Rising wage costs blunt Nalco's strategic advantages in metal production

Nalco's finances will take a hit of Rs 2.5-3 bn on account of the latest wage revision exercise

The unrestrained hike in wage bills year after year is steadily eroding National Aluminium Company's (Nalco's) competitive edge in metal production.  

A research report by brokerage firm Motilal Oswal shows employee wages now account for more than $500 per tonne in the cost of aluminium production, the highest in the world. Although Nalco's total headcount had subsided two per cent to 6,776 at the end of 2017-18, average recurring annual wages per employee still climbed 32 per cent to Rs 2.9 million -- the report dubs it as the highest in the Indian metal and mining industry. Wages are eroding the navratna company's strategic advantages despite its attractive valuations, the report commented.  

Nalco's average cost of metal production moved up by 10 per cent in the last financial year to $2,187 (or Rs 140,999) per tonne. Variable costs and wage hikes were the key drivers for the hike in production costs, besides input commodity inflation fuelled by the rise in alumina and carbon prices. Though Nalco could cut its manufacturing expenses by Rs 703 per tonne due to operating leverage, wage hike had a major impact of Rs 4,576 a tonne, negating the gains made. 
 

"Nalco has the advantage of captive bauxite mines, coal linkage and logistics due to strategic locations. However, its wage bill keeps growing unfettered every year without corresponding improvement in productivity," the report by Motilal Oswal analysed.

Nalco's Chairman & Managing Director T K Chand admitted the company's wage costs were comparatively higher -- this was due to historic and legacy issues of the PSU. He sounded confident on wage costs coming down as a result of natural attrition or superannuation of employees and Nalco pursuing brownfield expansion of its aluminium smelter at Angul. 
 

 

"For our brownfield expansion, we are adding 0.5 million tonnes in capacity with minimal incremental manpower. Then, we are also opening up our coal mines. Wage costs presently account for 22 per cent of the cost of our metal production but with smelter expansion and captive coal mining, it will reduce by seven to eight per cent by 2021. This will make Nalco's aluminium extremely cost competitive," said Chand.

Nalco seems unruffled by wage costs. The company has set in motion a new wage settlement process effective retrospectively from January 1, 2018, with validity till December end of 2028. The fresh wage revision will see components like basic pay, HRA (house rent allowance), incentives and other employee applicable benefits going up.
 

"Nalco's finances will take a hit of Rs 2.5-3 billion on account of the latest wage revision exercise. But we have already provisioned for it. There will be no impact on the company's performance in the coming quarters," the CMD said. 

The central PSU is the key beneficiary of strong alumina pricing and depreciating Indian currency as most of its cost of production is fixed in the Indian rupee. Only 10-15 per cent of its cost of production is incurred in US dollars or is linked to dollar pricing. Nalco reported Rs 13.42 billion in net profit in the last financial year. In Q1 of FY19, the company made Rs 6.87 billion net profit and hopes to continue the momentum through the financial year, aiming at a gross turnover of around Rs 120 billion.