Multi Bagger: Buy Mercator Lines

Mercator Lines Ltd was incorporated on 24th November, 1983 as a private limited company. It was converted into a public limited company on 3rd April, 1984. The company is an established player in the marine transportation industry. It has done pioneering work by operating vessels in some unchartered rivers like the Tapti and has thus opened new navigational routes. The company has forayed into the Oil & Gas Offshore business through its subsidiaries.

Long-term contracts have helped Mercator Lines post a 14.9 per cent increase in net profit for 2008-09 despite the collapse in the dry bulk shipping market last year. Net profit for the year ending March 31, 2009 was up at Rs 376.45 crore from Rs 327.65 crore last year. Total income increased by 45.11 per cent to Rs 2,248.82 crore (Rs 1,549.72 crore), said a statement from Mercator. "Despite a weak economic environment and depressed

freight rates, Mercator has delive red good results," said Mr H.K. Mittal, Executive Chairman, in a press release. During the year, the company started its coal mining activities which generated revenue of Rs 77 crore.

Mercator Lines’ diversification into allied areas will see the HK Mittal company getting a bulk of its revenues from non-conventional sectors and less from pure shipping.

Mercator, which earlier focussed on bulk cargo through its Singapore subsidiary, is now investing heavily in downstream activities. From ferrying raw materials such as coal and iron ore, the company has entered activities like coal mining, offshore oil exploration and oil drilling to minimise risks associated with the cyclic nature of the shipping business.

Mercator’s April-June quarter results saw 96% of its revenues of Rs 493 crore coming from the core shipping business. Bulk cargo from its Singapore subsidiary contributes 50% to shipping revenues.

This is set to change when various projects start. "There will definitely be a change in our revenue mix, which will see a significant difference by 2009-10. However, putting a number to it would be difficult," said a senior company official on condition of anonymity.

The revenues will change with the company’s asset addition. However, the contribution of shipping would go down substantially in percentage terms, said the official.

In the first quarter, Mercator’s dredging foray last year brought about Rs 30 crore, or 6% of the total revenue. Shipping analysts feel this will rise to 15% in 2009. Kapil Yadav, a research analyst with Mumbai-based Dolat Capital, said as all four dredgers are now deployed, they would operate for all the 90 days and contribute to revenues, as would the new assets that would be added subsequently. Mercator expects the two other dredgers ordered to join the fleet in a year and a half. It is looking for more assets.

The company’s most diverse foray — into coal mining — will also contribute from the coming quarter as its first consignment is being contracted. Atul Agarwal, managing director, Mercator, said that the company expects coal mining to contribute 5-10% to revenues in FY09. But analysts peg this at 13-14% now and 20-25% in 2-3 years.

Calling it backward integration, Mercator entered coal mining by acquiring licences for two coal blocks in Indonesia and one in Mozambique. It started production at its Indonesia mines, which has reserves of 15 million tonne (mt). The company expects to contract 1 mt this year and reach 2 mt next year.

At this pace, it expects to complete mining in Indonesia in five years. In that time, the Mozambique mine, which has reserves of 3 billion tonne, will be completely operational. It will take 2-3 years to begin production.

Rising crude prices have boosted oil exploration activities, leading to many shipping players including Mercator entering the offshore business. Mercator’s newly acquired 350-ft jack-up rig, which will be delivered by March 2009, has already been contracted for three years to Greatship India Ltd at a rate of $ 94,000 per day and will start contributing to Mercator’s revenues from the first quarter of FY10. The company has plans to add another rig to its fleet and expand in this segment.

Mercator went deeper into oil exploration when it was contracted two oil blocks under the seventh round of New Exploration Licensing Policy (Nelp). However, this activity will take another 5 years, as Mercator has to secure contracts and bag approvals to enter the exploration stage.

Mercator’s Agarwal said the change in revenue mix is certain. "But whether it would be more from shipping or not depends on the success of the new ventures and the growth in shipping," he added.

The company has marked Rs 2,000 crore to expand its shipping business. It recently acquired a very large ore carrier and is also chartering three post-Panamaxes for five years. These are scheduled for delivery in 2009 and 2010. Mercator currently operates a fleet of 11 dry bulk vessels, nine owned and two chartered.

Rachna Kothari, an analyst with LKP Shares and Securities, said the company’s business mix and de-risking is pretty good. "Their profitability is yet to be seen. But if the company is focussed on shipping, it will also be healthy," she said.

Another analyst, on condition of anonymity, said since dredging and rigs are a part of shipping, Mercator’s revenue would only be impacted by coal mining. Oil exploration is a distant avenue for now, he added.

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  • junaid

    After going thru the latest results of Mercater 2009 december results it appears now that Mercater would truely become a 5 billion dollor company shortly. Its coal mining operations being a new entrant has done a commendable job of 149 crore turnover in coal mining in december 2009 and if can attain 8 to 10 metric in years time then turnover of coal itself would become around 3000 crores and next itself it will cross 1 billion and in 2 years with a target of 2.5 mt per month of coal mining it would cross 2 to 3 billion dollors in next 2 years from coal mining itself.

    • Great research Junaid. Even we were looking to pick this stock, but we will wait for the market to correct and will enter in a correct level..

  • junaid

    After going thru the latest results of Mercater 2009 december results it appears now that Mercater would truely become a 5 billion dollor company shortly. Its coal mining operations being a new entrant has done a commendable job of 149 crore turnover in coal mining in december 2009 and if can attain 8 to 10 metric in years time then turnover of coal itself would become around 3000 crores and next itself it will cross 1 billion and in 2 years with a target of 2.5 mt per month of coal mining it would cross 2 to 3 billion dollors in next 2 years from coal mining itself.

  • Great research Junaid. Even we were looking to pick this stock, but we will wait for the market to correct and will enter in a correct level..