Delta Corp Limited is an Indian real estate, gaming and hospitality corporation that owns and operates over eight casinos and hotels under several brands.Delta Corp is a public company listed on the Bombay Stock Exchange (BSE) and National Stock Exchange of India Limited (NSE). It runs major of the casinos on the offshore of Panaji, Goa. The company operates casinos in three Indian states; Goa, Daman and Sikkim.
SETTING THE TABLE:
Before we begin our equity valuation of Delta Corp; it is important to observe the facts, economy, industry outlook, financials, past performance and competitive advantages. After analysis, each section will form assumptions leading to our valuation.
- Delta Corp is the largest gaming company in India.
- The Company Operates casinos in three Indian States: Goa, Daman and Sikkim.
- Deta Corp owns three offshore casinos in Goa namely Deltin Royale, Deltin JAQK, Deltin Caravela, making it a dominant player in Goa.
- In March 2014, the company launched THE DELTIN an INR 400 crore property which is India’s largest integrated casino resort in Daman.
- In July 2016, the company acquired temporary license to operate casinos in Gangtok, Sikkim.
- Rakesh JhunJhunwala is an investor and also on the board of directors of the enterprise.
- There has been a change in company strategy from before. The Hotels business is meant to complement the casino and gaming business. Previously Delta Corp was focused and considered itself a real estate company.
GAMBLING INDUSTRY IN INDIA :
Gambling in India is heavily restricted except for selective categories including lotteries and horse racing. In the 21st century, more people have started making cash bets upon prohibited betting and gambling activities in India. The critics of gambling claim that it leads to crime, corruption and money laundering while those in favour of a regulated gaming system in India argue that it can be a huge source of revenue for the state. Casinos in Goa contributed Rs. 135 crores to the state revenue in 2013
Only three states allow casinos, Goa , Daman and Sikkim. There are two casinos in Sikkim called Casino Sikkim and Casino Mahjong and 10 in Goa, of which six are land based and four are floating casinos that operate on the Mandovi River. The floating casinos in Goa are Casino Deltin Royale, Casino Deltin Jaqk, Casino Pride and Casino Pride 2. While the first two are controlled by the Deltin Group, the latter two are managed by the Pride Group. According to the Goa, Daman and Diu Public Gambling Act, 1976 casinos can be set up only at five star hotels or offshore vessels with the prior permission of the government. This has led the Deltin Group to open the first land based Casino in Daman which is set to begin soon. News reports also suggest that Visakhapatnam is also being looked on as the next casino destination.
Assumption 1: Entry Barriers to the Industry are high with the government not easily granting new licenses.
Tourism in India :
The operations of Delta Corp are significantly linked to the Tourism in India. This is because of the fact that it operates in Goa , Daman and Sikkim and economy of all three of these states is based on tourism income.The World Travel & Tourism Council calculated that tourism generated₹8.31 lakh crore (US$120 billion) or 6.3% of the nation’s GDP in 2015 and supported 37.315 million jobs, 8.7% of its total employment. The sector is predicted to grow at an average annual rate of 7.5% to ₹18.36 lakh crore (US$270 billion) by 2025 (7.2% of GDP).
Assumption 2: The Indian Tourism Industry will grow at 7.5 – 8% per Year.
The existing capacity oF Delta Corps Gaming operations is 1565 gaming positions. Gaming positions of 1565 mean that 1565 people can be seated on gambling tables or slot machines in the Deltin casinos.
To estimate the maximum amount of revenues the Deltin casinos can generate from existing capacity we need to take into consideration the following facts about a casinos business model:
- More time people spend in a casino leads to more revenue for the casino. ( How much time a person spends in deltin casino). Based on our survery and estimates we will assume that a person spends 4 hours on average.
- How much money will a person spend on average/hourly in casino ?. For this, we assume RS 5000 every 4 hours which gives us 1250 Rs per Hour.
Based on the Above Points:
The Current Revenue Generation Capacities of the 4 Casinos owned by Delta Corp can be ascertained as follows:
Gaming Positions (1565) * 24 hours * 330 days * Per hour Spends (1250) = 1549.35 Crores
Note * 330 days are the casino may be in operation as there maybe few days off due to maintenance.
Assumption 3: Per person spends 5000 Rs on average per visit to the casino
Assumption 4: Per person Spends 4 hours on average.
Assumption 5: Delta Corp Casino’s are operational for 330 Days in a year.
Currently, Delta Corp generates 377 Crores from its operations. If you compare this with the Total Capacity of 1549 Crores, you will realise that DELTA’s casinos utilise 24.33% of its existing capacity.
The Number of visitors per day would stand at 2289. (377 crores /5000- spends per person / 330 – working days in a year).
Assumption 6: Capacity utilisation currently is at 24.33%, and 75.67% is spare capacity.
FUTURE GROWTH PROSPECTS:
In our view future growth for Delta Corp can come four ways in future years namely:
1)New Casinos: We feel this revenue source for growth is quite unpredictable due to strict government policy and lack of clarity on the same. In 2018 onwards we feel that revenue will pick up as Daman casino with capacity of 1000 Gaming positions will become operational.
|10 year Projection||Rs and Crores|
|Year||Revenue Projection Daman Casino||Growth Rate|
2) Growth in Visitors (existing business): Growth in visitors and footfall will increase at 5-8% inline with growth in the tourism sector of India.
3) Growth in Spending by Visitors: We estimated that it would grow by 10% as salaries have tended to rise at 8-12% per year.
|Future||Vistors per day||Spending||Revenue|
|Growth in Vistors||Growth in Spending|
|0||2289.69697||5000||377.8 (current revenue)||5%||10%|
4) Online Business: Very Recently Delta Corp announced that it had acquired online website Adda52 which is a poker and rummy online gambling site. This site currently has revenues of 60 crores with EBITDA of 30-35%. The online gambling industry in India is at a nascent stage. This is a strategic investment where Delta Corp can get its current audience online and get people to gamble when not inside their casinos. The growth rate of online business will be faster than its casino business and we estimate it at 25%.
|10 year Projection||Rs and Crores||.Adda 52|
|Year||Revenue Projection Daman Casino||Growth Rate|
The above statements give us a revenue projection (10 years) of 1565 Crores (GOA Business) + 931 Crores (DAMAN business) +558 (Adda52 Online Business).
8) ANALYSIS OF FINANCIAL STATEMENTS:
Delta Corp has a decent financial track record. Delta Corp currently earns a close to 12% high return on equity.The company has a debt of 213 crores as of March 2016. Delta Corp is current reinvesting all its earnings, and there is no dividend income.This signifies that the company has been being in its growth stage.Delta Corp has high operating leverage with Fixed Costs at 48.72% of its Total Costs.
8.1) REVENUE GROWTH
Delta Corp has experienced a health growth in revenues over the past five years. Except for 2015 when it experienced a drop of 46.30%. This is due to the sale of its real estate business in Africa. This is a purposeful strategy of focusing on and growth the gaming business. Since 2015 revenue growth is back on track.
|% Growth||25.95||-46.30||31.31||16.57||Base Year|
Assumption 7: We expect the Revenue to grow at a CAGR of 23.48% till 2025 or till it reaches 3098 Crores considering existing capacities.
8.2) PROFIT MARGINS:
As of 2016 the PBIT (Profit Before Interest and Taxes) of DELTA Corp is 33.28%. As revenue increases in coming years with more capacity utilisation, the PBIT will increase to 50% as fixed cost reduces in proportion to sales.
We will, however, assume that the PBIT will peak at 50% which is the case with casinos worldwide.
Assumption 8 : Profit Before Income and Taxes will increase to 50% in coming years as revenue rises due to operating leverage of DELTA CORP.
8.3) CAPEX AND REINVESTMENT:
To maintain its current revenue and grow it in the future, the reinvestment in tangible assets is around 5% of its revenue each year. The company may make more acquisitions, Buy New ships, or build more casino resorts – This has not been factored in our valuation.
9) VALUATION OF DELTA CORP:
Almost always as is the case with predicting future earnings , there are many possible outcomes. Therefore a scenario analysis is important. After considering all factors our valuation reflects Average Per Share value of 278.86 Rs per share with a company valuation of 6,430 Crores INR. A range of Rs 130.16 to Rs 697.66 Rs per share value was discovered as a result of conducting scenario analysis on our assumptions.
“The current market price of 182 Rs as against the valuation of 278.86 per share.Therefore we feel that DELTA CORP is undervalued by 34% which is a margin of safety as an investor. In conclusion , A long term investor can start buying at current levels of 182 Rs (as of 1st November 2016) and keep adding if price goes down in the short run”.”
Please note that the valuation will be updated each quarter. As also will any news impacting any of the assumptions or factors in DELTA Corp’s valuation.So STAY TUNED.