Stock Review: Mercator Lines

 

Mercator Lines is ramping up its presence in the booming coal market at a time when the shipping industry is facing downside risks. But the cost pressure remains

 

MERCATOR Lines, a leading player in shipping, has aggressively expanded its presence in the coal sector through earlier acquisitions of mines in Indonesia and Mozambique. This move should help the company deal with a volatile operating environment in shipping business better, given that global coal prices jumped nearly 40% in the third quarter to $110 per tonne and have not shown any signs of easing since then.

   The company's sale of coal amounted to 44.3% of its total operational income in the first nine months of the current financial year, a considerable rise from the corresponding period a year earlier. In the shipping industry, spot freight rates in the key tanker segment have been subdued over the past 15-18 months, due to sluggish demand conditions and expanding global supply of vessels. However, the ongoing political turmoil in the Middle-East has forced oil-importing countries to look for alternative sources, which has led to a higher demand for vessels in the spot tanker freight rates. Freight rates are expected to remain volatile, given the uncertainty in global oil demand after the recent quake in Japan. We had recommended the stock in our issue dated May 31, 2010. Since then, the stock has not performed to our expectations. It has declined nearly 23 per cent during the period compared with a 5.5 per cent rise in the Sensex.

CAPACITY:

Mercator Lines has a diversified fleet, both on ownership basis and on charter from third parties. The company's consolidated shipping fleet capacity at the end of March 2010 was nearly 3.47 million DWT, (dead weight tonnes) a rise of 48.8% in two years. Its fleet includes dry bulk carriers, tankers, dredgers, and rigs. The largest domestic player, Shipping Corporation of India's fleet capacity at the end of March 2010 was 5.14 million DWT.

   Mercator Lines owns coalmines in Indonesia and Mozambique. During the year ended March 2010, the company's mines in Indonesia produced 0.7 million tonne of coal, more than double a year ago.

   The company had invested Rs 4,112 crore on a consolidated basis during the year ended March 2008 and March 2010 while its operational cash flow was 2,863 crore. As a result, its secured loans stood at 1,055.2 crore at the end of March 2010, a rise of 69% from two years earlier.

FINANCIALS:

The company could only partially take advantage of higher coal prices in the third quarter since it also grappled with a surge in costs related to coal operating expenses. Apart from that, in key tanker segments of shipping industry, the spot average freight rate declined nearly 60% year-on-year to $7,365 per day in the third quarter. In the dry bulk segment too, the average of the benchmark Baltic Dry Index fell almost 30% y-o-y in the third quarter.

   As a result, Mercator's consolidated operating profit margin declined 1,330 basis points year-on-year to 17.7% in October-December quarter, despite a 64.5% rise in net sales to 777.70 crore. Its net profit was 1.6 crore in the third quarter, higher than a year earlier. In contrast, rival Shipping Corporation's operating profit margin improved by 720 basis points year-on-year to 18.4% in Oct-Dec, helped by a tight check on costs and long-term contracts with key customers.

VALUATIONS:

Mercator Lines trades at a consolidated P/E of 7.1 times on a trailing four quarter basis. Shipping Corporation of India trades at a P/E of 7 times while GE Shipping trades at a consolidated P/E of 6.6 times.