Delta Corp - A huge but risky opportunity


(shreys) #103

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.


(chiragp) #104

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.


(Chirag2015) #105

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.


(shreys) #106

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.


(rahulshares) #107

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.


(shreys) #108

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.


#109

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


(shreys) #110

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


(S K Goldar) #111

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.


(shreys) #112

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.


(phreak) #113

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


(roysavio) #114

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.


(sr8) #115

IMO Sikkim and Kathmandu will take some time to add significantly to the topline. However Daman, will be a cash guzzler from the very first day itself owing to its location. But given the current political condition in the country Daman license doesn’t seem to be a reality anytime soon. Moreover cost sharing with the patrons does not seem to be a problem as most of the folks visiting casinos belong to the rich class and even the younger middle class seems open to pay up for luxury.

Disc: Thinking of taking position


#116

Some wrong assumptions here! e.g. all Deltin suites clients will migrate to offshore is a flawed thinking. Many VIPs want exclusive gaming areas who wouldn’t like the idea of going to a public place like casino vessels. Moreover, if somebody has to go to offshore centre, they might book their stay at somewhere else so Delta stands to lose high end hospitality clients. I think Delta would need to exit some hospitality assets as well if they want to surrender some onshore licenses. Loss of footfalls is given in any scenario along with higher impact of taxes. However, if other marginal casinos also decide to exit some traffic might move to offshore but even Casino Pride will be big beneficiary. The situation is in flux and would be too early to estimate numbers. I think FY19 will be largely a no earnings growth year for Goa operations. Nepal is a highly competitive place for gambling and Sikkim has smaller operations that will take few months to ramp up. Only silverline is online gaming which has clear blue sky to grow.


(vv15) #117

I agree with most of your comments . But i dont see online gaming having clear blue sky to grow.
Pokerstars is entering India on April 17th. There online experience is far far superior than that of Adda52. Pokerstar software has features like analyzing hand histories, support for 3rd party softwares and layovers which provide you real time statistics of opponents etc.

Pokerstars will also have plethora of promotional events and offers with there deep pocket. Also it provides chance to indian poker player to play with international players (Not 100% sure of this).
Online Gambling/poker market will grow exponentially but Adda52 needs to be innovative and aggressive to defend against pokerstars onslaught. More promotional offers will hit delta’s profitability.

In international markets we have pokerstars competitors who are doing good but there products/software is also superior. All comes down to what kind of playing experience Adda52 can provide.
Things in favour of Adda52 is that Pokerstars is infamous for high Rake % (Casino’s cut in a Hand). Last i saw pokerstars Rake was 5% flat vs 3.5% - 4.5% of Adda52 depending on Stakes. Also Adda52 has been somewhat successful in beating competitions from other poker websites like pokerbazzi,Spartan poker etc.

Disclosure : Exited Delta recently


(h k gupta) #118

I believe shifting to land base shall involve substantial capital expenditure and shall impact financials for a few quarters before land based casino start giving better results we should account for such disruptions


(phreak) #119

Results were pretty good as expected but the trouble has been

  1. Lack of progress on the land-based casino policy
  2. Status of the proposed fee hikes
  3. Pokerstars entry
  4. Daman casino operations

From the recent concall post results, it looks like #1 is dependant on Parrikar recovering and returning back to Goa. He is undergoing treatment in the US for advanced pancreatic cancer. It sounds as though the entire thing hangs on this one man’s pancreas which is unfortunate in more ways than one. Management thinks it should happen in the next 45 days though. Not sure how.

For #2 it looks like an appeal has been made by the casino operators and they are hopeful of a deferment, reduction or removal of the proposal. No further update on this yet though. However, management thinks that this could lead to small operators closing ops due to the high licensing fee and that it could lead to consolidation and Delta capturing a larger market share going forward.

Also, current spend on licensing fee is 39 Cr and to maintain the 4 current licenses, they propose to reduce the area of land-based casino to cut down licensing fee and think that the net-impact on the P&L will be about 30 Cr. They also would increase Entry fee - by a direct increase of Rs.200 or so (They get on avg 1100 footfalls, Rs.200 entry fee hike should add 8 Cr to the revenues) or by reducing the number of chips incl in the fee and also rationalise privileges for Club Deltin members. It looks like this cost optimisation would test the management quality.

#3, Management wants to up the ad spends for the poker business and seems to be doing so already with Q2 + Q3 ad spend at 7 Cr, while Q4 ad spend alone was 8 Cr. So we can expect margins to reduce for the fledgling online gaming business from 35-40% range to 25-30% range.

#4. Daman casino operations still remains a joker in the pack. It was one same time last year and still remains one.

Disc: Cut down stake by 50% post results


(hrfacebuk) #120

Agree in some ways on short term impacts.

But 1 and 4 would eventually happen.

2 will eventually be accommodated over a period of time.

3 needs to be monitored but all other points not a show stopper.

Uncertainty will always be there due to nature of business but if Business doesn’t shut down then one should consider the kind of cash flows that can be generated over long term 8-10 years or more and then call should be taken is what I feel.

Discl: No buying or selling in last 1year (if I remember correctly). 8-9% of PF as a long term holding (atleast for now).


(nikhil465) #121

I was going through the annual report of Delta Corp and some relatad party transactions with Freedom Charter Services Private Limited (FCSPL) caught my attention. FCSPL is a joint venture company of Delta Corp. It posted net losses of Rs.5 cr in FY16 and Rs. 3.1 cr in FY17. Whatever little I could understand about FCSPL on google is that it operates chartered flights.

Coming to the related party transactions, Delta Corp has given a loan of Rs. 12.61 cr in FY16 and of Rs. 13.97 cr in FY17 to FCSPL. The outstanding loan receivable from FCSPL as on 31 Mar 2017 is Rs. 66.92 cr including interest.

Further Delta Corp has also given a corporate guarantee of Rs. 35.67 cr for a loan taken by FCSPL.

It seems like Delta Corp is taking out money from its gaming and hospitality business and investing it in FCSPL, which is completely unrelated and non-core business for them.

Views invited

Disc: Invested


#122

good catch! The key question is if they own aircrafts themselves or just have planes on lease. IMO, this is an another way to keep the authorities in good humour. Also I suspect promoters using this facility for themselves. The good thing is that losses are not that big.