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
- Casinos –
- FCF annual = 155 crore ;
- ROE = 25% great business,
- strong barriers to entry
- 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-
- 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
- I am getting a good margin of safety
- The high barriers to entry will continue to protect the ROE of the casino business
- 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
