Niraj Dalal

Diwali is finally behind us and life is slowly getting back to normal. But today, no Diwali party is complete without card games and now, increasingly, ‘casino’ parties. Gambling has existed in India for far longer than modern history accounts. It is even written about in the Ramayana, which some believe dates back to 7300 BC. In the Mahabharata, the concept of gambling and its terrible consequences are well known.The point that I am trying to make is that gambling in India is as old as the hills and will continue to thrive in one form or the other, whether legally or illegally.

The reason I am talking about gambling is because I just returned from a long, lazy vacation in Goa — a state synonymous with beaches, great food and wholesome fun. But in recent years, there is an addition to the to-do list in Goa, and that’s a visit to the casino. No one leaves Goa without going to a casino at least once. And yours truly is no exception — I spent three nights straight, from 10.30 pm to 5 am, at the casino. Let’s not talk about the winnings because whatever was won was taken away by my wife for some ‘Goa shopping’. I went to Casino Royale on two occasions and once to Pride (a competing casino) and really enjoyed myself. What really caught my attention was how full the casinos were. It was a literal struggle to get a seat at the tables. 

Back home, when I was reflecting on my visit, the thing that seemed amply clear to me was that Delta Corp was at the right place at the right time. This is a stock that I have covered since my early days at Rare Enterprises and while it has had momentary upswings, by and large, it has disappointed most investors. But I believed in the story then and am far more convinced now. My Goa visit has reinforced the fact that it’s time to take another look at the Delta story and revisit the hypothesis. Based on my analysis, I strongly believe that Delta is at an inflection point and, if all goes well, this could turn out to be a great stock opportunity for investors in the coming years.

 Advantage — Delta Corp

Delta Corp, the only listed play on the gambling industry in India, owns and operates casinos and resorts in Goa. The company has three out of the six issued licences and is the largest operator in the country, operating two of its three casinos in Goa with a total of 1,500 gaming positions. Delta is expected to start a casino in Daman pretty soon — subject to licences and regulatory permission — at a place where a hotel is already in operation. This will add another 1,000-1,500 gaming positions, thus strengthening Delta’s leadership position. There’s a lot going for the company but, before that, there are certain risks that each investor must be aware of before investing in Delta.

Gambling is viewed as a sinful activity in most world cultures because of religious reasons. However, in India, Hinduism does not view gambling as a blasphemous act. There will, however, always be a regulatory concern over the industry and, hence, the regulatory overhang remains the biggest risk, albeit remote, for any investor.

Current regulatory framework takes a ‘restricted tolerance’ stance, with geographical segregation and high taxation meant to create perceived and real barriers to gambling. Governments understand the economic activity gambling creates but the social impact and the fickle nature of politics makes the risk of shutdown and disruptions a real one. The online gaming threat looms large but regulators have mostly kept it at bay and often outlawed it. But it is still a threat.

Opportunities galore

The total global gaming casino market is estimated to be at $180 billion-190 billion. Asia Pacific accounts for 43-45%, followed by the US at 38-40%. Macau and Singapore have led the Asian dominance in the last decade. In India, however, the gaming industry is still nascent and valued between $120 million-140 million — which is less than 0.1% of the global gaming market.

The gaming bet market accounts for 23% of China’s GDP (organised gaming being 70%) and 16% of US GDP (organised gaming being 90%). For India, the number is 3.5% of GDP and the organised market is less than 10% of that. Numbers and statistics like these really excite me and I am convinced that the gaming industry in India will take off in a similar fashion over the next three to five years, and Delta will be one of the biggest beneficiaries from that change.

Entry barriers provide a natural edge to Delta’s business model and position — obtaining licences being the biggest hurdle. Casinos are legally allowed only in Goa, Daman and Sikkim. New licences in Goa are unlikely to be issued, giving Delta a significant moat and first-mover advantage. With respect to Daman, land-based casinos are allowed only in five-star hotels. Delta’s The Deltin is Daman’s only five-star hotel. This makes Delta’s edge sustainable and very effective going forward, as the industry grows and matures. Competition, if any, will be very limited. Delta intends to own and control the complete gaming ecosystem to facilitate client acquisition and retention by giving them a superior experience. The company is the only listed and significant player with easy access to the capital market. Its hold on the gaming ecosystem and the strong umbrella branding with selective brand niches for different consumer segments make for a significant entry barrier. 

Delta’s gaming business has grown at a scorching pace, with revenue rising by 45% over the past five years. This growth is likely to accelerate with the launch of Daman operations. The addition of new properties and increased traffic are likely to boost Delta’s top line and bottom line significantly. Additionally, Indian demographics leading to consumption explosion, higher level of urbanisation, increase in discretionary spend and the shift from illegal forms of gambling to organised gambling augur well for Delta. Besides, Delta plans to divest its non-core assets valued at about ₹300 crore and use that to retire its debt. Once the sale goes through, Delta is likely to have significant benefits of interest cost savings, thereby adding to its overall attractiveness.

 Inflection point 

Delta has a small capital base of 23 crore shares (face value ₹1). The company has a debt of around ₹150 crore. It is set to be debt-free once the non-core asset sale goes through. For the September quarter of FY16, the company reported gaming revenue of ₹85 crore and an Ebidta of ₹22 crore, indicating an Ebitda margin of 28%. The company also reported a profit before tax of ₹13 crore last year. Delta invested heavily in all its three Goa casinos and the new one at Daman. The company has a fixed cost of ₹200 crore per annum, which is likely to go up to about ₹220 crore-240 crore once the Daman casino is operationalised. Simple back-of-the-envelope calculations indicate that revenue will double once the Daman casino is launched, a top line of ₹600 crore-650 crore annually is very achievable. This should result in huge operating leverage and significant margin enhancement. I would not be surprised if in the first full operational year of the Daman casino, Delta reports a PBT of close to ₹250 crore-300 crore and an EPS of ₹6-8. This should also result in significant cash generation and improvement in return on capital employed and return on equity. Using a poker terminology for Delta Corp, I think it’s time to go ‘all in’. The probability of emerging victorious with huge rewards is very high because, remember, the unwritten rule in gambling is that the house always wins.

The author holds the stock in his personal capacity and has recommended the same to his clients

This is Niraj Dalal's best pick for 2016, you might be interested in what he recommended for 2015