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Mercator’s 2007 diversification plan shields it in tough times

Mercator’s 2007 diversification plan shields it in tough times
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First Published: Sat, Dec 24 2011. 12 05 AM IST

The right time: Managing director Atul Agarwal says that though many criticized the decision to expand to other businesses, Mercator felt it was the right time to do as it had cash then.
The right time: Managing director Atul Agarwal says that though many criticized the decision to expand to other businesses, Mercator felt it was the right time to do as it had cash then.
Updated: Sat, Dec 24 2011. 12 05 AM IST
Mumbai: At the peak of the shipping industry boom in 2007, Mercator Lines Ltd decided to diversify its business, a decision that predictably met with little approval from experts and analysts.
The right time: Managing director Atul Agarwal says that though many criticized the decision to expand to other businesses, Mercator felt it was the right time to do as it had cash then.
The decision to branch out into the energy business has partially shielded Mercator from the tough times its peers in the shipping industry are facing because of an oversupply of vessels, low freight rates and mounting losses.
“The shipping industry was enjoying golden years during 2005-2007, with high freight rates,” Atul J. Agarwal, managing director of the company, said in an interview. “But during internal discussions, we felt that good things will also come to an end. Though many criticized (the move), we felt that it was the right time to expand into other businesses as we had cash then.”
Mercator, which dropped “Lines” from its name in November to reflect its new businesses, has since ventured into the coal mining, offshore services, dredging and oil exploration-industries that are less cyclical than shipping. For Mercator, the gamble has paid off. It has maintained its profitability even as Shipping Corp. of India Ltd (SCI), the nation’s biggest ocean carrier, reported losses.
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Mint’s P R Sanjai says the outlook for Indian shipping remains bleak and that private players like Mercator are diversifying.
“We would like to be known as (an) energy and transportation company in the next three years,” said Agarwal, 54.
Mercator is now in talks with investment bankers for selling shares to the public in its coal mining business for the first time next year, said Agarwal. The company has two coal mines in Indonesia and one in Mozambique. Mercator is also in talks with an Indonesian firm to purchase a coal mine.
Shipping companies are now facing one of the worst times in history, with seaborne trading volume falling 60% since 2007. Mercator posted a net profit of Rs 21.4 crore in the six months ended 30 September on sales of Rs 1,584 crore, with the coal business contributing 60% of the revenue, shipping 30%, 5% from dredging, and the rest from services to offshore oil exploration.
In comparison, state-run SCI posted a loss for a third consecutive time in the quarter ended September.
On the other hand, the largest private sector shipping company, Great Eastern Shipping Co. Ltd (GE Shipping), managed to report a net profit in the September quarter, because the company’s offshore business has performed comparatively better than the shipping business and boosted the company’s overall performance.
The financial turmoil across the world has adversely affected the vessel freight rates, with shipowners continuing to scrap vessels since the economic recession, according to rating agency Credit Analysis and Research Ltd (CARE).
“The flow of vessel deliveries during the period of January–September 2011, aggregating 73.8 million gross tonnes, further compounded the problem of shipowners with the existent global fleet already in overcapacity,” CARE said in a November report.
To be sure, SCI always wanted to diversify into other sectors including offshore, but the company’s chairman and managing, S. Hajara, said it is not a great idea to difersify when the economy is slowing.
“I have not seen a recession to this extent for shipping, and in the last 25 years, we have not seen this level of freight rates. Overall, the industry is getting beaten from all sides, including freight rates, rupee depreciation and excess supply,” said B.K. Mandal, director of finance at SCI. “But the offshore segment is doing comparatively better among other shipping verticals.”
Mercator spotted the opportunity of offshore services at the right time and “spread the risk”, said another senior executive at a leading consulting firm, requesting anonymity. “When the company had cash, it bravely explored new avenues. Offshore has assured enough cushion for Mercator.”
Mercator entered the offshore services sector by acquiring a jack-up oil drilling rig in 2007 to help companies explore oil. But the company later sold its two rigs and exited the business. In 2010, Mercator won a contract for providing a floating production unit from the UK’s Afren Plc. This floating production unit is a mix of a mobile offshore production unit (Mopu) and a floating storage and offloading unit (FSO). These are central to a crude oil production and processing facility for an oil field.
On 17 November, a consortium grouping Mercator and Gulf Piping Co. WLL of Abu Dhabi was awarded a contract by Oil and Natural Gas Corp. Ltd. for conversion of its mobile offshore drilling unit (Modu) to Mopu.
“The rig was a commodity business. Mopu and FSO are part of the production process and are specially designed for the company’s requirements. It cannot be replaced by any other Mopu, like a rig. So we are on the revenue side of an oil company with long-term contracts,” Agarwal said.
The consultant cited earlier said Brazil requires more than 50 FSOs while other parts of the world will need 100, and India five more. Mercator plans to bid for more business opportunities on this side.
Agarwal admitted that Mercator has not made much progress in oil exploration. The company has two oil blocks in India in the Cambay basin in western Gujarat.
“We are currently doing a seismic survey on the blocks. We are open to having partners for exploring these wells after surveys,” Agarwal said.
Not everyone is convinced about Mercator’s strategy. Even though Manish Saigal, partner (advisory services) and national industry head of transport and logistics at consulting firm KPMG India Pvt. Ltd, endorses the idea of creating a counter-cyclical business to cut dependency on shipping, he says the businesses should be synergestic and closely linked with a company’s core business.
When a company builds unrelated lines of businesses, the capital market tends to discount valuations, Saigal said.
Mercator, however, has no plans to exit the shipping business.
“Shipping gave credibility to us and we have no plans to exit shipping or downsize,” Agarwal said. “On the contrary, we are not averse to buy old or new ships. There are no immediate acquisition plans; the purchase plans would be opportunity-based.”
The company has plans to buy more dredging ships that are into deepening shipping channels near a port. Mercator owns six dredgers.
pr.sanjai@livemint.com
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First Published: Sat, Dec 24 2011. 12 05 AM IST