Economic turmoil, lack of credit and delay in off-take by customers are all working to deadly effect for manufacturing companies — specifically in the capital goods sector — heating up the fare for employees in particular.
To ease the pressure on margins, many companies have either shut shop or reported employment settlement costs or voluntary retirement schemes (VRS) in their balance sheets last quarter.
Greaves Cotton, for one, handed out pink slips to 80 staffers during the quarter, running up Rs3.4 crore as employee separation costs, A K Sonthalia, chief financial officer, said in a conference call. According to him, the company’s operating margin was down to 12.8% from 14.2% due to high employee costs, resulting in a 1% margin erosion.
“We started the year at about 4,400 headcount and right now, we are just above 4,000,” said Sonthalia.
More pain looms as the management has not ruled out any such measure in future either. “There may be a few more opportunities of further rationalisation,” he added.
Brokerage research firm PhillipCapital India said as much in a December 18 note, citing the example of Cethar, a leading player in captive markets, which has witnessed an order-book degrowth for the past two years due to a frail demand graph. The company’s order book has halved from Rs8,000 crore at the beginning of 2010-11. Its Trichy plant subsequently went belly-up and many employees were simply asked to quit. “In our view, this highlights the sort of stress that capital goods companies are currently going through,” said the report.
Kirloskar Oil is in the same boat and has implemented VRS for its workers amounting to Rs19.08 crore.
ABB, one of the world’s largest suppliers of energy equipment, is also feeling the heat. It has revealed its intention of exiting project management of its power system business, which is bound to have a bearing on its India operations. Operating margins of ABB India declined to 3.7% in the September quarter as segments like power system and process automation ran up losses at the segmental level.
That is only part of the story. On account of project delays, ABB India had booked upfront provision with respect to expected cost overrun in the September quarter.
For the January-September period, its order inflows tumbled 10% to Rs5,387 crore.
Earlier this month, ABB’s German rival Siemens AG (SI) joined in, announcing its move to slash headcount by around 8% by 2014 as part of a plan to save €6 billion ($7.8 billion) globally. In India, Siemens had closed down its windmill production line in Baroda and booked an impairment cost of Rs120 crore on this front. In the September quarter, Siemens’ revenue slid 9% on-year to Rs3,270 crore while its profit nosedived as much as 90% to Rs28.8 crore. For 2011-12, its order inflow plunged 17% on-year to `10,200 crore.
“Such a lacklustre performance by an Indian arm could force the global management to prune the workforce in India,” said an analyst from a domestic brokerage.
Crompton Greaves, another mid-cap capital goods company, has also initiated a mega restructuring exercise at its Belgium subsidiary and terminated many of its employees. As part of its broader strategy, it plans to shift this plant to a low-cost centre in Hungary.
Nirav Vasa, analyst with SBI Cap Securities, said in a note that financial stress is on the rise, as indicated by the cases referred to corporate debt restructuring (CDR), which have gone up 37% on-year while debt involved in these proposed CDR cases soared 50% on an annual basis. Indicative order finalisation in November, he wrote, stood at Rs9,540 crore, down 45% yoy.
Overall, the mood in capital the goods sector is “sombre”, said John Perinchery, senior analyst, Asian Market Securities. “Layoff is not the only indicator that captures the mood. I am seeing for the first time in the past 8-9 years that companies are offering a three-week holiday to their employees for Christmas and New Year, indicating a go-slow mode on order execution as customers are not taking deliveries,” he added.