It might be hard to determine the exact impact the Sixth Pay Commission is likely to have on the government’s finances. However, there is nothing ambiguous about its impact on the balance sheet of public sector undertakings (PSUs).
An ETIG analysis of listed PSUs that have already declared results reveals that the effect on the bottom line of some of these companies could be as high as 70%.
Of the PSUs that have declared results so far, five companies, Bharat Electronics, Container Corporation of India, MMTC, Power Finance Corporation and Nalco, have made provisions related to the Sixth Pay Commission recommendation.
Mangalore Refinery & Petrochemicals, which is not directly bound by the Sixth Pay Commission recommendations, has also made such provisions to maintain the industry level wage standard. The average increase in salary expense in the fourth quarter for all these PSU companies is more than 100%.
This is on account of the fact that the entire effect of the full year has been provisioned in the fourth quarter. If taken on year-on-year, the average salary expense of all these PSUs for the financial year 2007-08 has surged by more than 50%.
This rise in salary expense of PSU companies is in sharp contrast to their private sector brethren, in which there has been a decline (7.8% in FY08 as against 8.7% in FY07) in aggregate salary component of all companies whose results for the fourth quarter have been declared till now.
Though the rise in salary is good news for the employees, this additional financial burden for the PSUs might not go down well for the investors. A back-of-the-envelope calculation based on the assumption that other PSUs will have to make a similar provisioning suggests that the aggregate outgo on account of salaries could increase by as much as Rs 25,000 crore in 2007-08. This could also result in shaving off 200-300 basis points from the operating margin.
Of the companies that have already made provisions, Bharat Electronics and Nalco, in which the salary accounts for more than 6% of their net sales, are likely to find their operating margins being squeezed by as much as 4% only on account of this. For MMTC and Power Finance Corporation where the salary and wages account for less than 1%, the effect is not so significant.
With the economy witnessing a mild slowdown, PSU companies might find it difficult to offset the Pay Commission-induced inflation through higher sales.
An ETIG analysis of listed PSUs that have already declared results reveals that the effect on the bottom line of some of these companies could be as high as 70%.
Of the PSUs that have declared results so far, five companies, Bharat Electronics, Container Corporation of India, MMTC, Power Finance Corporation and Nalco, have made provisions related to the Sixth Pay Commission recommendation.
Mangalore Refinery & Petrochemicals, which is not directly bound by the Sixth Pay Commission recommendations, has also made such provisions to maintain the industry level wage standard. The average increase in salary expense in the fourth quarter for all these PSU companies is more than 100%.
This is on account of the fact that the entire effect of the full year has been provisioned in the fourth quarter. If taken on year-on-year, the average salary expense of all these PSUs for the financial year 2007-08 has surged by more than 50%.
This rise in salary expense of PSU companies is in sharp contrast to their private sector brethren, in which there has been a decline (7.8% in FY08 as against 8.7% in FY07) in aggregate salary component of all companies whose results for the fourth quarter have been declared till now.
Though the rise in salary is good news for the employees, this additional financial burden for the PSUs might not go down well for the investors. A back-of-the-envelope calculation based on the assumption that other PSUs will have to make a similar provisioning suggests that the aggregate outgo on account of salaries could increase by as much as Rs 25,000 crore in 2007-08. This could also result in shaving off 200-300 basis points from the operating margin.
Of the companies that have already made provisions, Bharat Electronics and Nalco, in which the salary accounts for more than 6% of their net sales, are likely to find their operating margins being squeezed by as much as 4% only on account of this. For MMTC and Power Finance Corporation where the salary and wages account for less than 1%, the effect is not so significant.
With the economy witnessing a mild slowdown, PSU companies might find it difficult to offset the Pay Commission-induced inflation through higher sales.
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