Delta Corp is India’s largest and only listed company in the entertainment sector involved in offering legal casino with 2,000+ gaming positions. Delta holds three of the six offshore gaming licenses issued in Goa, one land-based casino each in Sikkim, Nepal & Goa (inside its own 106-room all-suite hotel). Besides, it owns a 176-room five-star hotel in Daman and awaiting regulatory clearance to start a 1,200+ gaming positions casino in that facility.

Delta is also the market leader in India’s nascent, but fast-growing, online gaming space; it owns India’s top portal for poker and rummy adda52.com and has 20% stake in HalaPlay, a formidable fantasy sports website. These are skill-based games rather than games-of-chance/luck, are played with real money, and are legal in almost all the Indian states.

While gambling is considered a sin by many, it has been a part of our culture since the times of Mahabharat. Betting is a multi-billion dollar industry (estimated to be $60billion in India) but dominated by betting on sports like cricket to lottery (based on chance), which are illegal in India. The legal part of the industry, in which Delta operates, is still tiny (0.50%) but growing rapidly with proper regulations being put in place.

The organised betting with strong risk management in place is considered better for both the house (casino) as well as the players. Based on sheer statistics, on a net basis the house never loses given millions of small bet sizes where probability is in favour of the house.

Las Vegas or Macau have become global tourism hotspots because of their accommodative regulation around casinos. Similarly, Goa is India’s number one tourist destination for both domestic as well as international tourists and one of the key factors driving those billions of dollars in tourism and liquor revenue for the state is its casinos.

The worst hit sector due to COVID-19 caused lockdown is tourism and entertainment. While the likes of PVR and Wonderla will have zero revenues during the period of lockdown and their fixed cost will translate into net losses leading to net-worth erosion, Delta’s case is different with its significant online presence, the segment which is actually growing much faster in the lockdown. Adda52 is now clocking quarterly run-rate of Rs 50-60 Cr (annualised Rs 220-240 Cr) which shall help meet most of the fixed cost of offline business which will contain the losses during the period of lockdown.

Looking at the significant price drop, it seems to us the market has ignored the online revenues and its potential to protect any dent on net-worth. Let's do the math - at Rs 85 a share, the current market capitalisation is Rs 2,300 Cr while the balance sheet is debt-free and in fact has around Rs 600 Cr in cash with another Rs 500 Cr of strategic investments in 1). 100+ acre land near upcoming airport in Goa for a land-based integrated casino, 2). 20% in Mauritius-based Jalesh Cruises making Delta a preferred partner to operate casinos in all of former’s cruises, 3). India’s leading online gaming portal for poker, rummy and fantasy sports.

The residual valuation for the core physical casino business works out to be only Rs 1,200 Cr wherein the underlying assets; three ships & two five star hotel properties are owned by the company. Even on an operating basis, it looks like a bargain - 4,31,000 guests visited its casinos last year and the house won a net of Rs 630 Cr (including entry fees and liquor) and generated an operating profit of Rs 280 Cr. The consolidated net profit for FY19 was Rs 197 Cr, after paying 37% tax.

The other way to approach valuations is starting with the most exciting part of the portfolio - adda52. Delta reportedly acquired this for Rs 150 Cr in 2017 when it had revenues of only 50 Cr. Even at that tiny revenue it was making 35-40% operating margin, and was debt-free. The valuations for private market deals have been high at price-sales of 4-10 depending on existing revenues and scalability. Within three years of acquisition, the revenues have quadrupled and continues to grow at 20-30%, which could accelerate due to faster adoption during lockdown. Assuming Rs 230 Cr revenue in FY21, if we assign a 4x sales multiple, that comes out to Rs 920 Cr. Essentially, everything else is being valued at Rs 1,400 Cr which includes - Rs 600 Cr in cash, the strategic investments in Goa land, 20% stake in Jalesh Cruise, 20% in Halaplay, and entire operating business of casino in physical form along with core assets of ships & hotels.

This is clearly a bargain even if in the worst case things take a year or two to normalise. There are multiple triggers in this story - the near term would include scaling up of online games and permission to restart physical casinos whereas, the medium to long term opportunity is approval in Daman, scale up in Nepal and land based policy approval for live casino in Goa.

Delta was founded 15-years ago by a first generation entrepreneur JaydevMody, is currently run by a professional team, which is overseen by a competent and independent board which includes Rakesh Jhunjhunwala who owns 7.4% stake.

The opportunity is not free of risks, which are plenty and major ones include asset-heavy nature of business requiring frequent equity dilutions, regulatory flip-flops and revenue extraction by state governments in the form of higher license fees and sin taxes. However, this is also an opportunity which if it clicks can yield multi-fold return in a span of few years. For now, keeping in mind the risk management, we are initiating the position with a starter allocation of 3%.