(Mint)
(Mint)

How severely will wage hikes impact cement firms?

  • Now that provisions have to be made for arrears, although in two instalments, staff cost is anticipated to rise in the coming quarters
  • Cement companies are most likely to pass this burden via price hikes, as they have done in the past

Recently, raw material and energy costs began to ease for the cement sector. But even before those benefits could flow in, companies are faced with yet another expense that could keep their operating costs elevated.

On Thursday, the Cement Manufacturers Association signed a new wage settlement pact with major trade unions, for increasing the gross monthly payment of employees by 5,000. This settlement is for four years, from 1 April 2018 to 31 March 2022. Also, it provides for enhanced dearness allowance and other benefits.

To put things into perspective, on an average, employee cost contributed 6.5% to the sector’s overall cost structure in fiscal year 2018, as per Antique Stock Broking Ltd. Mint’s analysis showed that in the first nine months of FY19, staff costs for key cement makers rose by 5-15%.

Now that provisions have to be made for arrears, although in two instalments, staff cost is anticipated to rise in the coming quarters. An analysis by Reliance Securities Ltd showed that 30% of total employees on the payroll would be workers who will benefit from this revision. As per their calculations, expenses of companies will spike in FY21 due to higher base wage (see chart).

It should be noted that the last wage revision for cement workers happened in August 2015. Then, the gross pay was increased by 6,000 per month. Even though this time the revision is lower, analysts foresee operating costs rising by around 2%.

But as business tycoon Henry Ford said, it is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages. So, cement companies are most likely to pass this burden via price hikes, as they have done in the past.

Analysts recall that in September 2015, the all-India average price of cement was increased by 7-8 per 50kg bag, led by substantial price hikes in the northern and central markets.

Had the sector been in its glory days, price increases would not have been a big deal. In the current context, though, even if companies resort to further hikes, analysts are sceptical about such prices sustaining. If prices don’t sustain higher, cement margins may remain under pressure for a few more quarters.

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