Why I invested in Delta Corp

Delta Corp has strong Assets position of 600 crore (Cash + Land)  

Its liabilities (including contingent liabilities & provisions) is 200 cr

So Assets- All liabilities = 400 crore

It has three business segments

  1. Casinos –
  2. FCF annual = 155 crore ;
  3. ROE = 25% great business,
  4. strong barriers to entry
  5. Rapid historical growth

No growth valuation = 1550 crore

  • Online Gaming
  • ROE = 10%
  • Strong competition and market size keeps returns at low levels; don’t expect growth in this segment to generate additional points to valuation
  • Strong market share and scale in India
  • 30 crore FCF annual
  • Hotels & Resorts
  • Loss making segment since inception… Necessary evil
  • Continue to forecast a FCF loss of 25 crore per annum

Key Risks-

  1. Regulatory Change
  • Negative image business risks associated with such businesses
  • Hotels as necessary evil may drive down ROEs if casinos need to be opened along with hotels in new places, as the regulations ease.. For growth, I will assume necessary evil will tag along and will produce ROE of casino + hotel biz = 13%

Upside

  • Positive decision in Daman—can easily expect 5 yrs
  • Revenues don’t reflect new properties – e.g. Nepal and Jalesh

Nepal can bring additional FCF of 10 crore per annum

  • Lot of revenue growth room in Sikkim

Valuation

At no growth = 1550 + 400 +30-30 = 1950cr

Now, lets value growth

  • Assuming no growth due to Covid for 2 yrs, and then 7% traffic growth with existing capacity for next 7 years
  • Capacity expansion of hotels & Resorts will lead to 13% ROCE ….So , assuming 50 cr annual CAPEX , it will add 2 crore to FCF

Valuation = 3139 crore

Margin of safety = 30% (on conservative valuation) @ 10% Expected Returns

Summary

  1. I am getting a good margin of safety
  2. The high barriers to entry will continue to protect the ROE of the casino business
  3. I am expecting ~ 15% CAGR annually if held upto 10 years on this business, with an understanding of regulatory risks and future uncertainties that this business brings.

Note : This was prepared in April 2020

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