Can This Fundamental Shift Help Boost Revenue at Sarine Technologies Ltd?

On Friday, Reuters ran a report on the diamond supply chain. What was revealed in the report may help Sarine Technologies Ltd (SGX: U77), which provides capital equipment to the manufacturers in the diamond industry.

What’s the report about?

In the article, it was said that India gets its supply of raw diamonds from middlemen in Antwerp, Tel Aviv, and Dubai. These places in turn get their sources of stones from Africa or Russia. These rough diamonds are then cut and polished in the home of the Taj Mahal – India – before they end up on the fingers of married couples.

But now, instead of going through middlemen, India has made the following move, which is partly to combat growing competition from China:

Indian Prime Minister Narendra Modi, who comes from Gujarat where the polishing industry is centred, has answered calls to bolster the diamond sector by convincing Russia to sell rough diamonds directly to India.”

During President Vladimir Putin’s visit to New Delhi this month, Russia’s state-run diamond monopoly Alrosa signed a dozen deals to increase direct rough diamond deliveries to India that would help reduce the cut taken by middlemen in the secretive precious gems trade.”

In recent years, China has started to muscle into India’s space as a polisher of rough diamonds. According to Reuters, the value of exports of polished diamonds from China has been boosted by “72 percent in the past five years to $8.9 billion.”

With Russia selling rough diamonds directly to India, the cost of rough diamonds can go down, which in turn may help to reduce the selling price of polished diamonds, thereby increasing the demand for polished diamonds.

So, how can Sarine benefit?

Sarine’s products are mainly used in the midstream of the diamond industry value chain (the cutting and polishing of rough stones to produce polished diamonds), with the company’s flagship being the Galaxy family of products. Sarine’s equipment are needed by diamond manufacturers for the assessment, optimal planning, sawing, cutting, shaping and polishing of rough diamonds.

With the potential increase in demand for both rough diamonds and polished diamonds as seen above, Sarine’s products can potentially be in higher demand too, thus boosting revenue.

Meanwhile, the company is also entering the downstream segment (the retail of diamond jewelry) with two new products – Sarine Loupe and Sarine Light. This segment of the market alone was worth US$74.5 billion in 2013, which is 40% more than all the other segments combined (please refer to page 25 of Sarine’s presentation here). With the foray into the downstream market, Sarine’s gadgets will thus be used at every segment of the supply chain.

Foolish Bottomline

Revenue from India accounted for 81% of Sarine’s total revenue in the six months ended 30 June 2014. Even if the perceived scenarios described above relating to changes in India’s diamond industry doesn’t take place, Sarine’s products will still be in demand, even as China takes over India as the leader in the polished diamond market. That’s because polished diamonds will still have to be manufactured with the help of, and accessed using, proprietary gadgets such as those developed by Sarine’s, no matter which country is dealing with them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.