We had surplus cash at that time since shipping was doing well and instead of putting it back into shipping, we planned to diversify, said Atul Agarwal, managing director, Mercator. We, who were looked upon as foolish in 2007, are now the wise guys and are hailed visionary.
Mercator, started by co-brothers Agarwal, a chartered accountant, and engineer HK Mittal in 1988, purchased coal mines in Indonesia and Mozambique, a diversification that invited investors wrath and analysts concern.
The coal trading business is a low-margin business compared with shipping. However, if they build up scale in their coal mining business, the company will do better on the Ebitda level, said Kapil Yadav, assistant vice-president, Dolat Capital. Its also challenging because the company has to deal with a different government, but they are better placed than other pure-play shipping companies. They have to build up scale fast to keep the momentum of growth.
While revenues from shipping business for the quarter ended September 30, 2011 declined by 17% to R295.83 crore and coal trading, mining and transportation business grew by 56% to R434.78 crore.
Its core business has slipped to red, hit by falling freight rates, soaring fuel prices and idle ships with slowing trade.
But coal helps Mercator stay afloat, giving 5-7% margin on every tonne of coal shipped after paying 9% of the sales to the Indonesian government. Cost of mining coal is lower than its logistics cost. said Agarwal.
Many Indian companies that invested in non-core earlier are reaping benefits. Television and fridge maker Videocon Industries, which invested in oil blocks in Brazil and Mozambique in mid-2000 purchased for token amounts, will now give them three-fourths of the group revenues as the crude is pumped out.
Our unrelated diversification was due to sheer survival threat and to bring down our reliance on consumer goods, Videocon chairman Venugopal Dhoot said in an earlier interaction with FE. The jackpot at Ravva oil field gave us the confidence to look overseas.
Essar Shipping, Ports and Logistics, owned by the Ruias, diversified to build ports and leased rigs to oil exploration companies. The ports and rigs leasing business is compensating for the slowdown in shipping. Essar Shipping is planning 50% capacity for handling the groups cargo and the balance for third party cargo.
Companies in the shipping business tend to look at vertical integration at a time when shipping is not doing well, said Ganesh Radhakrishnan, government and infrastructure advisor at PricewaterhouseCoopers India. Adani is a good example of a vertical integrated company. Energy companies embrace vertical integration primarily to mitigate risks. Entry into each business must be in consonance with the group strategy and taken on merits as each of the businesses have totally different challenges.
Even Indias largest shipping company Shipping Corporation of India or SCI has shown interest to enter the port business (Vizhinjam, JNPT fourth terminal), it is considering setting up a mega shipyard and it is already exploring options for a joint venture with Coal India.
The fuel is key to Mercator. We expect coal to do well in the foreseeable future of 5-10 years, said Agarwal.
India is a potential market for Mercator as coal supply will fall by 10% short of demand. Indias coal mines will not be able to feed the rising demand and companies have to purchase from overseas.
The total coal availability in the country by end 2017 would be close to 647 million tonnes with a projected import requirement of over 86 mt, coal minister Prakash Jaiswal said in November 2011. Even if we commission only 10,000 MW power from new power plants, instead of 50,000 MW, the new power plants will increase coal demand, said Agarwal who purchased Mercator from its founder for R2 crore then.
Mercator sells 65% of its coal to India and rest to China, Malaysia, Thailand, Philippines. We wish to make it 50:50 in the coming future, said Agarwal.
The company, which owns three coal mines in Indonesia with 75 million tonnes in reserves and one in Mozambique with 1 billion tonnes of reserves, is scouting for more with a war chest of $50 million.