Recommendation: Buy

Current price: Rs 27 (at the time of publishing this tip)

Target price: Rs 41

Key points:

• Mercator Lines (MLL) reported a 40% YoY growth in revenues for Q3FY09 to Rs 530.81 crore on the back of increased vessel operating days (due to vessel additions). However, revenues have declined 18% QoQ owing to a significant decline in the day rates across vessel categories. Rise in the direct operating expense to sales ratio from 17.8% in Q3FY08 to 21.3% in Q3FY09 has resulted in the operating margin declining by 369 bps to 39.62%.
• During the quarter, MLL had an MTM forex loss (notional) of Rs 32.16 crore, which has further dented the profitability and resulted in the net profit declining 48% to Rs 30.81 crore. Thus many analysts have revised EPS estimate for MLL for FY09E from Rs 15.90 to Rs 9.73 and FY10E EPS from Rs 21.12 to Rs 13.80 to factor the lower operating margin and MTM losses (for FY09).
• MLL is expected report a stable operating performance on the back of 70% of its fleet being on long-term charters, and increasing contribution from the dredging and mining business. MLL’s increasing presence in other businesses of dredging and mining segment would de-risk its business model and reduce the impact of volatility of the shipping cycle on its revenues and earnings.
• Important stock data: Market Cap. Rs. 637.20 Crore; Debt (FY08) Rs. 2274.35 Crore; Cash (FY08) Rs. 857.21 Crore; EV Rs. 2054.34 Crore; 52 week H/L Rs. 129/20; Equity capital Rs. 23.60 Crore; Face value Rs. 1; MF Holding 11.48%; FII Holding 14.66%
• MLL is trading at 1.9x FY10E earnings, which is at a significant discount to its peers. With the
  de-risking of its business and lessening impact of volatility of the shipping cycle, I maintain a very positive outlook on MLL with a target price of Rs 41 over next 7-8 months.