Religare Picks: Mercator Lines, KPR Mill

MUMBAI: Religare Securities has initiated ‘buy’ on Mercator Lines for a target price of Rs 177. Mercator Lines is engaged in the business of dry and liquid bulk cargo transportation in the Asia Pacific region.

The company is a complete logistics solutions provider, operating a young fleet of 24 geared and gearless vessels.

Growth in dry bulk transportation in the Asia Pacific has prompted Mercator Lines Singapore, a subsidiary of Mercator Lines, to increase fleet size. Mercator Lines Singapore enjoys tax free status granted by the Singapore government.

Mercator Lines derives 70 per cent of its revenue from long term contracts for periods lasting from three to seven years, thus providing higher revenue visibility compared to global peers, where spot earnings are significantly high.

Further, operating vessels under Singapore and Indian flags provides the company considerable advantage in winning contracts, says Religare.

Mercator Lines also possesses dredgers and is expected to acquire one more, which will be deployed in Indian ports. It is the only private company operating dredgers in India, apart from Dredging Corporation of India. Mercator Lines will also enter the offshore drilling market in 2008-09, with the acquisition of a jack-up rig, says the brokerage.

Mercator Lines Singapore raised US$145 million through its maiden initial public offer and was listed recently on the Singapore Stock Exchange. The company intends to use the proceeds to acquire new vessels till 2009-10. There is also a possibility that Mercator Lines might go for acquisitions, says Religare.

At current market price, Mercator Lines is trading at price per earning of 8.4 times, price per book value of 1.8 times and EV/EBITDA of 6.3 times on 2008-09 estimate. The target price signifies an appreciation of 54 per cent from current levels.

KPR Mill

Religare has initiated ‘buy’ on the stock for a target price of Rs 212. KPR Mill is the largest integrated producer of readymade knitted apparel and cotton knitted fabric and yarn in Southern India, the company’s end-to-end production chain translates into efficiencies of scale and superior quality control, says Religare.

The brokerage expects the company to deliver a revenue compounded annual growth rate of 40.4 per cent to Rs 950 crore and earning CAGR of 52.6 per cent to Rs 136 crore over FY07-FY09.

KPR has a large base of 1,000 customers for knitted fabric and cotton yarn, along with 35 international clientele for apparel which includes Carrefour, Penneys, Pom-tex, C&A, Ethel Alustin, Kiabi, Bandos AG, Mothercare, Vetir.

The company’s EBITDA margin of 25 per cent led by operational efficiencies in terms of raw material procurement, self-sufficiency in power requirement, fully automatic inventory storing facility and an innovative employee retention model, is the best margins in the industry, says Religare.

According to Religare, large capacity expansion and backward integration projects almost completed over FY06-FY08 at a capital expenditure of Rs 520 crore and issue proceeds of Rs 130 crore to be utilised towards second phase of capital expenditure programme to be completed by 2008-09, has enabled a substantial growth in the company’s operations in the coming years.

KPR has ramped up the manufacturing capacity to 37.9 million pieces in 2007-08 and with double shift working, the capacity will go up to 63.8 million pieces in 2008-09, this will raise the revenue from sale of garments to Rs 360 crore in 2008-09 and Rs 500 crore in 2009-10 from Rs 140 crore in 2006-07.

At CMP of Rs 165 the stock trades at 7.8 times and 4.6 times projected earning per share of Rs 21.2 and Rs 36.1 for 2007-08 and 2008-09 estimate.