India Ratings and Research (Ind-Ra) believes that the stable corporate performance amid the second covid wave during 1QFY22 has raised optimism for a faster-than-expected recovery. However, the pressure on top line has largely been mitigated by a reduction in overhead costs, especially labour cost. to maintain a healthy bottom-line. In light of such weak wage growth, the agency believes salaried and wages earners would be a drag on the overall recovery in the medium term owing to the tepid recovery of household consumption. Moreover, an environment of pandemic-led uncertainty and elevated inflation could impact the level of spending and hence the overall demand.

The analysis is based on a study of the standalone financials of 2,036 non-financial corporates. The entre sample set has been divided into eight buckets according to the size of the annual revenue in FY19. The buckets are- top 10, 11 to 25, 26 to 50, 51 to 100, 101 to 250, 251 to 500, 501 to 1,000 and 1,001 to 2,036. The median annual revenue of the last bucket is around INR100 million.

Encouraging Corporate Resilience: Ind-Ra’s analysis of 2,036 corporates suggests that the number of companies posted losses in 1QFY22 has been lower than in 1QFY21. Out of the 2,036 entities, 523 entities posted losses in 1QFY22 compared to 986 entities in 1QFY21. Ind-Ra believes this has largely driven by limited the restriction imposed on business activities. Corporates too have learned and implemented various measures to combat this kind of situation.

Although the overall trend is encouraging, it is not broad based. While the top three buckets have limited number of entities making losses, the last two buckets (501 to 1,000 and 1,001 to 2,036 entities) have 23% and 33% loss-making entities, respectively. This is compared to around 50% entities in both the buckets in 1QFY21, reflecting the ongoing pressure on smaller entities.

Nonetheless, the overall corporate performance has been reasonably encouraging and could continue to be so with some moderation in margin and cash flows. 


Pressure on Employees Cost Continues: While the resilience of corporates is encouraging, the adverse effect of pressure on employee cost is a cause for concern. This could be a result of job-loss or salary cut or both. Ind-Ra’s analysis suggests that 50% entities out of out of 2,036 corporates have quarterly negative growth in labour costs in 1QFY22 compared to 4QFY21. Although there is some seasonality in employee cost, it is also true 1Q is always a better quarter than 4Q owing to the disbursement of various performance-based payments linked to the previous fiscal.

The more alarming fact is that the trend has been on a downward for the last few years, which is visible in the yearly wage growth data in the last three years.

The agency believes resuscitating wages will be critical for a revival of the overall economy and capex cycle, which has been languishing even before the COVID-19 outbreak. The wage channel is more critical at a time when the counter cyclical spending by the government has been designed to revive the production side rather than direct transfer to induce consumption demand. The framework has merits; however, the ultimate success of such mechanism relies on the transfer of wealth to households from producers through the wage channel. Thus, a weak wage channel does not auger well for the full pass through of income and delays recovery. Other than wage channel, capital market or financial system does play a role in distributing wealth. But, that largely depends on the size of the population linked to the capital market through direct or various intermediaries. In the case of  India, the limited number of household linked to the  capital market inhibits a broad-based transfer.




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Analyst Names

  • Soumyajit Niyogi

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356111

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121