Mercator Ltd – Deleveraging and demerger to create substantial wealth creation
Mercator Ltd is diversified business group with presence in Oil & Gas, Coal mining, shipping and dredging. In the last decade of company’s operations, capital misallocation, aggressive expansion with borrowed capital, inefficient operations have led to wealth destruction. However, management which learned from its past mistakes is now in the process of restructuring its business operations to unlock shareholders value. In this step, company is taking few strategic decisions to deleverage balance sheet, exiting loss making operations and sale of non-core assets. We believe that the restructuring process of the company is near its completion and stock price is at an inflection point.
Company at its June board meeting outlined its key focus areas in the business and planning to demerge its shipping and dredging business to unlock value for shareholders. While the focus on deleveraging continues, the presentation also states that the management is looking for monetization of its coal assets in Indonesia and simultaneously increase focus on Dredging business through high margin contracts.
Deleveraging to make balance sheet leaner and boost earnings:
Company’s aggressive expansion led to the massive surge in its debt. At its highest, company is having debt of Rs.3886cr in FY15. Led by management focus on deleveraging its balance sheet, the same has been brought down by nearly 50% over the last two years. At the end of FY17, company is having total debt of Rs.1839cr and is palling to reduce it by another Rs.300-400cr by end of FY18. Recently, the company has done $50mn QIP which will be used to replace the high cost debt. It also sold two of its vessels for the consideration of nearly Rs.47cr and the proceeds will be used for repaying debt. According to the latest news source of Bloomberg Quint, company is in the final stages of talks to sell its entire interest in Indonesian coal mines. This stake sale is likely to fetch close to $150 mn (about Rs.1000cr).
Dredging – Key beneficiary of Sagarmala project and Inland waterways development:
Mercator Ltd is amongst the largest private sector dredging companies. Company is looking to grow aggressively in the Indian dredging business through various means including rapid organic growth through fleet expansion and also potential acquisitions. Company is strategically positioned to benefit from Government of India’s vision to make India a global transshipment hub and enhanced used of inland water ways for more efficient transportation.
The company has strong bid pipeline of Rs.500cr. The order books is expected to rise considering the GOI initiative under the Sagar mala project involving projected annual dredging demand of around INR. 12,000 Crores. Inland Waterways Authority of India is developing NW-1 under the Jal Marg Vikas Project (JMVP) an expenditure of INR 5,370 Crores has been envisaged to be made over the period of next seven years. National Water Development Agency is working on the river inter-linking project between Maharashtra & Gujarat which necessitates substantial dredging.
In the latest development, the Union cabinet has approved the sale of its entire stake (73.47%) in Dredging Corporation India Ltd (DCIL). According to the news sources, Mercator is in the front line to acquire the government stake in DCIL. The presence of limited number of players in Indian dredging business will enable the company to capture the huge opportunities going forward.
Shipping: Turn around in charter rates will increase asset yields
Mercator’s tanker fleet consists of a Very Large Gas Carrier (VLGC), a Very Large Crude Carrier (VLCC), a Floating Storage & Operating (FSO) vessel and four product tankers (MRs) with an aggregate capacity of 626,791 DWT. All tankers were gainfully deployed. During the year; Mercator won a four year contract valued at about Rs.120 cr for one of the tankers.
The assets in the shipping segment look attractive and company constantly evaluating options to acquire new assets on an asset-light model basis. The business got impacted in the near term due to GST implementation as Oil is kept out of purview while freight rates attract GST. Going forward charter are expected improve as bottom of the cycle reached. There is also scope for significant supply coming off as scrapping of ships expected on account of CAPEX requirements for Ballast Water Management.
Oil and Gas: Commercial production to commence in next few quarters
Mercator Petroleum Limited (‘MPL’), a subsidiary of the Company has Production Sharing Contracts with the Government of India for exploration of petroleum in two blocks viz. CB-3 & CB-9, under the Seventh New Exploration Licensing Policy round (NELP-VII). MPL has 100% participating interest (‘PI’) in both the above blocks.
MPL, during the First Phase of its drilling campaign in CB-9, has drilled four exploratory wells, tested two of them and have discovered superior quality oil (light & sweet crude – 410 API) in both, with oil flowing to surface at the time of well testing in the presence of the Directorate General of Hydrocarbons (DGH). The quality of oil so discovered, enjoys a premium over Brent Crude (Brent Crude being 380 API).
Recently company has submitted a detailed filed development plant to the DGH. Company is planning to recover nearly 23 million barrels of reserves from the discoveries earlier made with the target to commence oil production from mid CY18. This is expected significantly enhance the company’s earning profile. Further drilling is being carried out in the block and as part of the overall campaign, a total of 6 wells have already been drilled in the block. The drilling campaign is expected to be completed by end of FY18.
During FY17, Shalabh Mittal, the son of H.K. Mittal (Chairman of the company) has been appointed as CEO of the company. Mr. Shalabh Mittal holds a Masters of Commerce degree from Sydenham College, University of Mumbai and Post-Graduation Diploma in Business Administration from the S. P. Jain Institute of Management and Research, Mumbai, India. He is also an alumnus of Harvard Business School, Boston, USA. He has wide experience of around 16 years in the field of management, operations & strategic planning etc.
Mercator ltd is quoting at market cap of Rs.1164cr and enterprise value of RS.2800cr. We expect the sharp reduction in debt by sale of coal assets and other non-core assets. Improvement in balance sheet, expected demerger of its business segments in to separate verticals, the huge opportunity size of dredging business and increase in asset yield of shipping business will lead to substantial wealth creation during next 12 to 18 months.