Why Is Rakesh Jhunjhunwala “Very Excited” About Delta Corp?

 
When Rakesh Jhunjhunwala, famous for his uncanny ability to home in on multibagger stocks, declares that he is “very excited” about the prospects of a stock, it is time for even the most cynical investors to sit up and take notice.

The last time, Rakesh Jhunjhunwala was “very excited” about a stock, it was 2003 when he recommended buying into Titan Industries at the then prevailing price of Rs. 60 (Rs. 3.94 after adjusting for split & bonus). At today’s CMP of Rs. 211, Rakesh Jhunjhunwala has garnered a mind-boggling return of 5354.78%. An investment of Rs. 10 lakhs in 2003 would be worth Rs. 5.34 crores today fully justifying his excitement in the stock (see Rakesh Jhunjhunwala Said Buy Titan …. At Rs. 65!).
 

Now, Rakesh Jhunjhunwala, in an interview to ET, declared that he was “very excited” about two stocks, being Delta Corp and Sterling Holiday Resorts.

So, let’s first see what it is about Delta Corporation that has Rakesh Jhunjhunwala so “very excited”.

Delta Corp’s Business Model:

 
Delta Corp is primarily engaged in the activities of Gaming and Hospitality. It also owns Real Estate in East Africa, Nairobi.

Delta Corp is the largest gaming company in India (offering 725 gaming positions) and is the only listed company in the space.

In the Gaming and Entertainment space, Delta Corp has three live offshore casinos in Goa and one onshore (land based) casino in Daman. In addition, Delta Corp has an in-principle license to set up an additional casino in Daman.

Delta Corp through its subsidiaries operates two offshore live casinos, namely, ‘Casino Royale‘ and ‘King’s Casino’ aboard two vessels, M. V. Casino Royale and M. V. Arabian Sea King. These casinos provide world-class facilities which are amongst the best in the industry. Delta Corp has also entered into an agreement to acquire a controlling stake in Advani Pleasure Cruise Company Pvt. Limited that operates India’s first live offshore casino ‘Casino Goa’ in Goa.

Delta Corp‘s first onshore casino was opened in FY 2009-10 at the five star hotel, Riviera De Goa through a casino management agreement. Three more onshore casinos are in the pipeline and are expected to be operational soon. Delta Corp also intends to expand its operations to other states. Delta Corp has received an in principle expression of interest for setting up an onshore casino at Daman which is under consideration.

Goa and Sikkim are the only two Indian states which have issued live gaming casino licenses. Goa issued 6 licenses, of which 3 are owned by Delta Corp. It is expected that no new licenses will be issued in Goa which effectively curbs increase in competition for Delta Corp.

In the hospitality space, Delta Corp has a 35% stake in Advani Hotels & Resorts (India) Ltd, a 51% stake in Daman Hospitality (Thunderbird Resort) and a 76% stake in Marvel Resorts Pvt. Ltd. Delta Corp also has an “All suite” Flotel (Floating hotel) to cater to its high rolling guests. The “Ramada Caravela Beach Resort” is a 202 room 5-star resort while “Marvel Resorts” is a 300 room luxury hotel expected to commence operations from Jan 2014. The “Dolphin Floatel” is Goa’s first Floating hotel with 16 all-suite rooms expected to commence operations from Oct 2011.

The Thunderbird Resorts in Daman is supposed to be the largest integrated resort convention complex in Daman (spread over 10 acres) and in India. It has 179 five star plus category hotel rooms and 60,000 square feet of gaming space.

In the real estate space, Delta Corp has a 40:60 JV with Reliance Industries Limited to develop real estate in East Africa. The JV has already invested INR 2 Billion and acquired 9 plots of land in prime locations of Nairobi. Of this approximately 2Mn. Sq. ft. is to be developed for commercial and residential purposes. Currently, four live projects are under various stages of development.

Delta Corp’s Financials:

 
Delta Corp doesn’t have a very old history given that it started operating two offshore casinos only in period 2008-10. The third casino “Caravela” was acquired in 2010-11. The 51% stake in Daman Hospitality (Thunderbird Resort) and Daman Entertainment (Casino Jackpot) was acquired in 2011-12.

In the year ended 31st March 2011, Delta Corp had (consolidated) operational income of Rs. 376.01 crores on which it earned EBIT of Rs. 178.89 crores (47.57%). The Net Profit after tax was Rs. 165.71 crores resulting in an impressive margin of 44% (the tax provision was low owing to MAT credit for earlier years). The diluted EPS for the year was Rs. 8.81. It appears that this may include the non-recurring gains from the sale of Delta Corp‘s property, Delta Plaza, in Prabhadevi, Mumbai for a total cash consideration of Rs. 250 crores in August 2010.

Delta Corp‘s June 2011 consolidated Quarterly results were also quite impressive. Delta Corp‘s sales grew to Rs. 91.17 crores as compared to Rs. 32.11 crores in the same Quarter of last year while the profit before tax soared to Rs. 31.37 crores from Rs. 8.72 crores in the preceding Quarter last year. The diluted EPS for Q1 FY 2012 soared to Rs. 0.56 from Rs. 0.26 in Q1 FY 2011.

Delta Corp’s Ratios:

 
Delta Corp‘s Ratios are not meaningful given its young track record as a gaming and hospitality company. Delta Corp‘s Debt-Equity ratio is however reasonable at 0.90 times.

Delta Corp’s Valuations:

 
At the CMP of Rs. 99, Delta Corp is trading at a PE of 11.23 times on the basis of the FY 2011 diluted EPS of Rs. 8.81. There is a wide disparity in Delta Corp‘s Quaterly results due to the seasonal nature of the business and so the Q1 FY 2012 results do not show a meaningful trend.

Rakesh Jhunjhunwala & Delta Corp:

 
Rakesh Jhunjhunwala has invested Rs. 78 crores in Delta Corp primarily because of its gambling business. The gambling industry has been growing every year as is evident by the increase in Delta Corp‘s visitations and revenues. The Indian gaming and entertainment industry is in its infancy and Delta Corp hopes to capture 75-80% market share in India.

In the USA, the casino industry is over USD 22.87 billion. In the Asia-Pacific region, the Industry’s casino winnings are over USD 25.56 billion.

Rakesh Jhunjhunwala is probably betting (pun intended) that Indians have a high inclination towards gambling and that rising income levels and favorable demographics will create good business for Delta Corp. Rakesh Jhunjhunwala expects Goa to become the Las Vegas of India and Delta Corp to be the market leader.

One can share Rakesh Jhunjhunwala‘s excitement in Delta Corp. Rakesh Jhunjhunwala always says that one must spot opportunities early and if one has the conviction, he must act and not dither. The casino and gambling industry is a sunshine industry with enormous potential. Delta Corp has the first-mover advantage in the Industry and so Delta Corp certainly has it in it to become Rakesh Jhunjhunwala‘s multibagger stock.