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Delta Corp, DELTA IN, Buy, TP Rs89 (+23%) — A play on the emerging Indian casino story

Delta Corp is the first aggressive and quality casino gaming operator in India, a country with very low casino gaming penetration, but enormous potential. It is the largest operator in the Goa casino market (has three of six offshore licences), where a combination of limited offshore gaming licences, low gaming tax rates and low capital requirements guarantee high returns. The company is well capitalised to pursue exciting growth opportunities in Sri Lanka and Daman.
Delta Corp’s first mover advantage in this high operating leverage business has the potential to yield disproportionate returns for investors over the long term. We initiate with a Buy and a 12-month price target of `89.

Indians have high proclivity to gambling, so low awareness of casinos an opportunity

In India, while enormous amounts are wagered in other forms of gambling like lottery tickets (Industry valued at $12.5bn), cricket ($1.5bn wagered in a single world cup match!) and horse racing (annual turnover of >$250mn), the annual turnover of casinos in Goa was just `1.6bn (or $35mn) in FY10. We believe that with higher advertisement & marketing spends, and changing demographics (higher exposure of the younger generation to casino gaming), the penetration of casino gaming in India will rise rapidly.

First mover advantage and operating leverage to drive cash flows and returns

Delta Corp made an aggressive foray into the offshore Goa casino market with its flagship Casino Royale vessel two to three times the size of the competition’s. In ten months, the Horseshoe boat will be operational and will be three times the size of Casino Royale. Our visits to offshore casinos in Goa convinced us that quality developments see higher visits and we estimate that limited supply of quality developments will be a constraint in the future. As close to 80% of a casino’s costs are fixed, we expect a higher number of visits to result in cash flows from operations of ~`3bn over the next two years and casinos to recover the capital employed within two to three years of starting operations.‎‎

Horseshoe and Daman casino openings, key catalysts for gaming growth

We estimate FY12 and FY13 gaming revenue growth of 88% and 69%, respectively, primarily driven by the opening of two casinos in Goa, Caravela and Horseshoe, and the Daman casino. FY13 EBITDA growth is estimated at 92%, further driven by operating leverage.

Valuation and risk to thesis

Our SoTP-based valuation values the Goa casino gaming business using a13x multiple on FY13E gaming EBITDA (see Exhibit 10 for details). Our 12-month price target is `89 and we initiate with a Buy. We see possible changes in regulations like gaming tax rates, licence fees, entry taxes, etc, as key risks. Also, we note that casino gaming will always be a politically sensitive issue for the Goa government.