top-line, there was a clear improvement in margins. Profit before Tax (PBT for the year increased to Rs. 101 crores compared to Rs. 97 crores in the brvious year, an improvement of 4.12 per cent. Profit after Tax (PAT for the year increased to Rs. 82 crores against Rs. 78 crores in the brvious year, an improvement of 5.13 per cent. FUTURE OUTLOOK According to the World Economic Outlook published by the International Monetary Fund (IMF) in April 2015, global growth is projected to increase moderately to 3.5 per cent in 2015 compared to 3.4 per cent in 2014, and further increase to 3.8 per cent in 2016. This improvement will be driven by revival in advanced economies supported by lower oil prices. In the US, growth is expected to pick up to over 3 per cent in 2015-16 led by improved demand due to steady improvement in employment opportunity, encouraging housing data, growing stock markets, favourable oil prices as well as support in the form of accommodative monetary policies. In the Euro Area too, growth is expected to gather momentum in 2015 and 2016 to 1.5 and 1.6 per cent respectively. In India, there is a renewed sense of optimism and positivity. The structural reforms undertaken by the government in the core sectors are likely to have positive long-term impact on the overall economy. New foreign trade policy unveiled by the government provides a framework to boost export of goods and services, generation of employment keeping in line with the "Make in India" campaign launched by the Government. Both the IMF and the World Bank have brdicted the Indian economy to grow at a minimum of 7.5 per cent for the next two years. In fact, the World Bank, in its India Development Update, has estimated the Indian growth rate at 7.9 per cent in FY 2017 and 8 per cent in FY 2018. For Gems and Jewellery Industry, year 2015 is expected to be better than the past year. The US, which is the largest global jewellery market in the world, is expected to see a consistent growth. Demand from Middle East region has started showing signs of improvement. While, China is also expected to improve with growing HNIs despite slowdown in overall economic growth. South America is emerging as a market with high potential with growing appetite for diamond jewellery in countries like Argentina, Chile, Uruguay, Colombia and Ecuador. India is witnessing consistent economic growth which is enhancing employment and business opportunities and in turn increasing disposable incomes. A recent study by the McKinsey Global Institute suggests that if India continues to grow at the current pace, average household incomes will triple over the next two decades and it will become the world's 5th-largest consumer. The middle class with its rising numbers and incomes is becoming the biggest market segment. The affluent class too will continue to grow in terms of size and value, albeit, at a slower pace than the middle class. The government of India has declared the sector as a focus area for export promotion based on its potential for growth and value addition. The government has recently undertaken various measures to promote investments and to upgrade technology and skills to promote brand India in the International market. Looking at the holistic picture, the overall outlook for the industry is very promising. OPPORTUNITIES Growing Demand In Key Markets USA USA continues to dominate the Gems and Jewellery industry as it is the largest diamond market in the world. The economy in the country has been steadily picking up, notably in the last quarter of 2014-15 as consumption increased significantly driven by low oil prices. Besides, the other important factor - employment, has also been rising. This is likely to have a positive impact on the overall demand for diamond jewellery, particularly in the sub-segment of engagement rings. Engagement rings is the largest segment of the entire US diamond jewellery industry, and accounts for over half of the total market. China After the US, China is the second largest diamond market in the world. Rising income levels over the last few years have transformed the jewellery market in China. The rapidly growing middle class with high disposable income and a higher as pirational level is the key driver for the surge in demand for diamond jewellery. According to a research by Wealth Insight, there has been an increase by 52.8 percent in the number of high net worth individuals (HNWI) in China between 2010 and 2014. WealthInsight forecasts that the number of Chinese millionaires is set to double and reach 2.2 million by 2019, while wealth is expected to grow by 75.9 percent, to reach $9.5 trillion by the same year. This augurs well for the industry and the surge in demand from China is expected to pick up pace in the near and mid-term. India Demand for diamond jewellery in India is expected to continue to rise, chiefly driven by the rapidly growing middle-class with higher disposable incomes. India has one of the best demographics dynamics in the world, with around 66 per cent of its population being under the age of 35. The Indian economy is emerging as the fastest growing economy in the world and is forecast to maintain a high growth rate in the near and mid-term. The middle-class, particularly the youth, are confident and aspirational, not holding back as far as discretionary spends are concerned. They are increasingly spending higher amounts on leisure and lifestyle. On Line Retailing During the last two years, there has been an unbrcedented explosion in the e-commerce space in India. A combination of internet penetration, surge in usage of smart devices and dramatic improvement in delivery have unleashed the true potential of e-commerce in the country. The traditional brick-and-mortar businesses are fast adapting to the click-based and tap-based models with extending their physical brsence into the digital space. The jeweller business has also been benefitted by the online retail revolution as major retailers and brands are now discovering the immense potential and advantages of digital media making it possible to exponentially expand their footprint and brand brsence, with minimal costs and time lags. The online retail segment is expected to continue growing, auguring well for the industry. India as a New Trading and Sourcing hub With a view to make India a key trading and sourcing hub for diamonds, The Ministry of Commerce is actively considering setting up of a Special Notified Zone (SNZ). This special zone will provide the much needed thrust to the diamond industry allowing duty free movement of goods by miners across the world. They can bring rough on consignment basis, display to local buyers, conduct regular auction of roughs and take back unsold quantity without any levy of tax. This will encourage international mining companies to sell their rough diamonds directly in India giving the Indian diamond industry a strong competitive advantage over other diamond trading centres of the world and will also ensure a steady supply of rough diamonds in India. RISKS, THREATS AND CONCERNS Depleting Old Mines Majority of the global output of rough diamonds comes from top nine producer countries - Russia, Botswana, DRC, Australia, Canada, Zimbabwe, Angola, South Africa and Namibia. The major diamond mines in all these countries are now past their peak level production. Explorations in the last few years have not been very successful in finding any major new mines. Depleting reserves has lead to increased brssure on the existing mines to cater to the increasing demand across the globe for diamonds. With the local beneficiation programme in the mining countries, an increasing portion is retained for local processing units further affecting the supplies to Indian Industry. Asian Star is amongst the few companies who have contractual rough supply from major miners in the world. The Company also has alternative direct sources of rough supply, and thus is assured of continuous supply of rough at competitive price. Synthetic Diamonds With Sophiscated technology and years of research it is possible to make diamonds which are near identical to the natural diamonds. It is difficult to differentiate between natural and synthetic diamonds. These diamonds poses a risk of being a cheaper substitute of natural diamond. Various instances of mixing of synthetic diamonds with natural diamonds have been reported. This poses a greater risk of undermining consumer confidence and affecting the perception of the industry. Industry has taken various pro active measures to safeguards against the threat of synthetic diamonds. Technically advanced instruments have been developed which have been successful in detecting them. Various initiatives have been taken by diamond producers, manufacturers and trade bodies to create awareness about synthetic diamonds. Proper disclosure at all levels of value chain and use of equipments to detect the undisclosed synthetic diamonds have been encouraged to boost consumer confidence. Liquidity Crunch Being a capital intensive industry, financing is crucial for various segments of the diamond value chain. Industry growth has been backed by bank financing. Following the economic slowdown, since 2012, the diamond banks, serving the industry for decades, faced several cases of loan defaults. The ratio of non-performing loans to total assets has been on rise. These have led banks to become more conservative and selective, tighten controls and apply stringent criteria. Various banks have either reduced or curtailed their exposure to the industry. This has created severe liquidity crunch having adverse impact on the performance, growth and profitability. Finance is a key function at Asian Star and is being managed by strong team of experienced professionals. Liquidity has never been an issue for the Company. It has ratings/ rankings among the top in the industry assigned by CARE and Dun & Bradstreet. It enjoys sustained confidence of bankers as one of the brferred customers. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY The Company has combrhensive and commensurate internal control systems in place. The guidelines comprise of a well-defined framework covering various aspects of governance, compliance, control, audit and reporting. All systems and processes are clearly documented, regularly appraised and updated, and strictly followed. These internal control procedures ensure the following: - Efficient use and protection of resources - Compliance with policies, procedures and statutes - Accuracy and promptness of financial reports The Company has an internal as well as external audit supervised by the senior management of the Company to ensure proper compliance. The Company is supported by a holistic MIS that ensures any deviation from set targets are immediately flagged off and corrective actions taken. All environmental norms, legal rules and statues are adhered to without exception or compromise. HUMAN RESOURCES People are one of the key and critical success factors for the Company and it acknowledges their contribution to its success over the years. Employee satisfaction is a top priority, and the Company ensures that all its employees enjoy a safe, healthy and progressive work environment at all its manufacturing plants and offices. The Company's HR team works cohesively with the employees to help them in their personal as well as professional development. There are various training and development programmes that focuses on the skill enhancement and career progression. The Company has a well-defined Code of Conduct that guides all employees in their interaction with the various stakeholders of the Company. The Company has a unique work-culture based on team-building and bonding through cross-job training. Every employee has a deep sense of belongingness and works as a big united family sharing success and growth. |