>Sharekhan Special(November)

Q2FY2009 earnings review

Key points

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The Sensex’ earnings (adjusted for the one-time items) grew by nearly 10.1% in Q2FY2009 on the back of the strong performance of the financial service companies (earnings up 30% year on year [yoy]), telecommunications (telecom) companies (earnings up 28% yoy) and capital goods companies (earnings up 18% yoy). However, the Sensex (excluding the oil companies) saw an earnings growth of 13.4% yoy during the quarter and the same is ahead of our estimate of a 10.1% earnings growth for the quarter.
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Notably, the revenue growth for the Sensex companies (ex-oil and banking companies) was healthy at 28.3% yoy. However, the same could not translate into an equally good operating performance largely due to a 228-basis-point contraction in the operating profit margin (OPM) and a higher capital cost. The margins in most sectors were affected by the rising input cost, employee cost (especially provisions for wage hikes by the public sector undertakings [PSUs] as per the Sixth Pay Commission’s recommendations) and a steep spike in the cost of power & fuel (both coal and oil). The margin contraction was more pronounced in case of automobile, cement, real estate (read DLF), pharmaceutical, cement and oil & gas sectors. On the other hand, metal and information technology (IT) companies registered an expansion in their EBITDA (earnings before interest, tax, depreciation and amortization) margin on an annual comparison basis.

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