Delta Corp – Is this house always winning?

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There is a very popular saying in the world of gambling and casinos.

“The house always wins.”

This basically translates to a belief that if you run a casino, you will always make money.

If this is as good as it sounds, all of us would want to own a share of the casino business, albeit an entire casino too.

In the Indian context, the biggest casino operator in the country which is listed is Delta Corp (DC). This basically means if one were to belong to the former category of investment enthusiasts, this is the only bet one can make.

The Dopamine Fix

In an earlier post in May, 2020 I had written about the 4 chemicals that control our brain. One of the ‘selfish’ chemicals is Dopamine – a feel-good hormone. This hormone is often associated with a sense of accomplishment, a sense of achievement.

The mental image of maximum dopamine rush.

Gambling occupies the top shelf in terms of generating the maximum amount of Dopamine in our brains giving us an instant and heavy rush of satisfaction. The other three are – nicotine, alcohol and mobile phones that co-exist with gambling in the top shelf.

Imagine being the ‘high-roller’ and sitting on the poker table.

In the casino world, this is how the three elements co-exist.

Dopamine gives your brain the feeling of an increased expected reward – the feeling that you get when you smell a freshly baked cake or when you go shopping.

Regulatory Landscape

The casino business is a state subject in this country. Presently casinos can operate in only two states in India – Sikkim and water bodies of Goa. Talks about Daman starting operations have been on for quite some time but the same has not been given the green light, yet.

DC has an integrated resort developed in Daman and is awaiting receiving the final nod to operate a casino.

A few years back, there was also chatter around Punjab opening up the state for providing a few licenses but it eventually fizzled out.

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Considering the nature of the business, the likelihood of grant of fresh licenses is low but cannot be ruled out.

This does create barriers to entry for the competition but at the same time, since state governments do have the tendency to change from time to time subject to electoral outcomes, the grant of fresh licenses cannot be ruled out.

Frequent changes in state governments also create uncertainty regarding restrictions around the business and its associated taxation policy.

Global Outlook

Globally, casinos are big businesses to be present in. Just to give you a heads up, Las Vegas Sands (LVS) is the biggest operator in this space with 11 properties in three locations – Las Vegas, Macao and Singapore.

For 2019, they closed their revenue at ~Rs. 96,173 cr. 120x the Revenue of DC.

What is interesting to note here is that despite being the biggest global behemoth, they are present in only three markets in the world and generate upwards of USD 13 Bn in revenues!

In a mature market with a mature company, topline CAGR is at 12% and Net Income at 23%. DC on the other hand, still at a very nascent stage has a sales growth of 29% CAGR and Net Income CAGR of 73%. Operating Income margins have remained healthy.

The Casino Playbook

To briefly summarize how a casino business operates and what should be an ideal playbook to generate sustainable cash flows, this is how we can sum it up.

In the later part of this article we will gauge how DC is close to the ideal playbook.

While the entry into casinos can be affected by the tourism demand, it becomes essential to look at asset light and lean models along with ensuring alternate sources of cash flows.

The India Opportunity

Gambling is often looked as a taboo in India. It is estimated that the entire gaming market in India is ~USD 60 Bn of which casinos have an estimated annual turnover of USD 200 Mn (barely 0.5%). Most punters bet on cricket (through non – legal means) and horse races in India.

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In a country where setting up casinos is difficult; DC has taken two alternative routes to ensure their topline grows beyond their regular casinos.

  1. Online Gaming – Acquisition of Adda52 and strategic investment (19.5%) in HalaPlay (a fantasy sports website). For FY19, Adda52 had a topline of Rs. 170 cr. The management has been quoted stating they have close to 20% margin in the online business and zero cash burn (very low CAC).
  2. Cruise Casinos – DC bought a 30% stake for USD 10 Mn in Jalesh Cruises, a luxury cruise to operate 25-30 tables at a fixed fee of USD 5 per person per day. DC expects to have an annual run rate of INR 25-30 cr. a year from this.

Looking Ahead

Jaydev Mody was recently labelled as India’s casino czar by Fortune India. While hotels are regarded as an integral part of running a casino operation, Mody is not a big fan of the idea and does not endorse setting up hotels.

DC has land parcels in Sri Lanka, Goa and even East Africa (co-invested with Reliance Industries) in order to have an international footprint.

As early as last year, DC expanded into Nepal and operates a casino inside the newly opened Marriott hotel in Kathmandu. They have ambitions to open multiple casinos in Nepal and be a leading brand in the next 3-5 years.

While the Daman’s matter for operating a casino is sub-judice, the land parcel in Goa was also acquired on the back of a land casino policy that was about to be crystallized.

Financials

DC has lean financials and has been steadily growing their operating profit margins. Their Net Profit margin has almost doubled from 10% to 25% in 4 years.

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The Return on Capital Employed was erratic between 2008 and 2015 hovering in the range of 3% to 29% on account of capex and variable capital allocation, between 2016 to 2019, the ROCE has been steadily improving from 8% to 16%.

Shareholding Pattern

DC has a diverse set of investor profiles. Right from ace investors Rakesh Jhunjhunwala (who also sits on DC’s board) to Radhakishan Damani, it also has a clutch of institutional investors – Morgan Stanley, Goldman Sachs, Eastbridge Capital etc.

This list should not be looked at with a myopic viewpoint since most of these investors have diverse bets placed across various companies.

Concluding Thoughts

While the gaming industry in India has existed in the country for decades, gambling is often regarded as a taboo. The competition in the organized casino business is often promoter driven as claimed by Mody which makes DC stand apart since it is professionally managed and has strong institutional ownership.

However, it is worthwhile to note that the regulatory risks cannot be ignored for this business. The regular policy flip flops can curtail future expansion plans – think Sri Lanka, Goa and Daman. DC has nevertheless taken alternate routes – Online gaming, Caravan cruises, expansion into Kathmandu to offset the setbacks.

After having read this, I ask this question to you.

Is this house always winning?

We have a long way to find this out.


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DISCLAIMER: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.



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Saket Mehrotra
Saket is a number cruncher, avid reader, coffee connoisseur, book store hopper & Metallica fan. He is an active follower of Sensex since 2009. CA, CS by profession.
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