MERCATOR LIMITED
PRICE: RS.21 RECOMMENDATION: BUY
TARGET PRICE: RS.34 FY12E P/E: 8.3X
We recently interacted with the management of Mercator to get an update
on the latest developments in the business areas of Mercator Limited. The
stock has fallen 52% in the last one year despite efforts of the company to
diversify the business of the company as a hedge against the poor
performing shipping segment. Company currently has diversified into
mining and has 3 mines in Indonesia with an estimated reserve of 75 mn
tonnes. It also has a Floating and Production Unit (FPU) and two oil blocks
in Cambay basin in Gujarat in the offshore sector. We believe the coal and
the offshore segment would drive the top line and profitability in FY13E
with contribution of coal (mining and trading) increasing from 47% in FY11
to 62% in FY13E. We also expect the IPO of Oorja Holding (mining business)
to come by FY14E after the business has achieved some scale and would be
value accretive. Management indicated that the shipping segment would
continue to go through a bad phase atleast for the next 3 to 4 quarters. We
believe the fall in stock price, strong performance of the coal and offshore
segment and IPO of Oorja holding offers an attractive opportunity for
investors to participate in the story which also has the backing of the value
of shipping assets.
We re- iterate BUY on the stock with a target price of Rs 34 for the stock.
Our target price is based on SOTP value of the different segments:
Shipping= Rs 19: Mining = Rs 12 and Offshore = Rs 3. Downside risk to our
call includes: 1) Further deterioration of the shipping market, 2) Fall in coal
prices and crude price and 3) High leverage.
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