RIL: Joins the VRS party - Views on News from Equitymaster

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RIL: Joins the VRS party

Jun 28, 2001

Corporate India seems to be on a belt tightening binge. Voluntary retirement scheme (VRS), the dirty word of yester-years has become part of the daily business vocabulary. In fact, companies offering VRS are being viewed in favourable light, as managements are seen taking initiatives to cut back costs and consequently, improve productivity and profitability. Reliance Industries (RIL) features in the list of companies offering voluntary severance packages to rightsize the workforce. The VRS package is part of the restructuring process at the textile complex in Naroda, Gujarat. The package has been accepted by approximately 4,600 employees and total outlay on the scheme is estimated at Rs 900 m.

Gains through VRS
No. of employees nos. 15,083
Staff cost Rs m 4,411
Cost / employee Rs 292,429
VRS cost Rs m 900
Employee opting nos. 4,600
VRS cost / employee Rs 195,652
Staff cost savings* Rs m 1,345
EBITDA Rs m 46,325
Savings / EBITDA 2.9%
VRS cost / PAT 3.4%
Savings / PAT 5.1%
* Estimates
Employees, staff cost, EBITDA for FY01

The share of textiles division in total revenues has been continuously declining over the past few years. The division contributed only 1% to the turnover in FY01, as compared to 5.1% in FY97. The restructuring at the textiles division, representing 1% of turnover, results in rightsizing manpower strength by 30.5%. The textiles division, it seems, besides contributing only marginally to the topline was a drag on post-tax profits, as it was employing more than 30% of the workforce.

Productivity led gains
(Rs m) FY98 FY99 FY00 FY01
Net Sales 115,107 126,238 178,499 254,293
PAT 16,527 17,037 24,033 26,456
Staff cost 3,099 3,583 3,748 4,411
Employees (nos) 17,375 16,640 15,912 15,083
Revenues / employee 6.6 7.6 11.2 16.9
PAT / employee 1.0 1.0 1.5 1.8
Staff cost / employee (Rs) 178,337 215,325 235,546 292,429

Although the VRS is the first drastic step towards rightsizing the enterprise the head count in the company has been steadily declining since FY99. Consequently, employee productivity numbers have increased impressively over the years. One can expect much improved productivity levels in the current fiscal. It can be seen that the revenue / employee has grown at a much faster pace compared to profits / employee. This indicates that costs have been increasing at a faster clip compared to revenues and consequently putting pressure on net profit margins.

To beat the rising other operating expenses organisations and RIL will have to increase the productivity of employees to prevent profits and more importantly margins from eroding.

RIL: Matching global standards
(Rs m) Reliance Ind. DuPont Dow
Revenues 280,083 1,357,621 1,320,414
PAT 26,456 126,968 77,888
Employees 15,083 93,000 50,000
Revenue / employee 18.6 14.6 26.4
PAT / employee 1.8 1.4 1.6

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