>MERCATOR LINES: Expenses on the damaged vessel and higher dry docking

WHAT’S CHANGED…


PRICE TARGET……………………………………………….Changed from | 34 to | 18
EPS (FY13E)............................................................................. Changed from | 4.6 to | 1.3
EPS (FY14E)………………………………………………………….Introduced at | 2.3
RATING……………………………………………………………………...Unchanged


Slide in operating margin continues…
Mercator Lines (Mercator) reported a below estimate performance on both the revenue and profitability front. On a QoQ basis, revenues declined 7% to | 1019.5 crore (I-direct estimate: | 1122.6 crore) mainly on account of lower realisation of coal and lower fleet utilisation of its
shipping and dredging fleet. In spite of a 5% increase in coal volumes to 2.29 million tonnes, coal revenues declined due to a decline in coal realisation by 10% QoQ to | 3000 per tonne. EBITDA declined 31% to | 115.9 crore (I-direct estimate: | 178.3 crore) due to a 410 bps decline in EBITDA margin to 11.4%. The decline in EBITDA margin can be mainly attributed to lower fleet utilisation and higher repairs and dry dock expenses. One of Mercator’s tankers, which had met with an accident in December 2011, has not been operational and two dredgers were under dry docking during the quarter. Expenses on the damaged vessel and
higher dry docking expense on dredgers has led to the decline in EBITDA margin. In spite of an extraordinary gain on forex to the tune of | 30.08 crore, lower EBITDA generation and higher interest cost (up 10.7% to | 59.5 crore) led to Mercator reporting a net loss of | 24.3 crore.


Lower fleet utilisation impacts revenues and EBITDA margin
During Q4FY12, two dredgers of Mercator were dry docked while one tanker was not operational as it had met with an accident in December 2011 leading to low fleet utilisation. Mercator now operates 18 dry bulk carriers, eight tankers, seven dredgers, one MOPU and one FSO.


Valuation
Considering the significant ramp up in coal trading volumes (low margin business) and pressure on margin in the shipping segment, we expect the EBITDA margin to decline from 15.8% in FY12E to 13.4% in FY14E. Consequently, we have revised downward our EPS estimates for FY13E from | 4.6 to |1.3. We have valued the stock at a 45% discount to global
average of 0.3x at 0.18x FY14E book value of | 101 to arrive at a price target of | 18. We recommend a HOLD rating on the stock. Existing investors can also hold the stock.


To read report in detail: MERCATOR LINES


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