Many 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 JanuaryMarch 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 OctoberDecember 2019 quarter.

In fact, many large manufacturers such as Hindustan Unilever, Marico, Havells, Godrej Consumer, and Marico, among others, reported doubledigit 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) 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 firms 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 firms’ combined net sales were 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 steps taken by many firms to cushion the blow of the pandemic. “Many firms 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 firms that resisted cost cutting in Q4FY20 will be tempted to do so now, given the extensions of the lockdown.

The quarterly results also suggest that the firms 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 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 firms across sectors such as FMCG, automobiles, auto ancillaries, and consumer durables.