From 'will corporate profits continue to grow faster than wages?' to 'will midcaps outperform large caps', and more, we answer 5 pertinent questions before you enter the new year
Illustrations: Chaitanya Dinesh Surpur
(To read part one of this story, click here)
1. Will the growth in corporate profits continue to outpace wage growth?
India Inc has had a good year. The Covid pandemic gave it a much-needed chance to start reducing fixed costs and employee wages were among the first to be hit. As early as April, companies resorted to pay cuts and furloughs as they moved to conserving cash. Fresh hiring all but stopped. At the same time, a cut in interest rates reduced the finance costs. A decline in fuel prices lowered energy costs.
Corporate profits in the first half of FY21 expanded faster than wages. This points to a lack of bargaining power by labour and, in 2021, these reductions look here to stay.
The increase in profits can broadly be categorised into three buckets. First, the increase in profitability was disproportionate to an increase in topline primarily on account of a large reduction in fixed costs. At Ultratech Cement, employee costs fell by 11 percent even as revenue rose by seven percent in Q2FY21. This resulted in a 55 percent increase in net profit. This clearly shows that even as business rebounded, employers were in no hurry to restore wages. “Sunk costs usually come back with a lag,” says Abhimanyu Sofat, head of research at IIFL. This time, an increased role for technology may result in some costs like travel never coming back.
Second, companies where a rise in sales resulted in a smaller rise in profits on account of weak pricing power, resulting in lower margins. Examples include consumer businesses like Hero MotoCorp and Whirlpool. Expect employee wages to remain subdued here in 2021 as companies look to first get margins back.
(This story appears in the 01 January, 2021 issue of Forbes India. To visit our Archives, click here.)