Rising salaries and growing workforces have resulted in wage costs rising across Indian companies, with sales rising even faster except in companies in the software, hospitality and retail business.
A Mint study of 1,328 companies listed on the Bombay Stock Exchange that have thus far declared their results for 2006-07 shows that employee costs have risen by 22.51% over 2005-06. That’s 150 basis points higher than the 21.01% at which employee costs rose in 2005-06 over 2004-05. However, the rise in wages has been more than offset by a 30.5% increase in net sales and a 47.3% increase in net profit.
Consequently, employee cost as a proportion of net sales fell from 9.29% in 2005-06 to 8.72% in 2006-07. And employee cost as a proportion of net profit fell from 87.7% in 2005-06 to 73% in 2006-07.
However, the shortage of manpower and the resulting rise in salaries have started affecting profitability in certain industries. Companies in the software, retail and hospitality business saw their employee costs rising faster than sales.
“The productivity increase has to be much ahead of the (increase in) wage costs. On that count, the numbers look healthy. But shortage of skills is a factor that we need to consider seriously,” said Siddhartha Roy, economic adviser to the Tata group. Unlike manufacturing firms, there isn’t much of a lag between the time employees are recruited and the time they start contributing to revenue (or sales) in services businesses.
According to a survey of white collar workers by consulting firm Hewitt Associates, salaries of Indian employees increased by 12-16% in 2006 (calendar year, and over 2005), the highest in the world.
The survey said Indian firms were expected to pay their employees 14.5% more in 2007.
It isn’t just an increase in salaries that is contributing to a growth in employee costs; companies are hiring more people to fuel their growth. Tata Consultancy Services, India’s largest software services firm which employs more than 60,000 people, grew its workforce by 21,140 employees in the year ended 31 March 2007.
The growth in employee costs doesn’t worry analysts and fund managers because of the faster growth in sales and profit.
“But going forward, a 20% growth in the employee costs is not sustainable for the economy. The slowdown will first affect the topline and later impact employee costs,” said an economist with the Aditya Birla group who did not wish to be named as his company policy does not allow him to talk to the media.
The economist added that the growth in wages was already beginning to hurt software companies. Cement firms needn’t worry, he said, because they weren’t “people-intensive”.
In cement and media companies, growth in net sales has outstripped the growth in employee costs, even though the latter increased by 52% for cement firms.
“Salaries in cement companies have not grown at this rate for the last 10 years. They had to grow now, because the sector is seeing good times,” said a senior official with one of India’s largest cement manufacturing companies who did not wish to be identified.
Employee cost as a proportion of sales for cement companies was 4.19% in 2006-07, lower when compared with 2005-06’s 4.57%. “For a long time, nobody bothered about wage bills in the cement sector; suddenly it seems to matter. Moreover, cement plants are located in rural areas. There is an enticement for the employees there to move to smaller cities. So, to hold them back there, the cement firms have to make their pay attractive,” added Amal Kumar Das, senior director, CHR Global, a Mumbai-based recruiting firm.
Employee costs rose 45.11% in 2006-07 in software companies, lower than 48.04% in 2005-06.
“The offshore component has to go up for software firms to sustain the low-cost advantage,” said Y.M. Deosthalee, chief financial officer of India’s largest publicly traded engineering company Larsen & Toubro. He referred to the fact that these companies would have to add more employees in India, and not elsewhere, if they wished to retain the edge they currently enjoy in costs. L&T has a software subsidiary.
India’s retail companies present a good example of what could happen should sales growth not keep pace with the rise in salaries, a combination that results in lower profitability.
In 2006-07, sales of retail firms grew 33%, down from 58.7% in 2005-06. Salaries rose over 50% in both years. The result: lower profitability. “If there is a slowdown in this country, you can’t retrench people. Then the employee costs turn fixed costs and start eating into your margins,” said Roy of the Tata group.
He added that if interest rates continued to rise, there could be a slowdown in the economy.
“The employee costs of Indian companies have gone up mainly because of shortage of talent and not because of increased productivity,” said Das of CHR Global.