Home >Market >Mark-to-market >Mark to Market | Wage hike a bonus, not a burden, for Maruti

Scarred by periodic labour strife, the country’s largest car maker Maruti Suzuki India Ltd raised wages by 50% at its Gurgaon unit. The sudden announcement has checked the rise in its stock price, which has been north-bound since the Manesar lock-out was lifted. The stock fell by 2.8% in the last two trading sessions to 1,318 on assumptions that the hike would hurt profitability, more so given the current slowdown.

But there are several reasons why the wage revision may actually pan out favourably for the firm. The first is the obvious one that it will improve the morale of the work-force and reduce labour unrest.

Second, the 50% hike will not dent profitability in the long term. It is spread over three years and in absolute terms works out to an average of around 18,000 per month per worker. In any case, Maruti’s staff costs as a percentage of sales is the lowest among listed auto firms. The June results data show that Maruti’s staff cost is 2.3% of sales, compared with Mahindra and Mahindra Ltd’s 4.9%, while that for Tata Motors Ltd and Ashok Leyland Ltd is much higher at around 9%. Analysts say that commercial vehicles manufacturers’ staff costs are usually higher than those making passenger vehicles and two-wheelers. According to Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, “The impact of the wage hike would not be more than 10-12 bps on the margins of the company. However, as it is retrospective, the earnings for the quarter would be further impacted by around 3% in the September quarter."

Bps is short for basis points. One basis point is one-hundredth of a percentage point.

The third reason is that it compares well with the previous wage revision of a mere 6% in 2009, which, too, was spread over three years. This should boost worker morale.

Investors will hope that the wage revision will turn the tide in favour of the management. Maruti’s ability to take its employees along is important, given that Manesar is still churning out only half the volumes that it was before the lock-out. Recent dealer feedback says that there is a two- to four-month waiting period for Maruti’s diesel models such as Swift, Dzire and Ertiga. Full production ramp-up at Manesar is the key to better sales and operating leverage that would help profit margins in the long term.

The impact of the diesel price hike, too, is expected to be negligible for passenger cars, given that the running cost gap between petrol and fuel cars is still 45-47%, although down from around 60% earlier.

Maruti has reportedly increased discounts on some petrol cars about a week ago to clear inventory. A report by Motilal Oswal Securities Ltd says that about 90% of Maruti’s dealer inventory comprises petrol cars.

At this juncture, the Street has factored in the Manesar problem into valuations. Net profit for the September quarter may well be half of the year-ago period. If so, it will be the fifth consecutive drop in the firm’s earnings.

Apart from an expected price increase in October, a quick ramp-up in production of diesel vehicles at Manesar is the key to absorb cost increases by way of wage revision and freight rates. This will support Maruti’s current valuation of 14-15 times fiscal 2014 earnings.

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