23rd jan2012-why mercator lines is a screaming buy

business   June29 2011,3.38a.m. ET
Mercator Plans Share Sale for Singapore Coal Unit IPO ..

By ANIRBAN CHOWDHURY

MUMBAI – Mercator Lines Ltd. plans to raise $150 million by January via an initial share sale of its Singapore-based coal exploration and mining unit, the managing director of the Indian shipping and logistics company said.



"We will not look at divesting more than 30% of the company's shareholding to the public," Atul Agarwal said recently.



The unit, called Oorja HoldingsPte. Ltd., owns coal mines in Mozambique and Indonesia.



Mr. Agarwal said Mercator will soon appoint bankers for the issue, which is likely to happen either in Singapore or London.



Mercator's listing plan mirrors its increasing shift in focus towards the fast-growing coal business. For the year ended March 31, the company's coal and logistics segment posted sales of 13.88 billion rupees ($308 million), about 49% of its total consolidated sales, and up more than three times in absolute terms from the previous year. In contrast, sales from the shipping business, previously its mainstay, rose just 7% and accounted for 46% of the total.



Mercator isn't alone in shifting away from the shipping business, which is still affected by weak freight and tanker rates despite a recovery in global trade. Essar Shipping, Ports and Logistics Ltd. has hived off and listed its ports business under a separate entity.



"By the next fiscal year, the coal business will likely account for 60% of the total revenue, while shipping will diminish even further as we have no plans of expanding it for now," Mr. Agarwal said.



India's companies are trying to buy coal mines overseas as local supplies aren't enough to meet rising demand for the fossil fuel in the world's second-fastest growing major economy. The power sector is the biggest consumer of coal and more than half of India's power generation capacity of 174.36 gigawatts is coal-based.



Mercator already has a ship-operations unit based and listed in Singapore.



Mr. Agarwal also said Mercator's new coal mine in Indonesia will begin production by December. The company has already invested $12.5 million in the mine, which has reserves of 25 million tons, and plans to invest an additional $12.5 million by December, he added.



Mercator is also in talks with several overseas companies for oil storage and processing contracts, Mr. Agarwal said. It recently signed a pact with U.K.-based Afren PLC for a similar contract that entails the use of a floating production, storage and offloading unit.



Mr. Agarwal said the company will invest in more such units worth $250 million-$300 million each if it gets more contracts.



Mercator, which owns four dredgers, plans to buy two more by December for a total of $30 million-$35 million as it expects more dredging contracts in India, Mr. Agarwal said.



He said the company plans to repay $100 million by the end of March out of a total consolidated debt of 32 billion rupees. Mercator may also raise debt of $35 million this year to fund its expansion plan, he added.



Write to Anirban Chowdhury at anirban.chowdhury@dowjones.com

Mercator Lines to launch IPO of coal division by year-end



Published on Thu, Jun 30, 2011 at 11:30
Source : CNBC-TV18



Mercator Lines to launch IPO of coal division by year-endMercator Lines is planning to launch an initial public offer (IPO) of coal division by year-end, said the company�s Joint MD Atul Agarwal in an interview to CNBC-TV18.

Excerpts from Bazaar on CNBC-TV18


Mercator Lines is planning to launch an initial public offer (IPO) of coal division by year-end, said the company's Joint MD Atul Agarwal in an interview to CNBC-TV18.



The company, he said, will raise USD 150 million by divesting 20% in coal mining arm. "The listing will be outside India, either in Singapore or London."



Below is the transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Also watch the accompanying video.



Q: Can you confirm that you are looking to launch the IPO of the coal mining unit?



A: Yes, we are planning the issue by the year-end for the coal division.



Q: Would it be, as reported, USD 150 million kind of a share sale?



A: We are looking to raise in that region.



Q: USD 150 million?



A: Right, approximately.



Q: By selling how much stake in the coal mining unit?



A: About 20%.



Q: So do you think the coal mining business would have a marketcap of USD 750 million?



A: That is correct. That is what we believe.



Q: Would you do the IPO here in the Indian market or somewhere else?



A: Unlikely in India because coal business is housed in the Singapore subsidiary. So, it will happen outside of India.



Q: In Singapore?



A: Likely, either in Singapore or London Stock Exchange.



Q: What would Mercator's holding in that, would it own 80% of that venture post the IPO?



A: That is correct.



Q: You are not looking to liquidate any further stake in that, right?



A: No.



Q: Is there any talk of a pre-IPO placement at all in that subsidiary?



A: Not as yet.



Q: What kind of revenue and profit profile does the coal mining business have at this point?



A: For the year ended March 31, 2011 i.e. current year, the total revenue from the coal division was roughly USD 280 million. We had a profitability close to about USD 18 million.



Q: What would Mercator want to do with that USD 150 million, if it can raise that through the share sale?



A: It will obviously look at investing it again in the coal business, expanding the coal business further.



Q: You don't want to give back some of that capital to shareholders of Mercator, would you?



A: That is something which has not been decided as yet, that is something we will take a call on as we go ahead.



Q: Have you started discussions with lead managers already?



A: We have discussed with a few, but we have not finalised anything as yet.



Q: So, by when do you think road shows can happen and you can file for a listing?



A: That will not happen probably before October-November because we are targeting it by the year-end.



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Mercator’s 2007 diversification plan shields it in tough times


The decision to branch out into the energy business has partially shielded Mercator from the tough times its peers in the shipping industry are facing because of an oversupply of vessels, low freight rates and mounting lossesP.R. Sanjai Mumbai: At the peak of the shipping industry boom in 2007, Mercator Lines Ltd decided to diversify its business, a decision that predictably met with little approval from experts and analysts.


The right time: Managing director Atul Agarwal says that though many criticized the decision to expand to other businesses, Mercator felt it was the right time to do as it had cash then.



The decision to branch out into the energy business has partially shielded Mercator from the tough times its peers in the shipping industry are facing because of an oversupply of vessels, low freight rates and mounting losses.



“The shipping industry was enjoying golden years during 2005-2007, with high freight rates,” Atul J. Agarwal, managing director of the company, said in an interview. “But during internal discussions, we felt that good things will also come to an end. Though many criticized (the move), we felt that it was the right time to expand into other businesses as we had cash then.”



Mercator, which dropped “Lines” from its name in November to reflect its new businesses, has since ventured into the coal mining, offshore services, dredging and oil exploration-industries that are less cyclical than shipping. For Mercator, the gamble has paid off. It has maintained its profitability even as Shipping Corp. of India Ltd (SCI), the nation’s biggest ocean carrier, reported losses.





Mint’s P R Sanjai says the outlook for Indian shipping remains bleak and that private players like Mercator are diversifying.





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“We would like to be known as (an) energy and transportation company in the next three years,” said Agarwal, 54.



Mercator is now in talks with investment bankers for selling shares to the public in its coal mining business for the first time next year, said Agarwal. The company has two coal mines in Indonesia and one in Mozambique. Mercator is also in talks with an Indonesian firm to purchase a coal mine.



Shipping companies are now facing one of the worst times in history, with seaborne trading volume falling 60% since 2007. Mercator posted a net profit of Rs. 21.4 crore in the six months ended 30 September on sales of Rs. 1,584 crore, with the coal business contributing 60% of the revenue, shipping 30%, 5% from dredging, and the rest from services to offshore oil exploration.



In comparison, state-run SCI posted a loss for a third consecutive time in the quarter ended September.




On the other hand, the largest private sector shipping company, Great Eastern Shipping Co. Ltd (GE Shipping), managed to report a net profit in the September quarter, because the company’s offshore business has performed comparatively better than the shipping business and boosted the company’s overall performance.



The financial turmoil across the world has adversely affected the vessel freight rates, with shipowners continuing to scrap vessels since the economic recession, according to rating agency Credit Analysis and Research Ltd (CARE).



“The flow of vessel deliveries during the period of January–September 2011, aggregating 73.8 million gross tonnes, further compounded the problem of shipowners with the existent global fleet already in overcapacity,” CARE said in a November report.



To be sure, SCI always wanted to diversify into other sectors including offshore, but the company’s chairman and managing, S. Hajara, said it is not a great idea to diversify when the economy is slowing.



“I have not seen a recession to this extent for shipping, and in the last 25 years, we have not seen this level of freight rates. Overall, the industry is getting beaten from all sides, including freight rates, rupee depreciation and excess supply,” said B.K. Mandal, director of finance at SCI. “But the offshore segment is doing comparatively better among other shipping verticals.”



Mercator spotted the opportunity of offshore services at the right time and “spread the risk”, said another senior executive at a leading consulting firm, requesting anonymity. “When the company had cash, it bravely explored new avenues. Offshore has assured enough cushion for Mercator.”



Mercator entered the offshore services sector by acquiring a jack-up oil drilling rig in 2007 to help companies explore oil. But the company later sold its two rigs and exited the business. In 2010, Mercator won a contract for providing a floating production unit from the UK’s Afren Plc. This floating production unit is a mix of a mobile offshore production unit (Mopu) and a floating storage and offloading unit (FSO). These are central to a crude oil production and processing facility for an oil field.



On 17 November, a consortium grouping Mercator and Gulf Piping Co. WLL of Abu Dhabi was awarded a contract by Oil and Natural Gas Corp. Ltd. for conversion of its mobile offshore drilling unit (Modu) to Mopu.



“The rig was a commodity business. Mopu and FSO are part of the production process and are specially designed for the company’s requirements. It cannot be replaced by any other Mopu, like a rig. So we are on the revenue side of an oil company with long-term contracts,” Agarwal said.



The consultant cited earlier said Brazil requires more than 50 FSOs while other parts of the world will need 100, and India five more. Mercator plans to bid for more business opportunities on this side.



Agarwal admitted that Mercator has not made much progress in oil exploration. The company has two oil blocks in India in the Cambay basin in western Gujarat.



“We are currently doing a seismic survey on the blocks. We are open to having partners for exploring these wells after surveys,” Agarwal said.



Not everyone is convinced about Mercator’s strategy. Even though Manish Saigal, partner (advisory services) and national industry head of transport and logistics at consulting firm KPMG India Pvt. Ltd, endorses the idea of creating a counter-cyclical business to cut dependency on shipping, he says the businesses should be synergestic and closely linked with a company’s core business.



When a company builds unrelated lines of businesses, the capital market tends to discount valuations, Saigal said.



Mercator, however, has no plans to exit the shipping business.



“Shipping gave credibility to us and we have no plans to exit shipping or downsize,” Agarwal said. “On the contrary, we are not averse to buy old or new ships. There are no immediate acquisition plans; the purchase plans would be opportunity-based.”



The company has plans to buy more dredging ships that are into deepening shipping channels near a port. Mercator owns six dredgers.



pr.sanjai@livemint.com



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