Last week, Mercator Lines Ltd announced its intention to change the company’s name to Mercator Ltd, subject to necessary approvals.

According to the firm, the current name reflects its primary focus on the shipping business only, while the firm has a presence in other businesses—coal being the major one—as well.

At its annual general meeting last week, Mercator said while it “shall continue to invest in new shipping assets, revenue contribution from this division in the company’s total turnover shall continue to decline and shipping division will be a support service for other business verticals".

The contribution from the shipping business has already been falling. For instance, in FY11, shipping business revenue had fallen substantially to 46% of total consolidated revenue from around two-thirds in FY10. In the June 2011 quarter, shipping revenue was 36% of the total, compared with 54% in the same period last year.

On the other hand, during the same time frame, contribution from Mercator’s coal business had increased substantially. The same trend is seen in earnings before interest and tax (Ebit), too. Of course, it’s important to note that the shipping business, in general, has not been in great shape for a while now.

Mercator’s diversification does make it well placed to combat the weakness in the cyclical shipping business. Analysts expect revenue contribution from the coal business to further increase in two years from the current levels (49% in FY11). However, as a result of this, overall operating profit margin of the firm is expected to moderate as coal business margins are relatively lower. In the June quarter, its operating margin fell to 19% from 33% in the same quarter last year, mainly because the coal business revenue accounted for three-fifths of total revenue.

Recent news reports indicate that Mercator has acquired a 50% stake in a coal mine in Indonesia. “The mine is expected to have resource of about 60 million tonnes (mt), out of which minable coal is expected to be around 35mt," said a note from Antique Stock Broking Ltd last week.

Revenue from the mine is expected to flow in from the last quarter of this fiscal and, accordingly, that quarter should be comparatively better for the coal business. Antique said Mercator will be a major beneficiary of the growing thermal coal import demand in India from capacity additions in thermal power plants.

Meanwhile, the stock has underperformed the BSE 500 index on the BSE Ltd since the beginning of this fiscal. Analysts reckon valuations appear attractive at current levels. Although the timeline for the listing of the firm’s coal mining unit is not specific, that could be a trigger for the stock in future.