He believes that softness in diamond end markets could trickle down to the midstream, which could dampen Sarine’s revenue. “Nonetheless, the weakness in the west could be partially mitigated by post-Covid recovery in China, which accounted for 15%-20% of end-market demand pre-Covid,” Mittal adds.
DBS views diamond manufacturing in India as a key determinant of Sarine’s revenue as it contributes about 90% of global diamond cutting and polishing activity. The value of cut and polished exports from India fell 4% from US$23.8 billion in FY2021 to US$22.9 billion in FY2022.
Mittal highlights the bright spot in trade revenue, which accounted for 11% of Sarine’s FY2022 revenue from 8% in FY2021. He says that traceability has been cast into the spotlight recently, with the US and EU reportedly aiming to develop a “watertight” traceability system in a bid to prevent the imports of Russian diamonds.
“In that regard, Sarine’s offerings such as the Sarine Diamond Journey could benefit through increased adoption. Separately, a broadened use of Sarine’s grading and traceability offerings as well as the pending Gem Certification and Assurance Lab (GCAL) acquisition could further lift trade revenue,” says Mittal.
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Given GCAL’s presence in the US, a successful acquisition is likely to accelerate the acceptance of Sarine’s e-grading by the market, which has been the biggest challenge facing the company’s e-grading service, DBS points out.
“In the longer term, Sarine’s efforts to increase higher margin trade-related revenue could lead to an improvement in its margins,” says Mittal.
On the back of cautiousness in the diamond markets as well as a global slowdown and higher operational expenses which have reverted to pre-Covid norms, DBS has trimmed its FY2023 and FY2024 earnings estimate for Sarine by 37% and 33% respectively.
As at 9.53am, shares in Sarine are trading at an unchanged 39 cents.
