Mercator Lines: Smooth Sail

Mercator Lines is making a transition from an aggressive asset-acquisition phase to revenue generation. Consequently, this shipping company's top line should grow at a rapid pace. Its foray into the booming dry bulk and offshore segments would further de-risk its business and enhance margins.

Brief Overview
Incorporated in 1983, Mercator Lines Ltd (MLL) was initially a lighterage operator at Mumbai port. In 1989, H K Mittal, the current promoter, took over the reins of the company and diversified it into the tanker and dry bulk segments (the shipping industry is broadly classified into wet and dry bulk and liners). Since 2003, MLL's capacity has gone up by 1,200 per cent in terms of tonnage to emerge as the country's second largest shipping company in the private sector.

Its fleet comprises tanker and dry bulk vessels. The company operates its tankers fleet through very large crude carriers (VLCC), Suezmax and Aframax tankers. In the dry bulk segment, it operates through Handymax and Panamax vessels. MLL serves a clientele consisting of the cream of Indian energy sector, such as IOC, HPCL and MRPL, along with reputed international clients. The company is looking at rapid growth in the dry bulk segment. Its subsidiary, Mercator Lines Singapore, is aggressively building dry bulk tonnage to take advantage of the firm trend in dry bulk rates. Over the years, MLL has evolved a focused business structure for specific business segments.

Shipping Boom
Shipping is the primary means for transporting various commodities worldwide. Demand for shipping is mainly driven by increase in global trade and commerce.
The shipping industry in India is bound to witness accelerated growth on the back of India's growing international trade. India imports around 76.4 per cent of its oil requirements, much of it from the Middle East. India's exports are mainly driven by iron ore and other products.

De-Risked Model
The company has a presence in both crude carriers and dry bulk segment, which de-risks its revenues from the normal volatility in the crude oil segment. About 60-70 per cent of the contracts are long-term and the remaining spot contracts. This gives it a steady flow of revenue and also helps it capitalise on opportunities in the spot market. As shipping is dependent on international trade, the business tends to be cyclical in nature due to which the industry freight rates tend to be volatile. In a bid to counter this volatility, MLL judiciously deploys its vessels under time and spot charters.

New Venture
MLL's strong foray into the dry bulk segment through its Singapore subsidiary would enable the company to capitalise on the firm trend in the dry bulk rates. This would help MLL benefit from the booming dry bulk segment due to increasing trade of iron ore and coal from emerging economies of China and India. Dry bulk rates have been on the rise and are expected to remain firm going ahead on the back of strong commodity demand and shortage of fleet. The impending listing of the subsidiary in Singapore would add further value for MLL.

Going Ahead
India's energy requirements would drive dry bulk trade as coal forms 55 per cent of the total domestic consumption. India has emerged as the largest importer of coal in the world. Driven by a rising population and expanding economy, energy usage in India is expected to rise around 450 kgoe/year in 2010. But, considering the limited reserves of petroleum and natural gas, eco conservation, restriction on hydel projects and geo-political perceptions of nuclear power, coal will continue to occupy center-stage of India's energy scenario. Further, the increasing demand for energy the world over will lead to a higher level of offshore oil and gas exploration and result in higher demand for maritime players.

Suspected Barriers
Cyclical nature of the industry can impact the revenues. The phasing out of single-hull vessels has been brought forward from 2015 to 2010 and further change in the regulation, earlier than 2010, would impact the company's business and financials. A significant portion of the revenue is denominated in US dollars and other foreign currencies. Any significant appreciation of the Indian rupee could impact its revenue and profitability.

Promising Numbers
MLL has been on an asset acquiring binge since FY07. Its capacity will increase by more than 50 per cent from FY07 to FY09E. The dry bulk segment would be the major growth driver with its share of revenue increasing from 31 per cent in FY07 to 48 per cent in FY09E. An improvement in EBIDTA margins would enable the fast paced growth in profitability, despite the increase in interest and depreciation expenses due to the acquisition of new vessels. We expect MLL's net profit to increase at a CAGR of 59 per cent over FY07-FY09E. Higher profitability, on the back of higher margins, would enable the company improve its return on net worth (RONW) and return on capital employed (ROCE).

A consciously planned presence in both, the crude carriers and dry bulk segment, should help the company deliver aggressive growth.

This article was originally published on November 29, 2007.