In tricky waters

Higher income from trading and coal mining helped Mercator post strong topline growth for the quarter ended March. At Rs780.2 crore, sales stood up 62% year on year. As the contribution of low-margin businesses like coal and trading to the topline increased, earnings before interest, tax, depreciation and amortisation, or Ebidta, margins of the consolidated numbers were lower. Operating profit declined 11.4% toRs119.3 crore, while operating profit margin crashed from 27.9% to 15.3%. Given the lower margins, the company ended up with a loss of Rs22.3 crore (not including non-recurring income) as against a profit of Rs0.2 crore.

For the entire year, the company posted a consolidated income of Rs2,829 crore for FY11 compared with Rs1,809 crore the previous year. Consolidated net profit was Rs46.85 crore compared with Rs53.23 crore.

While the coal business has been growing rapidly and has posted record topline and operating profits, the issue for Mercator Lines investors is its standalone numbers. The company’s standalone business has been posting a loss for the last two quarters. At the operating level, too, the company has marginally posted profits. Its standalone business is focussed on tanker shipping and dredgers. During the year, the group has acquired an Aframax tanker, two Panamax and one Kamsarmax dry bulk carriers, a mobile offshore production unit and a floating storage offshore unit.

In the previous quarter, the group had sold a jack-up rig owned by its subsidiary Mercator Offshore Ltd to GE Shipping. The unit, which was on a three-year rental with GE Shipping was earning $97,200 per day. The loss in revenue due to this rig will be around Rs150 crore. The proceeds of the sale will be used to reduce its consolidated debt by $135 million, which currently stands at $880 million.

The loss in revenue will to some extent be made up by commissioning of a seven year contract to charter out a floating production unit to Afren Plc, UK at their field in Nigeria. The unit, which was set up with a capital expenditure of Rs560 crore, has a revenue potential of Rs150 crore.

Mercator’s stock reacted positively to the results and moved up 5.29% to Rs39.80 a share. However, unless the shipping division starts firing along with the coal and offshore unit, the stock is likely to remain under pressure.