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Wage inflation visible
Among various cost heads, commodity input costs have hogged the
limelight, however, staff costs can not be ignored. Staff costs are now
growing at an above average 15%+ and one of the factors keeping an
upward pressure is the inflation itself. Higher wage growth can
potentially impact margins if revenue growth doesn’t keep pace and we
term certain PSUs viz. HPCL, BPCL, Coal India, Sail as more sensitive to
wage pressures. Among others, retailing cos, construction mid-caps and
Rel Comm could be more susceptible if revenue growth slows down. On
the positive, the domestic consumption story should stay strong.
Wage costs showing initial signs of inflation
‰ Our analysis of large 350 listed companies accounting for 2.9m employees and a
total employee cost of US$45bn (FY11), highlights that average per employee costs
have risen by 12.6% cagr over the last 8 years. The same number has been higher
at an estimated c.15%+ during FY11ytd.
‰ Revenue cagr has been even higher at 17% and has kept the employee cost as a %
of sales within a tight band of 6.5% - 7.5% of revenues for the 350 companies.
‰ Since FY07, however, % employee costs have moved up a small 40 bps.
Manufacturing sector & PSU salaries have grown faster
‰ Contrary to the popular perceptions, average wages in manufacturing sector at
Rs618k (US$13.7k) were 3% higher than those in the services sector in FY10.
‰ Services sector per employee wage costs were 17% higher five years ago, the
trend however, has changed gradually as the manufacturing sector employee costs
have risen at a higher 15.4% cagr vs. 10.5% cagr for services sector.
‰ A similar analysis for PSUs vs private cos reveals that, an average PSU employee
earns Rs776k (US$17k) of 48% higher than an average private sector employee.
‰ These startling numbers are also partially driven by the fact that manufacturing
sector in general and PSUs in particular have seen a low / negative net hiring trend
which means that with the rising average age, the wage/employee would be higher.
‰ For PSUs, however, over the last 7 years, employee costs as a % of revenues has
declined by c.1ppt to under 7% now – pointing to improving labour productivity.
High food / general inflation should sustain higher wage growth
‰ Given that the most of the labour intensive work viz. construction (civil / industrial /
building) is outsourced, it’s not captured in company’s reported employee costs.
‰ Thus the reported employee cost inflation, we believe, understates the true wage
inflation as we estimate that inflation for construction labour has been even higher.
‰ Given the continued high food inflation in the economy, we believe that the wage
inflation could trend up – especially in the manufacturing / construction sector.
‰ The Government’s national rural employment guarantee scheme (MNREGS) has put
a further upward pressure by reducing the labour availability.
Revenue growth required to absorb on wage hikes
‰ We haven’t yet seen any negative surprises on the wage costs aside from pharma
companies, BHEL, Maruti, M&M etc but the trend can not be ignored.
‰ PSUs viz HPCL, BHEL, BPCL, SAIL, Coal India, Bharat Electronics are more sensitive
to wage pressures as staff costs work out to more than 60% of PBT.
‰ With wage resettlement cycle for PSUs behind, there’s a limited risk of a negative
surprise, however, a potential slowdown in revenue growth could be a concern.
‰ Retail cos viz. Pantaloon, Shoppers Stop and construction companies viz. Ahluwalia
contracts, HCC, Punj Lloyd, Voltas are more sensitive to wage cost pressures as
margins are thin.
‰ While IT services is the most ‘employee-cost’ intensive sector (38% of revenues in
staff costs) the expected FY12 revenue growth of 25% will help absorb wage
inflation. Within IT cos, HCL Tech and Wipro would be more vulnerable. Slowdown
in telecom has driven up wage bill as a % of PBT for Reliance comm. to 99%.
So who is vulnerable?
As explained in the note, per employee wage cost inflation has averaged at
12.6% cagr for the past 7 years for the 350 listed companies and the same
number has moved up to 15%+ in the 9mFY11. Given the overall higher
inflation in the economy, we note that the risks to the wage inflation is on the
upside.
The companies that would be more susceptible to the potential higher wage
inflation would be the ones which have a higher base (FY11 wage costs as a
% of FY11 PBT) and the companies where revenue growth could slip without
enough flexibility to lower wage growth. Variability of wage costs would be
lower for PSUs as the wage settlements are now largely behind, however, we
note that PSUs would also have a lower flexibility to slow-down the wage
growth in case revenue growth were to surprise on the negative.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wage inflation visible
Among various cost heads, commodity input costs have hogged the
limelight, however, staff costs can not be ignored. Staff costs are now
growing at an above average 15%+ and one of the factors keeping an
upward pressure is the inflation itself. Higher wage growth can
potentially impact margins if revenue growth doesn’t keep pace and we
term certain PSUs viz. HPCL, BPCL, Coal India, Sail as more sensitive to
wage pressures. Among others, retailing cos, construction mid-caps and
Rel Comm could be more susceptible if revenue growth slows down. On
the positive, the domestic consumption story should stay strong.
Wage costs showing initial signs of inflation
‰ Our analysis of large 350 listed companies accounting for 2.9m employees and a
total employee cost of US$45bn (FY11), highlights that average per employee costs
have risen by 12.6% cagr over the last 8 years. The same number has been higher
at an estimated c.15%+ during FY11ytd.
‰ Revenue cagr has been even higher at 17% and has kept the employee cost as a %
of sales within a tight band of 6.5% - 7.5% of revenues for the 350 companies.
‰ Since FY07, however, % employee costs have moved up a small 40 bps.
Manufacturing sector & PSU salaries have grown faster
‰ Contrary to the popular perceptions, average wages in manufacturing sector at
Rs618k (US$13.7k) were 3% higher than those in the services sector in FY10.
‰ Services sector per employee wage costs were 17% higher five years ago, the
trend however, has changed gradually as the manufacturing sector employee costs
have risen at a higher 15.4% cagr vs. 10.5% cagr for services sector.
‰ A similar analysis for PSUs vs private cos reveals that, an average PSU employee
earns Rs776k (US$17k) of 48% higher than an average private sector employee.
‰ These startling numbers are also partially driven by the fact that manufacturing
sector in general and PSUs in particular have seen a low / negative net hiring trend
which means that with the rising average age, the wage/employee would be higher.
‰ For PSUs, however, over the last 7 years, employee costs as a % of revenues has
declined by c.1ppt to under 7% now – pointing to improving labour productivity.
High food / general inflation should sustain higher wage growth
‰ Given that the most of the labour intensive work viz. construction (civil / industrial /
building) is outsourced, it’s not captured in company’s reported employee costs.
‰ Thus the reported employee cost inflation, we believe, understates the true wage
inflation as we estimate that inflation for construction labour has been even higher.
‰ Given the continued high food inflation in the economy, we believe that the wage
inflation could trend up – especially in the manufacturing / construction sector.
‰ The Government’s national rural employment guarantee scheme (MNREGS) has put
a further upward pressure by reducing the labour availability.
Revenue growth required to absorb on wage hikes
‰ We haven’t yet seen any negative surprises on the wage costs aside from pharma
companies, BHEL, Maruti, M&M etc but the trend can not be ignored.
‰ PSUs viz HPCL, BHEL, BPCL, SAIL, Coal India, Bharat Electronics are more sensitive
to wage pressures as staff costs work out to more than 60% of PBT.
‰ With wage resettlement cycle for PSUs behind, there’s a limited risk of a negative
surprise, however, a potential slowdown in revenue growth could be a concern.
‰ Retail cos viz. Pantaloon, Shoppers Stop and construction companies viz. Ahluwalia
contracts, HCC, Punj Lloyd, Voltas are more sensitive to wage cost pressures as
margins are thin.
‰ While IT services is the most ‘employee-cost’ intensive sector (38% of revenues in
staff costs) the expected FY12 revenue growth of 25% will help absorb wage
inflation. Within IT cos, HCL Tech and Wipro would be more vulnerable. Slowdown
in telecom has driven up wage bill as a % of PBT for Reliance comm. to 99%.
So who is vulnerable?
As explained in the note, per employee wage cost inflation has averaged at
12.6% cagr for the past 7 years for the 350 listed companies and the same
number has moved up to 15%+ in the 9mFY11. Given the overall higher
inflation in the economy, we note that the risks to the wage inflation is on the
upside.
The companies that would be more susceptible to the potential higher wage
inflation would be the ones which have a higher base (FY11 wage costs as a
% of FY11 PBT) and the companies where revenue growth could slip without
enough flexibility to lower wage growth. Variability of wage costs would be
lower for PSUs as the wage settlements are now largely behind, however, we
note that PSUs would also have a lower flexibility to slow-down the wage
growth in case revenue growth were to surprise on the negative.
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