Foreign Financial Firms Investing in Indian Diamond Industry

Publicly-listed Indian diamond and jewelry manufacturers are beginning to attract the attention of leading foreign institutional investors (FIIs), with big players such as Citigroup, Morgan Stanley, BSMA, Goldman Sachs and UBS entering the sector, picking up stakes in Gitanjali Gems and Shrenuj & Co.

While the former four have purchased 4,425,000 shares for a 7 percent stake in Gitanjali in different deals over the last few weeks at a reported cost of Rs. 1.14 billion ($28 million), the latter two have acquired 3.936 million shares for a 6.28 percent stake in Shrenuj & Co at a cost of Rs 167.2 million ($4.118 million).

Mehul Choksi, chairman of Gitanjali Gems, believes that this investor interest in the company is a result of its multiple initiatives on the retail front and its entry into infrastructure development. “FIIs now hold approximately 17 percent in the company, because they no longer view us just as a traditional diamond manufacturer-exporter.”

Gitanjali has unveiled new brands and store formats in India and has expanded through acquisition and tie-ups in other global markets, while its entry into the infrastructure sector is focused on setting up Special Economic Zones. Construction of its gem and jewelry SEZ in Hyderabad is nearing completion, and the company was recently approved for new SEZ projects in Nagpur and Aurangabad in Maharashtra.

Interest in Shrenuj has been largely spurred by its expansion in the retail segment in various markets, opines Vinod Shetye, CFO – in particular the recent expansion through the acquisition of Simon Golub Inc in the US. However, he adds that though the diamond sector is a global player, large organized investors have not really looked at it as a potential sector.

The acquisition in the two companies has been through purchases in the secondary market. Choksi and Shetye both confirmed that there are no plans to sell promoter-held stock in the near future.

Market analysts believe that these transactions reflect growing interest in an otherwise ignored market segment, and that this is a result of some leading players beginning to move away from the traditional family-held structure towards a more corporate-oriented approach.

The transactions are also occurring at a time when FII interest in Indian stocks is at a new high. According to data released by Securities and Exchange Board of India (SEBI), FIIs inflows into the equity and debt markets has been about $10.5 billion between January and July 2007, compared to the total net investment of $8.87 billion in 2006.