By Sourajit Aiyer
Demand slowdown has hit top line growth for Corporate India for a while; companies are maintaining profitability by operational measures. And when one digs deep into long-term data, interesting findings come to light.
From an employee’s perspective, the impact of low profitability varies among sectors. If you are working in the right one, you are lucky!
Profit per company has remained flat for five years, despite growth in number of companies. Using Capitaline’s listed companies’ data as a proxy for Corporate India, the absolute profit per company remained flat for the last five years despite growth in the number of listed companies.
This means the “average company” has not grown any bigger in profits over the past five years, and the accretion to the total profit pool is only owing to an increase in the number of companies.
Even looking only at the Top 500 companies by market cap as a truer proxy of Corporate India, the profit per company there too remained largely flat over the past five years.
Profits are a yardstick for expanding budgets, wages and taxes; and when companies do not grow any bigger in profits, it has some consequences.
The probability of management budgeting salary hikes at a healthy rate is low unless profit growth picks up. So if an employee wants to grow his salary, the only realistic option is to change jobs, since the absolute number of companies is growing, rather than try to grow within the same company, as the absolute profit per company is not growing. After all, if profit is not growing, the budget for the next year is not going to grow either.
Sticking with the same organization in such a scenario will hit the hardest-working employees the most. The lazy employees may not mind, since they would not have a market elsewhere. The age-old management logic of preferring candidates who show job stability vs. job-hopping will be rendered illogical, and recruiters have to rethink their perception of job-stability.
Attrition has already hit highs in India. As per an Economic Times article, the average attrition rate was around 20%. Unless companies start growing profits, attrition will only intensify. This will push companies more towards non-salary compensations, like employee stock options.
However, this assumes promoters are comfortable with dilution, and the impact of dilution on earnings is not adverse. Nevertheless, stock options are becoming more critical if employees want to grow their compensation in a scenario of low growth in salaries.
In such a scenario, some other item has to give way, if profits have to grow. Companies have tightened the screw on operating efficiencies and salaries, so the scope of wringing out incremental profitability from these avenues is limited.
The case for interest rate cuts is already strong to spur growth. But the probability of fresh debt raised after rate cuts being used for investment might be constrained, since companies might prefer refinancing existing debt at reduced cost first.
Policymakers have to find ways to incentivize new investments by companies, by making India an easy place to do business in. A lot of work by the new government is occurring on this front, and it could not come at a better time. The stagnation of profit per company has even hit India’s bellwether sector, where it enjoyed competitive advantages.
CAGR of sector profits from FY05 to FY15 include Software (22%), Finance (25%), Automobiles (21%) and Pharma (20%). Since IT has been India’s growth sector, we exclude it to see how the non-IT sectors fared. But the picture remains the same. This means that even India’s bellwether sector has not escaped the challenge of the last 5 years.
Finance-sector companies are good for shareholders, but not good for employees. Finance (non-bank) was one sector where profit-per-company actually grew in last 5 years. As it was one of the few sectors to fare well, this should have translated into growth in salaries, investments and discretionary spending.
While many invested into new growth engines and discretionary spending in technology or marketing, the 10 Year CAGR in employee costs severely lagged. The Top 500 finance companies saw a healthy 34% CAGR in profits over the last decade, but the growth in their employee costs was just 7%; that’s a difference of 27%.
Assuming that change in employee costs is a result of both increased hiring and salary hikes, the actual salary hike would have been even more dismal had they hired more people. The other opinion may be that the need for hiring in the technology sector fell.
Employee cost to net sales ratio held firm at between 8-9% in Corporate India during the decade. However, the employee cost to net sales ratio declined slightly in the Finance sector, implying any increased spending went into other avenues.
This reaffirms the observation that Finance companies were good for shareholders, but not for employees. I will discuss the scope for new capital raising and what policymakers can do in a future article.
— Sourajit Aiyer is a finance professional based in Mumbai. Views expressed are entirely personal.