Mercator Lines

Mkt Cap 2,337.21
P/E 21.50
EPS (TTM) 4.63


Buy at CMP 94
Target 1: 107 (10 Days)
Target 2: 125 (1 Months)
Target 3: 148 (6 Months)


Reason to buy:
Mercator Lines is close to buying two dry bulk vessels and vessels deal size is seen at USD 110 million. Mercator Line’s Joint MD Atul Agarwal has confirmed that they definitely are looking at Chinese yards for these orders, but it is in discussion stage and nothing has been finalized yet.

Mercator Lines (Singapore) Limited, reported a strong 303.0% surge in net profit to US$52.2 million for the financial year ended March 31, 2008 (“FY2008”), surpassing its bottom line of
US$12.9 million in the previous year.” Mercator Lines India holds 72% shares in the subsidiary and will be consolidating these numbers with Mercator India’s results.

Crude prices have been surging to a new all time high, now reaching USD 125/bbl on supply threats. The shipping companies like Mercator lines which carry crude are likely to see higher prices, because the demand will be higher.

Fundamentals
Mercator Lines Limited is the second largest private sector shipping company in India (by aggregate fleet tonnage capacity).It has established a market presence in the Indian coal transport market, specializing in the transportation of dry bulk commodities such as coal into India from Australia and Indonesia, and iron ore from India to countries such as China, Japan and South Korea. The Group also provides its customers with complete and customized logistics solutions from the load port to the point of usage.
Mercator lines are the providers of sea borne transportation services, primarily involved in the transportation of crude oil in India and overseas. Total tonnage as on today stands at 23,40,838 DWT consisting of one very large crude carrier (VLCC); one Suezmax tanker; six Aframax tankers; two MR Tankers and one Panamax. Two vessels of aggregate tonnage of 1,55,840 metric tons were owned by subsidiary of the Company consisting of one panamax and other Kansarmax. In July 2007, the Company took the delivery of a Panamax vessel of 74,444 DWT.
The Company’s subsidiaries include Mercator International Pte. Ltd. Mercator Offshore Ltd., Mercator Lines (Singapore) Pte. Ltd., Varsha Marine Pte. Ltd. Vidya Marine Pte. Ltd., Mercator Lines (Panama) Inc. and Mercator Oil&Gas Ltd.
The Group services primarily large thermal-based power plants and steel companies, and has established strong relationships with its customers, including reputable names such as Arcelor Mittal Group and Tata Power. Mercator derives its revenue largely from long term fixed rate contracts, specifically time charters and contracts of affreightment (“COAs”). Ranging from 11 months to five years, Mercator’s long term fixed rate contracts ensure revenue visibility.

Key Indian Clients :
Manglore Refinery and Petrochemicals Ltd.
Indian Oil Corporation Ltd.
BG Exploration and Production India Ltd.
Reliance Industries Ltd.
Steel Authority of India Ltd.
M. Pallonji & Co. Pvt. Ltd.
Key Overseas Clients :
S. T. Shipping & Transportation Inc.
Dorado Tankers Inc.
Maruben International Petroleum, Singapore.

Awards and Recognition
The Chairman and Managing Director of the Company Mr. H. K. Mittal was awarded "Entrepreneur of the Year-2005-06" by The Economic Times of India and "The Entrepreneur of the Year Award Services-2005" by ERNST & YOUNG in November 2005.

The Company was awarded the "Star Company of the Year Award" in Small and Medium Sector (SME) by the leading financial newspaper, Business Standard in February 2005.

The Company was rated as "Fastest Growing Small Company of India" across all the sectors by Business Today in March 2005.

The Company was also nominated consecutively for two years for the "Emerging Company of the Year 2003-04 and 2004-05" by the Economic Times Awards for Corporate Excellence.

Prospects
According to the Drewry Publications, global demand for iron ore is expected to increase by 5.5% to 828.5 million tonnes, while demand for coking coal is expected to reach 236.0 million tonnes in 2008, and steam coal to arrive at 569.2 million tonnes in 2008. In addition to India’s growing position as a major coal importer, its “Power for All” mission to achieve 100,000 MW of power generation by 2012 will also greatly boost dry bulk demand. China, which accounted for 49.0% of seaborne iron ore imports in 2007, is set to maintain its position as major importer as its share of seaborne iron ore imports is expected to increase to around 55.0% by 2012. Based on the demand and the Group’s chartering philosophy of having the majority of its revenue driven from long term contracts, Mercator believes that the growth prospects going forward look promising and will continue to execute its strategic plans and identified growth initiatives.

Strategies and Future Plans
It added two prominent new customers in 2008 – Italian-owned, Singapore-based shipping group Siba Ships Asia Pte. Ltd. as well as Hong Kong-based shipping company, Refined Success Ltd., a subsidiary of leading PRC shipping conglomerate, COSCO (H.K.) Shipping Co., Limited, one of the largest dry bulk shipping companies in the world.
Tapping into the demand growth in the international markets, plans are in the pipeline to enlarge the Group’s fleet capacity, with the acquisition of a Very Large Ore Carrier (“VLOC” – 280,000 dwt) scheduled for delivery around December 2008 and two Post Panamaxes (92,500 dwt) scheduled for delivery between May and September 2009.
It recently purchased two of its chartered-in vessels, “YK Titan and “YK Taurus”, increasing its owned fleet to a total of nine vessels upon delivery. The Group presently operates a fleet of 11 dry bulk carriers, consisting seven owned and four chartered-in vessels, with an aggregate capacity of 829,057 dwt. YK Titan is scheduled for delivery between July 1 and August 31, 2008 whilst YK Taurus is scheduled for next month. Mercator also expects to exercise its purchase option for Ocean Senang, a December 1999-built geared Panamax at an attractive price of US$24.2 million.”