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Buy Mercator Lines – ICICI Direct

August 15, 2007

ICICI Direct’s research team recommends a BUY on Mercator Lines Ltd – MLL with a price target of Rs 85 [CMP Rs 57, potential for 47% returns]It is the second largest private sector shipping company in India.

MLL has charted out an expansion plan of Rs 1,000 crore for acquiring dry bulk carriers through its Singapore subsidiary. MLL will benefit from the rising dry bulk charter rates as the rates are expected to remain firm on account of sustained momentum in commodity movement from developing economies of China and India.

MLL has placed an order for construction of a new offshore rig at a cost of Rs 810 crore, which is expected to be delivered in Q1FY09. Offshore activity for oil and gas exploration is likely to remain at a high.

The company is expected to improve its operating margins going ahead from 26% in FY07 to 33-35% in FY08E and FY09E. On fully diluted equity of Rs 23.23 crore, we expect MLL to report a consolidated EPS of Rs 10.1 for FY08E and Rs 14.2 for FY09E. MLL trades at 4.1x it FY09E consolidated earnings and is available at a significant discount to peers like Shipping Corporation of India and Great Eastern Shipping. The stock is likely to be re-rated at 6x its FY09E earnings with a target price of Rs 85.

Dalal Street. Biz:
Kindly note that Citigroup has terminated coverage on Shipping Corporation of India and Great Eastern Shipping citing low investor interest in the stock.

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