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Shipping / Offshore / Railways
• The volumes continue to remain subdued on dry bulk led by decline in steel production and inventory pileup in China.
While the freight rates have recovered, we believe that a stronger pick up in volumes of key raw commodities materials
like coal and iron ore shall be required to sustain an uptick. Further, decline in Chinese imports and rising fleet supply
have kept the rate realisations muted during Q3FY11. The current dry bulk rates for capsize are ranging from USD
25000‐30,000 per day
• The ongoing colder winter and concomitant demand for heating oil has been a key support to tanker rates during
Q3FY11. However large US inventories of crude and distillates could cap the possibility of strong upside movement of
oil
• The Baltic Dry Index closed at 1373, implying a decline of 44% for the period Oct‐Dec 23, 2010. Baltic Dirty Tanker Index
(BDTI) increased by 55% to 1062 points for the same period. Likewise the Baltic Clean Tanker Index (BCTI) increase by
23% to 767
• Utilisation levels and vessel charter rates are expected to remain firm in Q3FY11 on account of pick‐up in
exploration/drilling spend backed by firm crude oil prices
Top Pick
Mercator Lines
• Majority of the vessels are on long term contract which we believe is a key benefit in a volatile environment
• Contribution from coal mine and offshore businesses adds to the revenue visibility, and key support to sustaining
valuations
• Trading at 6.4xFY11E EPS and 3.5xFY12E. On EV/EBIDTA basis, the stock is trading at 4.4x FY11E & 3.5x FY12E – we
believe there is low downside risk to valuations (current valuations are In line with historical ) from these levels. We
reiterate BUY with price target of Rs.75 (4xFY12EV/EBITDA)
Some of the Long term charters for Bulk Carriers owned by Singapore subsidiary are linked to BDI as mentioned in their website/result notes. Hence not much benefit. Further for coal bottom line is only 8/9 per cent of top line.
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