Delta Corp - A huge but risky opportunity

How much of the increase can they pass to the customers without impacting the business? Is the customer price inelastic?

I came across an interesting snippet of information. Delta Corp, India’s most recignized gaming company, which has provided splendid returns to investors is currently valued at 6730 crores ( 1.03 billion USD).
Another company, Boyd Gaming, listed on NYSE, a leading gaming company in the US is valued at around 23000 crores (3.6 billion USD).
Adjusting for purchasing power, both Delta Corp and Boyd Gaming are available at similar valuations.
But, Boyd Gaming has sales exceeding 12000 crores. Post adjustment for purchasing power, Boyd is 12-15 times larger than Delta. Now, people may adopt different conversion rates for PPP. Hence,the numbers may differ. But, the idea remains that despite being a company much,much larger than Delta valuations accorded are similar. So, it’s either the American markets undervaluing or Indian markets over valuing.
But, it’s pertinent to note that Boyd is a heavily indebted company.
So, is this disparity due to elevated debt or there’s inefficiency in markets.
Only time will tell.

2 Likes

I think this means Delta has much bigger upside as Delta’s market penetration is much lower, maybe than Boyd Gaming (Disclosure - I have not studied Boyd)

But since this hike is applicable for all casino’s, I feel they will pass on to the end customer. Knowing casino customers are not well known to be cost conscious, I think this hike would have very minimal impact on Delta

The company does not have a good asset turnover due to which it is inefficient in terms of using its assets. Cash flows are constrained.

Capex > cCFO - due to which the company will have to rely on external borrowings.

It is a classic case of valuations taking the front foot. Markets will mean revert. Delta Corp is no different. It will go down more.

Pokerstars launching locally on Apr 17. I think this will be a huge threat to Adda52 and therefore Delta. Adda’s current advantage was that Indian credit cards could not be used to deposit money to PS. Now that PS is local, that advantage is gone - and as an erstwhile user of the Pokerstars platform, I think their playing experience is far superior.

Disc: Exited recently

1 Like

I’m in agreement with you. I do feel that the gaming industry is here to stay and there’s scope for massive expansion. But, I find it hard to believe that it’ll be a monopoly. When the business starts getting attractive there’s no reason why no other entrepreneur will participate in this gaming boom. And, greater competition will obviously lead to some struggle. Monopolies seldom last. It’s current valuation, in my opinion, is that there’ll be little competition for eternity.
I like the business very much but it’s obscenely priced. Just my thoughts.
I may be totally wrong.

1 Like

Sometimes increasing competition is a boon for the industry. The new player comes, spends a lot on marketing, educates and brings new customers and increases the size of the industry.

Without a doubt, it is a nascent industry with huge potential and currently, Delta Corp has a first mover advantage.

Online poker has terrific social network effects. The more the number of players on a platform, the more the diversity of games on offer and the more enjoyable playing on that platform becomes. This is why Pokerstars has globally dominated online poker - especially after their acquisition of full tilt. In my view, this is a winner take all market and I would not bet against Pokerstars to be that winner.

1 Like

Sure. That’s possible. As you rightly mentioned, entry of new participants leads to expansion of the market. Gaming, casinos and the entertainment industry as a whole has a lot of growth potential. India’s wealthy are getting wealthier and spending time at casinos is certainly pleasurable.
But, in my experience, not a lot of middle class families would want to spend time in casinos. Frankly, it’s looked down upon in my family and most families I know. It’s anecdotal. Hence, those who enjoy gambling but can’t visit casinos, online gambling will be their saviour. It’ll be crucial for Delta Corp to do well in online gambling. Also, as the industry matures casinos on land will be the norm. In the US, Las Vegas continues to be the undisputed king of the industry. But, other cities have also done fairly well. Similarly, Goa will have the apex spot but there will definitely be emergence of new entertainment hubs.
I was often tempted to invest in Delta Corp but the only obstacle to my investment was it’s valuation. At a valuation exceeding 6500 crores I asked myself if someone could replicate their business in totality and I felt someone could.
Just my thoughts.

1 Like

The valuation of deltacorp was anyways very high . The present PE multiples don’t justify the business prospects . People have forgotten how to value a company in PE terms . It really doesn’t matter if it is the only player in the arena.

The hike in licensing fees can hit the bottom line by close to 60-80 crore . Deltacorp has 3 offshore gaming casinos , the hike can easily translate into a 60-80 crore hit on the bottom line.

It will be very difficult to pass on the hike to consumers by way of higher entry fees.

2 Likes

Given they have 3 offshore and 1 onshore license (Correct me if I am wrong), the license fee as per the revised structure can easily go over 100 crores.
This seems to be a huge hit to the P&L.

To develop an intuition of current valuations-
It would take at least a decade of growth exceeding 25% to recoup your initial investment. It’s likely that growth will exceed 25% in some years. But, to maintain such growth for more than 10 years is no mean feat.

Any chances of hike being moderated? As this would kill the nascent industry. Its very common for govts to levy a huge tax and after some industry lobbying cool it down. Happens always. Though this hike will not face any political opposition.

Disc: Not invested.

I’ve performed some back of the envelope calculations. Please excuse me if I’ve erred.
In my understanding Delta Corp owns three offshore casinos. One casino can accommodate less than 200 passengers, one can accommodate between 201 and 400 passengers and one can accommodate more than 400 passengers. Per the new fee structure their expenses would increase by 63 crores annually. That amounts to 15 crores per quarter. That, without an iota of doubt is a significant amount.
Now, what’s to be seen is if the company would be able to transfer the burden of increased fees to its patrons.
To find the approximate increase in payment per visitor I’m making a lot of assumptions.
I’ve assumed 80 percent occupancy at their hospitality divisions. They’ll contribute around 20 percent to the top line.
So, let’s say, for the year ending March 2018, they register a top line of around 300 crores. Around 55-60 crores will be from their hotels. Remaining 240 crores from their offshore casinos. I’ll assume around 1000 footfalls everyday at their casinos. That would amount to 300000 footfalls a year. I’ve considered lesser footfalls to account for some lean seasons.
240 crores earned from 300000 footfalls means that every footfall contributed around 8000 rupees.
The increased expense of 63 crore to be distributed over 300000 footfalls would mean that each patron would have to spend 2100 rupees more. That’s an increase of around 25-26%.
Now, the question is would their customers be willing to spend 25-30 percent more to experience Delta Corp’s top notch service?
I have no idea. If someone could guide it would help.
If there are errors in my calculation process, my apologies.

You have to include costs for Delta’s land based casino as well so impact could be 70cr+. Your calc is valid in other aspects and Delta can simply hike entry fee from 4k to 5k per person to survive this. But it is very certain that there will be dip in footfalls. If you go to any casino there is always a certain % of visitors who are amatuers. Most of the newcomers are price sensitive as they know they would lose bets against the house and so anybody going to Goa for casino will be down by 25k, i.e. 15k for return flights and 10k for entry for a couple. How many folks can afford this? IMO, this will not kill this industry but significant speed breaker for a year or two. Mind you this is trading at high valuation and compression of PE itself is big dampener for any new investor. There could be renegotiation and fees could be revised down but damage is done.

Disc:- exited recently

Agreed. For their onshore casino in Goa fees have been hiked from 8.5 crores to 40 crores.

As per media reports, the government of Goa has hiked various licensing fees for casinos in the state which is expected to come in to force from 1st April, 2018. Post this announcement, the stock price of Delta has corrected almost 17% yesterday.

However my views on the stocks are –

  1. There is no confirmation or update on same from any official resource or the management of Delta.
  2. Even if this information stands true, since Gaming (casinos) is a luxury business, they can easily pass on the increased cost to their customers, as there are less chances of same impacting the overall demand.
  3. Increase in license fee would further strengthen the entry barriers, thereby lowering the competition for existing players which is in a way positive for Delta.

Taken the position today in the stocks.

1 Like

I’m inclined to believe that the company can pass the pass the burden in expenses to its patrons. In my estimates, the increase will be in the range of 20-30 %. However, this increase is likely to affect footfalls. And, in the years to come there will be new entertainment zones in different parts of the country. Goa is India’s equivalent of Las Vegas. There’ll definitely be other towns and cities becoming prominent gaming hubs. To grow bigger, Delta obviously can’t restrict it’s activities to just one state in such a big country.

I think to start with the 62 Cr will be the additional burden per year. Considering TTM PAT is 122 Cr, this is roughly about half the current post-tax income, assuming the costs are not passed on. So worst case the market cap could be cut downwards by half of what the market was willing to pay before ruling and best case assuming costs are shared between the house and the patrons, by roughly a quarter which I think is in the current price. We should also not forget that Daman casino is yet to add to revenues and there could be fresh revenues from Kathmandu in the future and an improvement of operations in the Sikkim casino and from Adda52 but there is no doubt Goa is the bread and butter.

If the Goa govt. pushes for getting the boats off the Mandovi as early as 2020 though, the costs could come down as the costs would consolidate to one one onshore casino, in addition to reduction in operating costs of the vessels. So the pain could be worst felt for the next two years.

If the costs are passed on to the patrons and it reduces footfalls and spending in the casinos, the GST revenues could come down in the process. Considering 28% is the GST for this sector, the govt. could do well to not kill the golden goose and make sure volumes expand which will automatically ensure better revenues for itself. But then, the govt. is not renowned for its foresight.

What remains to be seen is how much of the costs are passed to the Customer and if the Indian gambler is as resilient as the Indian smoker. Once the dust settles we will see if this is like the demonetisation discount or something lot more paralysing.

Disc: Invested around demonetisation

1 Like

Motilal Oswal doesn’t foresee a long-term impact. It says the fees can increase from 37cr to 105cr post the fee hike but would not impact Delta as much as other operators.