Online gaming revenue was INR 35 cr for Q2FY19 vs INR 24 cr during Q2FY18 - a robust 46% YoY growth. The CFO clarified during the concall today that it is not appropriate to compare the online gaming revenue of Q2 with that of Q1 as there was one time revenue of around 5 crore on account of the Poker Sports League organized by the company in the month of May and it was booked during Q1. Q2FY19 is the best ever quarter of Delta Corp till date both for casino operations and online gaming operations.
Online gaming revenue for the last five quarters:
Q2FY18 : INR 24.08 crore,
Q3FY18 : INR 28.42 crore ,
Q4FY18 : INR 33.54 crore,
Q1FY19 : INR 39.03 crore,
Q2FY19 : INR 35.16 crore.
Hence I see the online gaming revenue as quite encouraging .
Well, last year 24cr sales had only two months of revenue so not comparable. My issue is not about revenue which is ok but their lack of control over margins is not ok. Initially the guidance was 30%+ which came down to 15-20% and now nobody knows since the competition is high.
If the land policy does come through (I think its just a matter of time), how will DC fund the Capex? I remember some Concalls from last year where they mentioned most of it will be from internal accruals and at that point they had 500 Cr or so cash and the complete capex was 1500 Cr or something (don’t remember well). At that point it sounded risky to me. What are the latest updates on the Capex plans? I was invested here from last year but exited after the fee hike. The Capex is what I am wary of.
I think there is no case of any equity dilution anymore. They had 500cr invested in land acquisition and other stuff and they will generate 250-300cr per year which will be more than sufficient to fund capex. Additionally, there is no debt on BS so taking loan is also an option. Final capex figure will be out after the policy is declared but they have detailed plan including building plans, contractor selection (i.e. L&T) etc ready.
The margin contraction is on account of higher marketing and promotion expenses. During the concall Q1FY19 the management had guided EBIT margins of around 15% - 17% going forward. The mrktg and promotion expenses are pegged at INR 70-80 crore for the whole year FY19.
Here is the relevant portion taken from the concall Q1FY19:
Yash Agarwal: Sir what level of EBIT margins for the full year basis will be sustainable for the online gaming business?
Hardik Dhebar: I think this is the bare minimum. I do not think it can drop below this. We believe that it could settle around 20%-21% but for the time being till Rummy and Fantasy are going to continue to lose money you could see a 15%-17% sort of a range.
Varshit Shah: Thanks for the opportunity. Sir can you give some colour on the online business and you have already given a strategy out there so the questions is pertaining this quarter I think there is a topline bound is due to the tournament revenue and our EBITDA margins have actually slightly been on the negative side quarter-on-quarter so is it because of the price money, which was involved in the tournament am I reading it correct?
Hardik Dhebar: To answer your question, yes, there is a component of the sports league that is contributing to the increased revenue but there is nothing substantial on account of the marketing trend because the sports league per se is a profitability neutral kind of a business so the margin reduction that you are seeing in terms of our EBITDA margin is not on account of the price money or anything it is purely on account of our marketing and sales promotion activity on the Poker vertical as I also mentioned in the beginning that having repositioned and re-launched Rummy and also kick-started the daily fantasy sports vertical the marketing and sales promotion expense to that extent have gone up slightly more in this quarter and therefore you are seeing that impact on the EBITDA margins, which got nothing to do with the Pokers sports league.
Now the management expects the online gaming margins to stabilize in the range of 10-12% to 12-13%. Online gaming margins are not expected to reach the earlier levels of 20+ or 30+ percent in the near future.
Delta’s adda52.com is the only website that provides three verticals- Fantasy sports, Rummy and Poker- on single platform. The platform provides all-time liquidity in terms of live gaming tables to players. The players can login any time any day to play without waiting for tables to be live. This is the huge competitive advantage the platform has. The increased ad spends will help adda52.com attract more traffic over the period of time. The more the active players on a gaming platform the more the new players rush to website to play and this is called network effect.
The management’s thought process drops some hints about how it all will likely happen. Here is what the management said during a concall with investors:
“…we will be having a surplus of at least 100 to 125 acres of land, which will be either sold, leased or partnered within various forms with the hotel developers, hotel owners, the water park owners, the theme park owners from which obviously will not only generate cash and get back little bit of our investment, but also will in areas of strategic interest like the hotels we may also own some equity indirectly by contributing our land such that we can control the rooms, so all in all we will definitely monetize our excess land and get some value back thereby restricting our capital outflow to the minimum.”
Capex is expected to be in the range of INR 1600-1800 cr, of which Delta has committed to invest around INR 700-800 cr in acquiring land, building casino and a 300-room hotel. Balance investment for the construction of ecosystem (multiplex, convention center, retail and waterpark) will be evaluated through various structures.
My guess on capex is this:
Cash: 400-500 crore; Accruals: 600-700 crore (over the period of three years); the balance of 600 crore may come from (1)entering into partnership agreements(not sure if this is the right term to use here) with developers and stakeholder of the entertainment zone. Delta may provide land to them for the construction of ecosystem (multiplex, convention center, retail and waterpark) and share the equity interest in the property with them in return for development of the land by them; (2) sale of assets including Advani Hotels, land parcels in Sri Lanka may be considered.
Not a great way to move in a business like this. They are agrieved for sure but challenging the regulator has never worked well in India at least. Hope it reaches some kind of amicable settlement.
In fact, these type of applications are never rejected. Either Govet lists non compliance as per law or simply they keep file with them for indefinit period. Court can help if law permits and compliances are there. Good move.
To me its first of a kind court case whereby a litigant is seeking courts intervention to direct government to do its job which it should have done in normal course. Hope it is not a new beginning of judicial government rather than a political government. I am not sure if i should consider it as a last resort or frustration of delta. In any case it seems that Delta must be extremely confident about merit of their application. Court may not grant license but may surely direct the government to dispose of their application in a time bound manner. Looks like the indecisive/tardy government bureaucrats will grant license seeking refuge under court order.
Nobody knows they are indecisive or unwilling. In either case it will hurt the egos somewhere unless it is well choreographed move. We need to keep in mind that this is a part of Vice industry and even Supreme court could not do much when Maharashtra govt put its foot down. Check this rather hilariously tragic link below.
I think Mr. market is hoping that Delta will use sound legal suggestion from highly connected Jia Mody (spouse of the promoter) and her law firm to come out of this situation. My investment thesis is based on online growth and new onshore casino policy while Daman will be definitely be a massively positive outcome especially when they own two casino licenses in Daman of which one is planned to operate from Deltin Daman.
Robust performance continues on all fronts for Delta Corp in Q3FY19. Net Revenue from operations: INR 206 crore, Net profit: INR 50.5 crore. EBITDA margin for Casino Gaming Division expanded to 38% during Q3FY19 from 35% during Q3FY18. Online gaming division posted 33% YoY jump in topline(from 28.5 cr to 38 cr) with margins bouncing back to 18.5% after slumping to 2% during the last quarter on higher advt spending. The next quarter could take the EPS to 7.20 rupees for the FY19. After all, the license fee hike proved to be a blessing in disguise for Delta. This is how moats around great companies get deeper and wider.
Disc.: Accumulating Delta since the year 2016. It forms 69% of my portfolio and 35% of networth.
