As many as 27 out of the top 100 companies listed on the National Stock Exchange (NSE) will not be able to sustain current wage bill if their revenue dip by 30 per cent or more due to a nationwide lockdown and imminent salary cuts, a Deloitte study said.
Given the slowdown in general consumption across all levels, companies must evaluate their ability to pay salaries, said Deloitte, which conducted a study of the top 100 companies listed on the NSE in terms of market capitalisation.
It said "27 companies won't be able to sustain current wage bill from cash profits, if their revenue dips by 30 per cent or more. The impact will, in fact, be even larger since the cash stuck in inventory and receivables is likely to increase in such a scenario".
These companies, it said, will have to either dip into its cash balance or borrow in short term.
Without naming the companies, the study said 11 of the 27 vulnerable companies have a debt to equity ratio of more than 1, making it difficult to borrow to pay salaries.
"All the companies covered have an ability to pay their fixed opex, interest and compensation cost from cash and cash equivalents for about 5.5 months at the median," it said, adding for 20 companies, this cover can last for less than a quarter.
A nationwide lockdown imposed from March 25 to contain the spread of COVID-19 has resulted in the shutting down of businesses and factories, suspension of flights and trains and restrictions on the movement of people and goods. This has led to a slump in consumption, denting revenues of many companies.
"The situation appears less comfortable after considering that other current liabilities also need to be serviced from the same cash and cash equivalents cover. Thus, even if shareholders were to take the most generous view of foregoing their share of value adds for the current year, wage bill cuts are imminent for even some of the largest of the companies in India," it said.
Deloitte said companies must evaluate their ability to pay salaries using the very effective parameter of Compensation Cost Coverage Ratio.
Compensation Cost Coverage Ratio looks at cash profits for the company before tax and wage obligations, divided by wage obligations. Higher the ratio, higher will be the company's ability to keep paying wages as before, even when it faces a reduction in cash profit.
Even after factoring the company's other possible cash commitments like planned capex, debt repayments, replacement/upgradation of depreciated assets and working capital requirements, a sustainable ratio has to be at least 1.5 or higher, it said.
"However, a ratio of 2 or lower can possibly leave little to be returned to the providers of equity capital," it said.
In case of a 30 per cent drop in revenue, the 27 companies with a compensation cost coverage ratio of less than 1 can continue to pay fixed opex, interest and comp cost for 4 months at the median.
The survey of top 100 NSE companies yielded a median cost compensation coverage ratio of 3.25. More than 60 per cent companies showed Compensation Cost Coverage Ratio of 4.
Giving sector-wise breakup, Deloitte said companies in the energy sector have a higher Compensation Cost Coverage Ratio median of 6.31.
This is because working capital and incremental capex have a far higher share of operating cash flow as compared to compensation cost.
The service sector is second in line with a median ratio of 5.60. The median falls sharply to 3.4 if one public sector logistics company is taken out of this service sector basket.
"It may be noted that the companies in the service sector will likely need a higher coverage ratio since their revenues are more associated with uncertainty and stress, due to the lockdown and continued social distancing norms," the study said.
IT companies, it said, have the lowest median of 1.51. A large portion of operating cash flow goes towards compensation costs for IT companies.
The study said for several sectors, cash profits may actually fall deeper than their revenue in the first couple of quarters of FY21, because of a decrease in the overall consumption.
Sectors like retail, travel and entertainment continue to have close to zero revenue but continued operating expenses, leading to negative cash profits.
While 43 out of the 100 companies fall below the ratio of 3, six have a median ratio of more than 10. The six firms are asset-heavy companies, in the sector of power transmission, mining, and gas distribution.
Deloitte suggested companies to assess Compensation Cost Coverage Ratio under various scenarios and plan for maintaining a target compensation cost coverage by deferring compensation or incorporating variable cost.
"It is prudent to ensure that the coverage doesn't fall below 1.5 in the worst-case scenario plan," it added.
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