Saturday, October 20, 2012

Mercator-little understood but debt default risk impacting valuations

Earlier, I blogged about Mercator( when it was Rs 25. Now the share price has slid to Rs 21 and the latest annual report FY12 has been released hence I felt its time to come up with an update( The company has a jazzy annual report which has won several awards, so I reproduce graphics from it when helpful. For example, as the FY12 revenue mix shows, the company's main revenue comes from coal trading/mining from its Indonesian operations. Hence, should the market value it as a shipping company or a coal mining company? There is sufficient information in the annual report for sure, but not being a shipping investor, I do not try that.

Instead, what I focus on is the Rs 3400 crores odd debt. The company has had negligible operating cash for the past 3years, and has cash reserves of just Rs 280crores or so. No wonder then, that it was planning an IPO of its coal assets to raise funds. But given the precarious cash position, one wonders whether debt default risk(which seems the only valuation impacting factor) will catch up with the company before then.As the valuations on P/BV are at a record 5yr low, it may make sense to still enter pending debt recap issue.

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