Investing in stocks is considered equivalent to going to a casino by many. How would then investing in a stock which runs casinos be viewed by them? Russian roulette perhaps!
While this is certainly not the case with investing in general but the stock under discussion, Delta Corp, a leading casino operator in India, certainly fits the description.
Delta Corp was doing fairly well before GST applicability was enhanced from Gross Gaming Revenue (GGR) to Full Face Value (FFV) of chips sold with effect from 1st Oct 2023.
GGR refers to the casino earnings which is lower than FFV of chips bought by a customer. Due to this increase in taxation, casinos had to compensate customers, leading to fall in margins.
Post this change, the main considerations for forming an opinion about Delta Corp are as follows: –
1) GST applicability on FFV instead of GGR wef 1st Oct 2023 has reduced margins permanently. Delta also received retrospective tax demand of @ 17000 cr causing the stock to tank from Rs 250 levels to Rs 140 at present.
– The issue of GST had been under consideration of the GST council for a long time. Finally, the GST council went ahead and dealt a big blow to the casino industry by changing the applicability from GGR to FFV.
– Delta is countering the effect of higher GST by giving chips of full value to customers with the condition that these cannot be encashed and can only be lost at the table. However, this will mean a permanent drop of 6-7% in margins.
– As per Q3FY24 concall management expects this margin loss to be compensated by increase in topline via a new offshore casino on a ship with double seating capacity which will be commissioned by Q4FY24. Since there is huge operating leverage, profits can be expected to move up in line with management expectations even while the margins will permanently drop.
2) Even before the increase in GST, growth in casino business was always suspect because of lack of new licences and limitation of geographical areas. GST issue has forced it to pivot to hotels, entertainment park and real estate business.
– Because of the foregoing GST issue, the company has pivoted to hotels, entertainment park and real estate business in the following manner.
– It has decided to convert one of its properties to a five star hotel. In the new ship, apart from the casino, it is building entertainment facilities and party halls. Goa being a hot tourist destination, hospitality can bring in good business.
– Delta was building a theme park in Goa containing a new casino. Now it has decided not to build the casino but to develop it as a full fledged entertainment park. Entertainment parks have a good future in a growing country like India. Case in point is Wonderla Ltd which runs entertainment parks in South India. Its 5 year profit growth (FY18 to FY23) has been 30% with stock price growing at 25% CAGR in this period.
– Delta has made its real estate entry in collaboration with a listed real estate company called Peninsula Land with an investment of 100 cr in parent company and 250 cr in JV to gainfully utilize the surplus cash its casino business throws out. At present Delta holds 500 cr cash to invest in these ventures and management plans to keep the company debt free.
3) Valuation seems to be in the twilight zone of uncertainty.
– In Q3FY24, the first quarter after the GST ruling, Delta’s PAT went down to 35 cr from 85 cr last year. Management is expecting profitability to return to last year’s level by Q4FY24 when the new ship is commissioned. Even if profits recover partly to say 50 cr per quarter, it means 200 cr annual PAT. Current market cap of the company is @ 3800 cr which translates to PE of 20 which is neither too high nor too low reflecting confusion about its prospects.
To summarize, Delta has been forced to branch beyond its highly profitable but low growth casino business into newer areas of hospitality, entertainment parks and real estate due to regulatory action. These diversifications seem to be within its circle of competence and could turn out to be a blessing in disguise. However, the decision about retrospective demand of @ 17000 cr is a binary event. If a favorable decision comes, it will mean a new lease of life and the stock price will display this with a sharp upmove. But if a court ruling is unfavorable, it can kill the company. Investment therefore needs to be done with the mindset that this indeed is a Russian Roulette kind of an investment with downside being permanent loss of capital and the upside, beyond the initial euphoria, being dependent on how the new diversifications play out.