Many manufacturing companies weighed labour cost cuts even before lockdown

Salary and wage bill for manufacturers was down around 1% YoY in Jan-Mar

Corporate results for January-March 2020 suggest that many manufacturing companies had begun to rationalise their labour costs in that quarter itself, even though they were shut for only seven days during the period because of the nationwide lockdown in the wake of Covid-19 pandemic.

The combined salary and wage bill for manufacturers was down around 1 per cent year-on-year during Q4FY20, its worst show in at least 10 years. In comparison, these companies' salary and wage cost was up 7.7 per cent Y-o-Y during Q4FY19, and up 2 per cent during the October-December 2019 quarter.

In fact, many large manufacturers such as Hindustan Unilever, Havells, Godrej Consumer, and Marico, among others, reported double-digit decline in their salary bill in Q4, in line with a dip in their revenues and volumes due to the Covid-19 lockdown.

This fits in the unemployment trend reported by the Centre for Monitoring of Indian Economy (CMIE) earlier this month.

According to the CMIE survey, unemployment began to inch even before the lockdown was announced and it was up nearly 100 basis points in March over the previous month. Unemployment rate was 8.75 per cent at the end of March against 7.76 per cent in February. 

The combined net sales for these 25 companies in Business Standard sample was down 11.4 per cent Y-o-Y during Q4 — its worst show in nearly four years. In comparison, these companies’ combined net sales was up 10.3 per cent Y-o-Y during Q4FY19 and it was up 1 per cent during Q3FY20.

Analysts attribute this to cost-cutting measures announced by many companies to cushion the blow from the pandemic. "Many companies announced salary cuts and freeze in annual bonuses, as the lockdown caused a sharp dip in economic activity and their revenues. Others fired their temporary and contractual workers in line with cuts in production level after the lockdown. This is what we see in the quarterly numbers," says Dhananjay Sinha, director research Systematix Group.

He expects a much deeper decline in the salary and wage bill in Q1 and Q2 of FY21, as companies that resisted cost cutting in Q4FY20 will be tempted to do so now, given the repeated extension of the lockdown.

The quarterly results also suggest that the companies saved on operating expenses such as on raw materials, advertising and marketing costs, and other overheads. Total operating expenses was down 10.5 per cent Y-o-Y compared to 14.1 per cent Y-o-Y growth in operating costs in Q4FY19 and flat growth during Q3FY20.   
 

The cost cutting, however, didn't go far in arresting a decline in corporate profitability during the quarter. The combined profit before tax (PBT) of these manufactures was down 23.1 per cent Y-o-Y, while operating profit was down 14 per cent Y-o-Y.

The analysis is based on the quarterly results of 25 manufacturing companies across sectors such as fast-moving consumer goods (FMCG) firms, automobiles, auto ancillaries, and consumer durables. The sample excludes companies from process industries, which were allowed to operate during the lockdown such as steel, cement, chemicals, petrochemicals, and pharmaceuticals, among others.
 

The numbers also suggest great variability in the salary and wage cost among companies in Q4 even in the same industries. In the FMCG sector, for example, Hindustan Unilever reported 11.7 per cent Y-o-Y decline in salary bill in Q4, while it was down 16 per cent Y-o-Y for Godrej Consumer, but in the same industry Nestlé and Colgate Palmolive reported 18.7 per cent and 22.3 per cent Y-o-Y increase in salary and wages bill, respectively.
 

Analysts, however, say that job losses and salary cuts and their adverse impact on demand will delay economic recovery, and will also make it tough for the companies to ramp-up production once lockdown is lifted.