Mercator Lines

Mercator Lines has diversified into coal mining and offshore business model to offset the cyclical nature of shipping industry

 

MERCATOR Lines, the third largest shipping company in the country, has been trying to minimise the difficult operating environment in the shipping industry over the past 12-15 months through diversifying into coal mining and offshore businesses.

   However, with the US economy, a key determinant for the shipping industry, showing signs of a recovery, coupled with booming demand conditions from emerging economies for transporting oil, it should help the shipping industry, going forward. We had recommended this stock in our issue dated December 28, 2009 and since then the stock has declined nearly 19%. The stock currently trades at about one times its March 2009 book value while its larger peer GE Shipping trades at about 0.9 times its FY09 book value. Also, Mercator has traded historically at a range of 0.6 and 2.6 times its trailing book value between March 2005 and March 2009.

FLEET CAPACITY

Mercator Lines' owned fleet capacity at the end of FY 09 stood at nearly 2.12 million DWT (dead weight tonnes), a rise of 55 % from two years earlier. Like most of its peers, majority of Mercator's fleet capacity is in the tanker segment, which is used for the transportation of crude oil. As part of its strategy to diversify its business, Mercator has acquired a jack-up rig and four dredgers, which have been given on long-term contracts to users, coupled with its coal mines acquired overseas.

   At the end of mid-May 2010, the company's fleet capacity stood at nearly 2.28 million DWT. The company had invested Rs 4,473.1 crore on a consolidated basis during March 2007 and March 2009 while its operational cash flow during this period was just Rs 2,882 crore. As a result, its total debt was Rs 2,835 crore at the end of FY09, a rise of 54.6% from two years earlier.

   Rival GE Shipping's fleet capacity was 2.71 million DWT in May 10, while Shipping Corporation of India's owned-capacity was 5.35 million DWT as on August 2009.

FINANCIALS

Mercator's consolidated core operating profit margin declined 1,080 basis points y-o-y to 28.2% during the March 2010 quarter, at a time when its total income from operations also fell 10.2 % y-o-y to Rs 482 crore.

   This fall in its net sales is despite its income from coal mining that jumped 60.9% to Rs 123.7 crore in the fourth quarter, as part of its strategy to diversify its revenue stream. As per various estimates, tanker vessels utilised for transporting crude oil and allied products, earned on an average about $29,000 – $30,000 per day in the fourth quarter, a decline of 10% on a y-o-y basis.
   

This was largely due to sluggish demand for transporting oil towards the West, the key determinant of global oil demand. On a sequential basis, however, average freight earnings for these crude carriers have shown a sharp improvement. In addition, a rise in operational costs in the quarter resulted in Mercator's core consolidated net loss of Rs 7.6 crore in the quarter as
compared to a core net profit of Rs 21.6 crore a year earlier. However, taking into account non-core items like profit on sale of assets, Mercator's adjusted consolidated net profit was Rs 10 crore in the fourth quarter, a decline of nearly 93.9%.

   In contrast, rival GE Shipping's consolidated operating profit margin jumped 2,420 basis points to 41.2 % in the March 2010 quarter helped by a tight check on costs.

VALUATIONS

Mercator Lines currently trades at about 20.5 times on a consolidated basis on a trailing four- quarter basis, while rival GE Shipping trades at 8.8 times on a consolidated basis. However, on comparing trailing book value basis, both these players trade at broadly similar levels. Investors keen on a diversified shipping company could consider Mercator Lines on a long-term basis.