Mercator Lines

Mercator Lines has diversified its activities in a bid to offset the impact of cyclical nature of the shipping industry

 

MERCATOR Lines, India's third-largest shipping company by tonnage, has been attempting to diversify its activities in a bid to minimise impact of the cyclical nature of the global shipping industry. In the last two years, the company has made investments in offshore, dredging and coal mining activities.

   Also, with Western economies emerging from recession, the shipping sector is expected to be one of the first sectors to benefit from a possible upturn in the global demand for transporting crude oil and other products. Mercator Lines currently trades at a discount to the largest private sector player GE Shipping and the government controlled Shipping Corporation of India, the largest company in the sector.

FLEET CAPACITY:

Mercator Lines' total owned fleet capacity amounted to nearly 2.12 million dead weight tonnes (DWT) at the end of FY 09, an increase of 55% from two years earlier. The company has further expanded its owned fleet with the recent delivery of a vessel of 42,235 DWT.

   Rival GE Shipping's fleet capacity was almost 2.84 million tonnes at the end of October '09, while Shipping Corporation of India's fleet capacity is 5.35 million DWT as on August '09. Like most of its peers, majority of Mercator's fleet capacity is in the tanker segment, which entails transportation of crude oil products. As part of Mercator's strategy to diversify its activities, it acquired a jack-up rig, four dredgers, and coal mines overseas. Nevertheless, the company's shipping business contributed nearly 74.3% to its consolidated net sales during the first half of FY 10.

   Mercator incurred a capex of Rs 4,472.4 crore from FY07 to FY09 to purchase additional vessels and to diversify into allied businesses. However, its cash flow during this period was just Rs 2,882 crore and its total debt jumped 54.6% to Rs 2,835.6 crore at the end of FY 09.

FINANCIALS:

The sluggish trend in global merchandise trade had a visible impact on Mercator. Its operating profit margin declined 2,670 basis points y-o-y to 22.7% in the September '09 quarter, and its consolidated net sales plummeted by 47% y-o-y. The difficult environment for the shipping industry was reflected with the average spot freight rates in tanker segments like VLCC (very large crude carrier) declined 93% y-o-y to $4,514 per day, in the second quarter of FY 10, point out sources. No doubt, Indian shipping companies have longterm contracts with customers but that could

not prevent deterioration in quarterly results. However, signs of a global revival of trade flows have helped to bring some revival in spot freight rates over the last few weeks.

VALUATIONS :

Mercator, at CMP, trades at 5.7 times on a trailing basis. GE Shipping trades at 6 times and Shipping Corporation at 11.3 times. Investors could consider Mercator Lines to take advantage of long-term growth opportunities in shipping sector.