Mercator: A turnaround candidate

I can smell an imminent turnaround in loss-making Mumbai-based Mercator. The company has been underperforming for years. There was a time when the firm quoted a market capitalisation in excess of a couple of thousand crores; it is now down to around Rs 500 crore.

This destruction of stakeholders' wealth was the result of capital misallocation. A few years ago, the company created a Singapore subsidiary to engage in the dry bulk vessel business. This business pulled the company down, enlarged debt to around Rs 1,000 crore and sucked out precious profit of the company. A company that was making robust profits - Rs 467 crore at peak, 2008-09 - started turning in losses.

So, what is the fresh twist in the Mercator story? Just one. The company has expressed its intent to divest its dry bulk vessels. When this happens (presumably soon), it will probably make a one-time $30-million investment write-off, plug the cash drain and turn around.

So, let us take a landscape perspective of Mercator's many businesses.

One, the company is engaged in the tanker business, which is profitable at the moment. This business is marked by enduring relationships with large downstream customers. The result is an annuity-like revenue predictability and business stability. Two, the firm owns a coal mine and a logistics support business in Indonesia. While coal prospects are nothing to write to bankers about, the ability to provide a logistics-based solution using the company's captive infrastructure makes it possible to more than break-even. Three, Mercator is engaged in oil drilling and exploration in Cambay and owns a mobile operating process unit. While the prevailing environment is not comfortable, the company has not bet its house on this business.

Four, the firm is engaged in the dredging business in which Mercator is arguably the second largest in India. This business generates a decent annual profit and, going ahead, holds out attractive prospects. Even as the country is the fastest growing global economy and the seventh largest economy (by nominal gross domestic product), its port investment per capita is among the lowest. India's coastline spans 7,517 km, the 16th largest in the world; yet, the country possesses only 12 major ports. India's cargo traffic was 1,052 million tonnes (mt) in 2015; the National Maritime Agenda intends to create a port capacity of around 3,200 mt by 2020. Besides, the Indian government has stipulated a minimum 14-metre depth across 12 nationalised ports, a large improvement over the prevailing depth of 9-12 metres, which will enable the entry of the latest generation of containers, tankers and dry bulk ships. The National Waterways Policy estimates a dredging requirement of around 75 million cubic metres. Besides, the central government plans to assimilate 101 rivers into the National Waterways network. Dredging opportunities also exist in areas such as rivers, dams, lakes, captive jetties and beaches, among others.

Assuming the company breaks even (and attractively so), the profit and depreciation (estimated at Rs 115 crore-plus pre-divestment) would translate into attractive cash in a defensive market.

And, if the equity markets revive and the company can dilute some of its equity to pare debt, then what a story this could be!

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed