Compensation of employees relative to GDP of private companies in good shape; These stocks are Icici Securities’ top picks

Overall private company spending on “compensation of employees” (COE) continues to rise ahead of nominal GDP growth due to the growing formalization of the economy, said analysts’ research note from ICICI Securities. Vinod Karki and Niraj Karnani.

Data from National Accounts Statistics showed that the COE to GDP ratio for the private sector increased rapidly to 12.4% in FY21 from 9.2% in FY12 (COE nominal in the private sector was Rs 24.5 trillion in FY21). The public sector, which includes government and PSUs, has maintained a rate of 12-13% of GDP spent on COE over the past decade – particularly robust in fiscal year 20-21, where the private sector and households were under pressure due to the economic impact of covid. Activities.

In addition, ICICI Securities’ note pointed out that listed private companies are showing similar growth trends, with the overall COE reaching ₹9.4 trillion on the TTM basis (CAGR of 10.9% against 9.5% for nominal GDP over the 2012-21 financial years). Including PSU shares, the Total Compensation of Employees (COE) for the TTM-based listed companies sector amounted to Rs 12.1 trillion.

Citing national accounts data, the research note found that the bulk of COE spending within private businesses comes from the category “real estate, home ownership and professional services” at 40%, which is expected to be largely computer services, followed by manufacturing. 22%, other services 10%, ‘trade, repairs and hotels’ 9% and financial services 7%. He added that “listed private space companies show a similar trend, with IT and manufacturing having the highest COE share.”

“The aggregate COE’s long-term sectoral growth in the private sector in FY 2012-21 is driven by ‘computer and other services’, agriculture, financial services and communications, while the brake on growth came from construction, “trade, repair, hotels and restaurants” and manufacturing,” the note said.

In addition, the research note pointed out that a quarterly pace of adding 1 million net new subscribers in CY17, the EPFO ​​net new subscriber addition jumped 4x and reached a quarterly increase of around 4 million in CY22 so far. Income tax collection has also greatly exceeded nominal GDP growth since FY 2001 at a

CAGR of 15.3% (income tax recovery of ₹6.4 trillion in FY22 through March 16, 22). The number of people filing with wage income increased from 11.8 million in FY12 to 29 million in FY18.

In addition, ICICI Securities further notes that the number of people with wage income declarations has increased and that their average declared wage income corresponds to ₹0.7 million per year in FY18 compared to per capita income of ₹0.13 million per year for the same year. Based on FY21 data of listed companies, the average cost per reported employee is Rs 0.9 million and the overall sector strength of listed companies based on available data is about 7 .6 million employees in FY21.

However, total compensation of employees (COE) in the unorganized sector (households) underperforms nominal GDP growth. According to the note, the COE in the informal segment (households) underperformed, its share of GDP falling from 8.8% in FY12 to 7.2% in FY21, exacerbated by the impact of covid on contact-intensive segments of the economy.

According to analysts at ICICI Securities, the upward trend in the ratio of total employee compensation (COE) to private sector GDP (12.4% in FY21)

appears structural as formalization increases. In the United States, the COE/GDP ratio of the private sector is over 40% while the COE/GDP ratio of the government is around 10%. The near-term trajectory looks positive heading into FY23, with annual salary surveys from various agencies pointing to around 9% salary increases for India Inc, along with robust hiring reports. in the formal segment.

They added that the creation of new formal jobs is expected to improve given additional tailwinds from the reopening of post-covid restrictions in contact-intensive sectors, the resumption of building construction activities, infrastructure development, manufacturing driven by export demand and the LIP, strong demand for IT and digital services professionals and the natural progression of formalization seen over the past decade.

“Expansion faster than nominal COE GDP for the private business sector indicates a clear sign of formalization of the economy and improvement in productivity which, together with the significantly high per capita income of this segment, is positive for the gross savings rate and consumer discretionary within this segment,” the duo added.

However, ICICI Securities analysts also note that the formal sector’s contribution to the overall workforce is considerably low at 11% or 58.9 million workers and, despite its rapid expansion, the informal segment of the economy takes the lion’s share with 89%. The low-income profile of the informal labor force is a challenge for aggregate demand, especially in an environment of rising inflation.

Here are ICICI Securities’ top picks from the perspective of channeling savings, credit demand and discretionary consumption from formal sector employment growth:

Savings and Credit Growth – SBI, Axis Bank, HDFC Bank, Aditya Birla Capital, SBI Life, SBI Cards and Payments Services.

Leisure and Lifestyle – Indian Hotels, Trent, Sapphire Foods, Inox Leisure.

Real Estate, Building Materials and Appliances – Phoenix Mills, Brigade Enterprises, Havells, Green Panel Industries.

Auto – Maruti, Eicher Motors, TVS Motor.