Delta Corp – A huge but risky opportunity

I initiated a position in Delta Corp ~6-7 months ago and it constitutes 1% of my pf. Usually each stock pick is 3-5% of my portfolio and I build this position over time basis my conviction.

I have 1% in Delta due to the uncertainties the business faces on different fronts, mainly taxation and political issues, thus the lower conviction. However, on the flip side I like the direction the company is going in and the fact that it allows me to own a company that is very different from what I usually own (steady compounders in the consumer space).

After yesterdays GST announcement and the subsequent drop, here are my 2 cents.

Known business risks:

1. Taxation. Will forever be a concern with this business, I won’t be surprised to see other taxes added over time.
2. Political issues the business faces (esp. during elections). Will always remain a factor.
3. Geographical concentration, may ease up over time, especially as the Indian economy grows

Near term risks:

1. Possible slowdown in business, hit on margins and profitability due to the tax change
2. Delayed IPO of the gaming business
3. Pressure on stock price till things settle down

Un-factored risk:

1. Retrospective taxation demand. If this ever happens it will kill the business and everything good, bad and ugly will cease to matter

Upcoming positive triggers:

1. Land parcel owned by the company is being developed into residential properties. Will be ready in Q2 FY24, will be monetised over FY24/25 (source: Delta Corp's Jaydev Mody On Firm's Business Outlook, Expansion Plans & More | Inside Out | CNBC-TV18 - YouTube)
2. Doubling capacity/new gaming positions with the new vessel by end of FY24. Full impact to be realised in FY25 (source: concall)
3. In 3-5 years they are building entertainment city in Mopa (next to the new airport in Goa) on 100 acres of land. Another 1500 gaming positions will get added (source: Delta Corp's Jaydev Mody On Firm's Business Outlook, Expansion Plans & More | Inside Out | CNBC-TV18 - YouTube / concall)
4. ~550 crores cash on books (10% of market cap) (source: concall)
5. Dark horse: IPO of the gaming business will see light of the day sometime. I think this business over time can be as big as the offline business
6. Joker in the pack: Awaited Daman verdict

I think 1-3 are things that should play out with a higher degree of certainty.

• #1 will add more cash on books
• #2-3 will increase gaming positions 4-5 times over ~5-6 years, which means profits should rocket over the next 5-7 years.

#5 is now uncertain, though over time things will get clear about that too. The online business being as big as the offline business is my feeling, may not happen.

#6 is the joker in the pack, if it works out it will immediately double their gaming positions. However, after the tax thing yesterday, I feel they will lose the case (courts don’t rule favourably when sin products are involved is my take).

Other positive factors:

1. Growing per capita income means the business will only grow over time, demand at their casinos is already high
2. Addictive nature of gambling. People that drink and smoke, will drink and smoke. People that gamble, will gamble
3. Mopa airport will bring more people to Goa, that is good for the business
4. Heavily regulated business mean high barriers to entry
5. Leader in the casino space
6. The GST ruling has cleared the tax overhang on the stock

I have had all these thoughts swirling in my head since yesterday, thought best it is to pen it down and forget about it

Waiting for the dust to settle to continue SIPing in the stock and further building my position limited to 1% of my pf. Of all my stock investments, this business remains the ‘value pick’ in my pf.

Downside: At the extreme, I lose all my money and 1% value of my pf.

Upside: It could be huge from these and upcoming lows from a 5-yr standpoint.

——

Some interesting quotes from mgmt on the demand (picked from the last con call)

• Q: Demand from high rollers vs casual rollers:

  • We don’t have any such breakup that we maintain or we have anything because, again, if you see the average GGR, that we generate per person is about anywhere between 14,000 to 16,000 or 14,000 to 17,000 ahead. So, and I don’t know whether you have been on earlier calls as well or no, but we are a company which is wanting to be more like a family destination and a retail attracting customers. There are the high-rolling business is not something that we rely upon, and it’s very, very miniscule as far as our larger picture is concerned. So that’s my answer to you.

• Deltin Royale, when we had introduced, I think we haven’t seen a weak opening at all. We’ve always been lucky or since the demand is so high, because as I said, Goa attracts close to about 10 million people a year, which is one crore people a year in visitations, okay. And the total intake of all the vessels put together today will not be more than, I don’t think more than 20 lakhs a year. So you have 80 lakhs people who are un-serviced even today. So I think the demand is very high. And by virtue of that, you will not see underutilized assets in any case. Having said that, again this is not a business like the steel plant or the cement plant that you operate at 100% capacity or 110% capacity. It’s a very, very subjective business in terms of the quality of people that you get on board. But to answer your question, I think we have been fairly utilized from day one.

• We have never factored in Daman Casino ever in our discussion. We believe that that is, for our investors who believe in us, that is an option value. What I can only tell you is that we genuinely believe based on the international demographics, which are very easily available. And it’s an internationally accepted fact that a casino with a 10 million population in a four-hour driving distance is a gold mine destination and you have examples in Las Vegas itself, Foxwoods in Connecticut and whether you even look at Macau for that matter, it is the mainland China which feeds into Macau. And therefore, if you have a 10 million population in a four-hour driving distance, it’s a gold mine. Daman, I will only give you the statistics and you can then imagine whether it can be as big as Goa or bigger than Goa. Daman has a 50 million population in a four-hour driving distance, which is five times the population that makes it a gold mine, standard casino destination, anywhere else in the world