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Saturday, September 28, 2013

Mercator Ltd:-The demerger play on amazing verticals

Paid call to members given a week back and already a capital appreciation of over 35%.Still a long way to go though.

Stock tip:-

Scripscan:Mercator Ltd
Traded in:Nse-bse
Duration:12-15 months
Return percentage:100%

Company:Mercator group has diversified business interests in Coal, Oil &Gas, Commodity Transportation and Dredging.Mercator group’s enterprising spirit has made a mark in Commodity transportation of Crude Oil, petroleum products, Coal, Iron-ore, with capacity expansion of more than 1200% since 2003. Mercator aims to continue this legacy of growth in its focus on the business of Energy based resources especially Coal Mining and Oil &Gas Exploration and services.


Coal Mining & Logistics: Mercator owns Coal Mines in Indonesia and Mozambique of which Coal mines in Indonesia are operational. Mercator can offer complete logistics solutions for its customers from load port to the point of usage.It also procures coal to meet the requirements of its clients. This business is done through international subsidiaries under the brand name of ‘Oorja.’ Coal Mining, procurement and logistics contribute more than 60% of its revenues.

Offshore Oil and Gas Services &  Exploration: Mercator has built, owns and operates a Floating Production Unit (FPU) for Afren Resources Ltd. in Nigeria.An FPU is a combination of a Mobile Offshore Production Unit (MOPU) and a Floating Storage & Offloading (FSO) vessel. Mercator also has a long-term contract for an FSO with British Gas in India.Mercator owns two oil & gas blocks in the very prolific Cambay basin (Gujarat), India.

Dredging Services and Commodity Transportation: Serves the huge infrastructure needs of the Indian ports with its 5 Trailing Suction Hopper Dredgers and one cutter suction dredger. Mercator under-takes maintenance and capital dredging projects and helps maintain the drafts of the shipping channels at ports.Mercator has one of the largest capacity in India to transport Crude Oil, Petroleum Products for major oil companies. Mercator owns/operates a fleet of dry-bulk carriers transporting Coal, Iron-ore and other dry-bulk commodities.Its Singapore subsidiary is also listed on the Singapore Stock Exchange.

Real Story:Mercator ltd is an amazing company which has been completely misunderstood by the market.People still overlook it as a shipping company but if one digs a bit into it,the real picture would make your eyes wide open.Mercator from a revenue of a mere 30crs in 2001 has skyrocketed it to a massive level of 3750crs in fy13.Calculate the astounding CAGR folks.Its one heck of a company with different verticals so penning point wise would do justice probably.

1)The company reported 3750crs of consolidated sales in fy13 with a loss of 492crs loss.Enough to dismiss the company?Here's the real deal folks-Its coal business contributed over 2000crs of the total sales and chipped in with a PBIT of 83crs.

2)The real dampener has been its shipping vertical.With some one time write-off and misc losses it reported an operating loss of 432crs.I aint bothered about its huge fleet size or its DWT capacity or even its status of being the second largest private shipping company of India.The other verticals of the company is what fascinates me.

3)Its offshore business just like the coal business has put up a grand show in fy13.On a sales of 270crs it delivered a PBIT of 75crs.

4)Other businesses contributed 360crs of sales with a PBIT of 33crs.

CARE Ratings quintessence:I value the ratings very highly as seldom they are biased.Despite reduction in the income from shipping segment, the total income has consistently grown due to company’s strategy to diversify into coal and offshore segment.Company’s mining operations are expected to grow further in future on commencement of mine in Mozambique.Furthermore, under the offshore segment, company’s FPU is deployed on a nine year contract,thereby representing a stable revenue stream from offshore segment. Company’s diversification in coal operations and offshore segment offsets the present subdued performance in the shipping segment and the same is expected to continue in future.Around 30% of total fleet (including tanker,dry bulks, offshore vessels and dredgers) of ML is deployed on spot basis or on short term contracts. Besides, the long term contracts for most of the vessels are getting over by October 2013.Spot deployment of vessels as well as the vessels deployed on long term which are to expire within few months exposes the company to risk of volatile freight rates and redeployment risk. However, long term contract under offshore segment and increasing coal mining and trading operations are likely to compensate for the volatilities in the dry bulk and wet bulk segment.Also refinancing high cost debt with low cost debt has led to lower interest expenses.

Conclusion:The company is set to become a dominant global player in the Energy Value Chain of Coal, Oil & Gas, and Marine Services & Infrastructure.Exciting times are certainly ahead for this particular company.Overall for fy13 it reported a total loss of 492crs.Deprecation provided has been 535crs.So mercator reported a cash profit of 43crs.Mercator is a classic play on SOTP(sum of the parts)methodology.It wanted to demerge the coal business way back in fy11 but the subsequent market turmoil forced it to postpone it for a later period.That's where the real story lies guys.Coal is such a commodity where the demand-supply gap would only widen in the years to come.To play the coal fancy we only have coal India as the listed entity.Whenever the demerger happens,the coal unit of mercator would thus be extravagantly valued for sure.Am really not sure what it will do in the present fiscal.For fy15, the company should deliver an EPS of 3.2 bucks.Average industry PE of 7 times helps me to arrive at the target price of 22 bucks.At 11rs you have nothing to loose folks.The scrip would get completely rerated whenever the demerger happens.From a period of 2-3 years perspective,taking into consideration the demerger factor-The counter should be a 4-5 bagger.

btw:People looking for midcap/smallcap positional call professional service may rush a mail at my mail id to know more about it.


Anonymous said...

Though i have not duug in deep about the company operations, it tempted me to analyse the co. after reading your post. If things are so rosy as you have mentioned like a whooping increase in its revenue streamline, clarify me regarding one matter. If you look @ the OP in 2006 and OP in 2013 it has infact been a reduced no despite huge topline boosting. What do you think is the reason for that?

Equity wealth said...

There's couple of reasons to it.

1)It got grappled with surge in costs related to coal operating expenses.

2)Its tanker segment saw a massive decline in the spot average freight rate(almost 60% from the peak).

Keep commenting.

Anonymous said...

This is the only listed player to play coal other than Coal India?
-- Haven't you heard of something called Adani Enterprises?

Equity wealth said...

Oh yes.Thanx for the same.

Amitha said...

Hi Arun,

What is the future of this stock in the next 3 months.Can i expect it to reach 30 in the near future.CMP-24.50


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