Good Mid Cap Stock From Shipping Business - Mercator Lines Ltd

Mercator Lines, as part of a strategy to de-risk the cyclical nature of its core shipping business, entered the offshore drilling business with the delivery of a Rs 1,000-crore jack-up rig. The rig was immediately deployed on a three-year contract with ONGC, through GE Shipping.

It is common practice for new players such as Mercator Lines, which don't have the required technical experience, to route their contracts through experienced intermediaries. The rig has been chartered at a daily rate of $92,700 plus profit-sharing. It can work in 350 feet water depth and drill up to 30,000 feet. Being a new and technically superior rig, with 'high pressure, high temperature' capability, the rig can command a premium over other rigs.Mercator has also paid an additional premium to the Singapore-based shipyard for pre-poning the delivery of this rig by three weeks.

The company is likely to book around a fortnight's worth of revenues or nearly Rs 7 crore in FY09, which will be very small in its consolidated turnover of Rs 2,000 crore. However, in FY10, the rig would single-handedly contribute nearly 7% of the company's revenues.

Mercator's consolidated revenues grew a healthy 67% y-o-y to Rs 1,673.1 crore in the first nine months of FY09, as its long-term contracts helped to minimize the impact of a sharp fall in spot shipping freight rates. Its operating profit margin also improved 460 basis points y-o-y to 44.1% during this period.

Mercator has diversified into other non-core businesses such as the supply of dredgers and coal mining in Indonesia. These non-core activities are expected to represent around 10% of the topline in FY09, which would shoot up to 20% next year.

Market Cap 1,066.68
EPS (TTM) 7.67
P/E 5.89
P/C 3.28
* Book Value 45.91
* Price/Book 0.98
Div(%) 110.00
Div Yield(%) 2.43
Market Lot 1.00
Face Value 1.00
Industry P/E 5.19

This stock is held by many good mutual funds buying mid cap stocks in their portfolio.

It looks like to be a good stock to buy at dips. Investors should buy stocks with 2-3 years investment period for good returns.