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Beginner’s ill-luck
Delta Corp has been hit hard by demonetisation but the game goes on

Jitendra Kumar Gupta

Gambling could probably be the worst affected business after the government‘s clamp down on black money. No wonder Delta Corp, the only listed player in the space hit the 20% lower circuit after the Modi government demonetised the 500 and 1,000 notes. Delta makes close to 84% of its revenue from its three offshore casinos in Goa and about 14% from its hotels business. “Beyond black money, which is obvious why Delta has corrected, even customers who have clean money will restrain from splurging on luxury items and services like gaming and casinos,” says AK Prabhakar, head of research, IDBI Capital.

While the big gap down happened on 9th November post-demonetisation, the price had started collapsing from October 30th itself. On that day, it closed at 184 and since then it has been a one-way slide to its current market price of 104. However Niraj Dalal, founding partner, 3A Capital Advisors says, "One cannot entirely blame black money. Even before this issue cropped up people did provide PAN card and other details. While the overall impact is hard to calculate mathematically, the business is going to be hit in the short term, which could be another two quarters or so."

Lever play

Delta Corp in which legendary investor Rakesh Jhunjhunwala has a near 10% stake, enjoys huge operating leverage.  Its offshore casinos and hotels have high fixed costs and need to operate over certain thresholds to absorb the fixed cost. In FY15, to reach a revenue 300 crore, it incurred an operating expenditure of 233 crore and provided another 85 crore in interest and depreciation. The net result was a loss of 27.39 crore.

But FY16 turned to be another story, because operating leverage kicked in. Sales grew at 26% to 378 crore whereas operating expense grew by 9% leading to a profit of 43 crore. While this works wonderfully in good times, in the current market condition with the possibility of business getting hit, operating leverage could actually work against the company. In FY16, it incurred a total operating expenditure of 256 crore. Assuming fixed cost stays at 70% and adding another 86 crore in interest and depreciation, it needs to pull in revenue of at least 270 crore in FY17 to break even.

What’s in the price?

However, this is a probabilistic scenario and revenue might actually be tilted towards large customers, who may or may not be impacted. For H1FY17, it has already recorded revenue of 243 crore and profit of 52 crore. In such a scenario, it has a cushion for the next couple of quarters. "There is remote possibility of the company incurring losses since it will hit only a certain class of customers and the impact will be limited to a few months. At 90-110 a share, it is already priced in," says Dalal.

Meanwhile investors were counting on an earnings growth of about 25-28% over the next two years largely backed by the opening of the integrated casino in Daman and Gangtok and Delta’s entry into online gaming. Its two operational casinos Deltin Royale and Deltin JAQK have a combined capacity of 2,000. Now Delta is awaiting approval for its casino in Daman, which is expected to add another 1,200 gaming positions.

Daman, where it is already operating a five star hotel, is supposed to be a bigger market because of its proximity with Mumbai and Gujarat. That apart it recently acquired a stake in Gaussian Networks, which is the owner of Adda52, India’s largest online poker gaming website with a user base of over 8 lakh.

Those may be positive triggers, but due to the current uncertainty and its eventual impact, potential investors are adopting a wait and watch approach. Before demonetisation, analysts were forecasting a book value of 55 & 46 for FY17 and FY18, respectively. If one goes by its FY16 book value of 39, at its current price of 104, Delta is available at 2.6x book.

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