Old Economy too joins the wage bill party

NEW DELHI: It's not just New Economy companies that are being hit by wage bill inflation. An ET analysis shows that in several manufacturing companies, the absolute increase in wage bill in FY07 was greater than the absolute increase in raw material costs.

This trend is visible across sectors including auto, FMCG, construction, paper, engineering, textiles, steel, pharma, and electronics. It is reflected in companies such as SAIL, Hindustan Construction, Moser Baer, Raymond, Colgate Palmolive, Eveready Industries, Swaraj Mazda, Mcleod Russel, Nalco, Tata Coffee, Chemplast Sanmar, West Coast Paper, Alfa Laval, Sesa Goa, Alembic and Panasonic AVC, among many others.

Traditionally, the wage bill impact on service sector companies such as those engaged in IT services have been used for financial analysis, while for manufacturing companies raw material costs were under the scanner. However, increasing wage bills have now begin to hit margin expansion of manufacturing companies as well.

Take the case of SAIL. Its raw material costs increased by Rs 857 crore in FY07 as compared with the previous year. In comparison, the company’s wage bill rose by Rs 930 crore in FY07. Of course, the wage bill constitutes a relatively low component in the overall cost structure. In the case of SAIL, raw material costs are 100% more than wage costs.

But this only underlines the fact that increase in employee-related expenses had a bigger impact on margins than increasing raw material prices.

For some companies such as HCC, Raymond, Rallis India, Eveready, JCT and Chemplast Sanmar, raw material costs declined year on year even as wage bill increased, leading to increased share of the employee costs in the total expenditure of the company. In addition, for a large number of Old Economy companies, the rate of growth for employee cost is much higher than the expenditure on raw material or inputs. This list includes heavyweights ACC, Maruti Udyog, L&T, Nirma, JSW Steel, Punjab Tractors, Nalco, Tata Chemicals, IOC and ONGC.

Interestingly, almost all major construction and real estate development companies mirror this trend.

vivek.sinha@timesgroup.com