Mercator Ltd had the foresight to protect itself from the vagaries of the shipping business and diversified its revenue stream several years ago. The company now derives a major chunk of its revenue and earnings before interest and tax (Ebit) from its coal business.
For instance, in the first half of this fiscal year, Mercator derived about half of its consolidated revenue and 40% of its total Ebit from its coal business. The contribution from the coal business to overall revenue has declined a bit from the same period last year, though, and one reason for that could be the volume pressures it faced in the last quarter.
The revenue contribution from the shipping business has declined on a year-on-year basis. Oversupply of ships and subdued economic conditions have taken a toll on the shipping business, resulting in depressed freight rates. The company’s offshore business, though, has done well and compensated for the underperformance of the other two key businesses (shipping and coal).
Since the beginning of this fiscal year, the Mercator stock has underperformed the BSE-500 index. While the stock has declined by about 19% since the beginning of FY13, it has also risen by about 20% from its lows during the period. Still, at the current market price, the stock trades at around five-and-a-half times its estimated earnings for the next fiscal year. Valuations do appear attractive at current levels but triggers for outperformance are limited.
The outlook for the shipping industry is far from rosy and that will likely be reflected in the near-term performance of the company. The coal business is a major revenue contributor, but profit margins in this business are relatively much lower.
The consolidated debt burden (long-term plus short-term borrowings) on the books at Rs.3,213 crore is on the higher side.
As on 30 September, Mercator’s debt-to-equity ratio stood at 1.27 times, and cash and cash equivalents were to the tune of Rs.140 crore. Its current market capitalization is about Rs.500 crore. Those numbers don’t really look encouraging.
According to an analyst, the company is looking at converting some of its Indian denominated debt to foreign debt and that will help. Investors would do well to keep a tab on developments on that front.