Mercator Lines Q1FY11 Result update Aug 03 10

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1 on Aug 3, Market Price (02/08/10) 49 Market Cap. (`. Cr.) 1, Week High/Low 72/42 Face Value 10 Target Price 61 Codes BSE Code ISIN No INE934B01028 Bloomberg Code MRLN IN Reuters Code MRCT.BO Book Value (FY10) ,000 15,000 10,000 5,000 0 Jul 09 Share price data Oct 09 Sensex Jan 10 Apr 10 Jyotsna Sawdekar Sr. Research Analyst Shipping jsawdekar@jaypeeindia.com Prasun Kumar Research Analyst Shipping prasunkumar@jaypeeindia.com Direct No : Mob No : Jul 10 Mercator On consolidated basis, sales have shown growth of 34% y o y and 24% q o q to `5.99bn. EBITDA was 5% down y o y and 32% up q o q to `2.02bn. EBITDA margin inched up to 34% from 31% in the previous quarter. Dep. was 14% down y o y and 1% up q o q to `0.76bn and Interest cost was down 13% y o y and 7% q o q to `488mn. Depreciation and interest cost stood at 12.6% and 8% of sales. Net Profit was up 39% y o y and 539% q o q to `0.6bn, which was in line with our expectations. We foresee good quarters to come and better asset utilization. We maintain a buy rating with a revised target price of `61 per share. Q1FY11 Result in line with our Expectation: Net Profits for the quarter was in line with our estimates of `0.6bn. Company had been aggressive in acquiring assets even during the global financial downturn, last quarter has seen acquisitions of one Aframax tanker and is in process of construction of Mobile offshore production unit (MOPU) and Floating storage and offloading unit (FSO). Improvement in coal segment seen with sales up by 438% y o y and 85% q o q, and margins moving to 5.18%. Coal segment holds strong growth prospects with further streamlining of operations. Industry Outlook: Crude tankers and Dry bulk segments are expected to grow with the slow recovery of the global markets. The dry bulk segment has seen downfall due to Chinese cut down on imports DBI has finally stabilized and is expected to show moderate upside movement. Tanker markets are dependent to a large extent on US and the major crude importing economies, the European crisis has not affected the tanker rates directly, and is expected to improve with the upturn of the US economy. The scrapping of the single hull fleet, shipyard order book slippages and the demands from fast growing Asian economies promise good returns for the running quarter. Valuation: At CMP `49, the stock is currently available at a P/E of 8.3x and 5.2x its FY11E and FY12E earnings of `5.9 and `9.4. While on EV/EBITDA basis, it is trading at 4.2x and 2.9x during the same period. We value Mercator by assigning a 6.5x P/E multiple to its FY12E earnings. Based on this, we maintain our BUY recommendation with a revised target price of `61. Y/E 31st March FY08 FY09 FY10 FY11E FY12E Revenue (` mn) Revenue growth (%) 30% 48% 16% 17% 15% EBITDA EBITDA margin (%) 40% 41% 36% 38% 38% Net Profit (`) Net Profit margin (%) 22.5% 17.5% 2.9% 6.6% 9.1% EPS EPS (w/o MI)

2 Financial Table FY09 FY10 FY11E FY12E P/E Dividend Yield P/ BV EV / EBITDA EV / Sales Vessel delivery for the quarter The Company has taken delivery of one Aframax tanker (90,607 DWT). Mobile offshore production unit (MOPU) and Floating storage and offloading unit (FSO) is in construction phase. Company has been proactive and has renewed its fleet with all double hull tankers much in advance as required by regulations for phase out of Single hull tankers. Improvement in coal segment margins Key Triggers Coal segment margins show significant improvement with sales up by 438% y o y and 85% q o q and operating margins at 5.18%. Coal segment holds strong growth prospects with further streamlining of operations. Bounce back in dredging segment TCY Other Highlights for the quarter Mercator Lines has shown promising results with 1QFY11 EPS of `2.6, better than our expectations of annual EPS `6.8. MLL has shown improvement in all segments, MLL s strategy of long term contracts in 70:30 ratio has provided an effective hedge against the downside of shipping rates experienced during the quarter. Dredging segment has bounced back to TCY of 18,289 per day from 7,170 per day rates last Qtr. Shipping fleet stands with 1 Rig, 16 Bulk carriers, 8 Tankers, 4 Dredgers. Revenue Days Q1FY11 Q1FY10 YoY (%) Q4FY10 QoQ (%) Tanker segment Dry Bulk segment Dredger segment Average TCY s earned (US $ per day) Q1FY11 Q1FY10 YoY (%) Q4FY10 QoQ (%) Tanker segment 20,636 19, , Dry Bulk segment 30,217 24, , Dredger segment 18,289 23, ,

3 Sensitivity Analysis on EPS Sensitivity to 10% change in Re pricing Re pricing at 10% discount Pricing at Par Re pricing at 10% premium On FY11E EPS On FY12E EPS Quarterly Performance ` mn Q1FY11 Q1FY10 YoY (%) Q4FY10 QoQ (%) Net Sales Other Income Total Income TOTAL EXPENDITURE PBIDT Interest PBDT Depreciation PBT Exceptional item Profit before tax Tax (5) (83) 94.3 (30) 84.3 Reported Profit After Tax Extra ordinary Items Minority Interest (153) (154) 0.1 (130) 17.8 Adjusted PAT After Extra ordinary before Minority Interest EPS ( Fully Diluted Equity) Margin (%) OPM NPM

4 Annual Performance Particulars ` million FY08 FY09 FY10 FY11E FY12E Net Sales Total Expenditure EBIDTA EBIDTA margin (%) 40% 41% 36% 38% 38% Depreciation Interest PBT PBT margin (%) 28% 22% 6% 10% 12% Tax Adj. PAT PAT (margin) 23% 17% 3% 7% 9% EPS (`) EPS (w/o MI)

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