More legs to the rally in Delta Corp

The company is a concept play on expansion of the casino and gaming industry in India

Casino and hotel operator Delta Corp (Delta) has a host of growth catalysts in place going forward. Under-penetration of casinos in India, launch of the company's casino in Daman (Union Territory) and value unlocking from sale of land parcels are among the catalysts. The company's leadership position in the Indian gaming industry makes it well poised to benefit from growth of this market in India. In fact, ace investor Rakesh Jhunjhunwala recently stepped up his stake in the company to 10.28 per cent from 9.74 per cent earlier - an indication of his positive views on the stock. Notably, even as the stock has run up 2.7 times in the past one year to current level of Rs 172 apiece on the back of strong financial performance, there is room for further upside.

After achieving break-even in FY15, the company’s net profit growth is pegged to grow by a whopping 82 per cent this fiscal to Rs 77 crore and at a compounded annual growth rate of 77 per cent over FY17 to FY19 as per Bloomberg consensus estimates. Such a strong earnings growth would also lead to meaningful expansion in the company’s return ratios like return on equity. Increasing the use of capacity at currently operational casinos as well as the launch of the Daman casino will aid Delta’s revenue growth. Given that 68 per cent of its costs are fixed in nature, increase in capacity use tends to drive up profit margins.

Investors should note that the above profit estimates do not factor in any gains from sale of Delta’s land parcels in Goa, Sri Lanka and non-core investments. The company is also looking to sell off these assets which have a book value of about Rs 200 crore. Apart from deleveraging its balance sheet (loans of Rs 26 crore), it will also provide fuel for expansion.

Delta is also tapping the inorganic route to grow and has acquired online gaming portal Adda52.com. The deal will improve Delta’s presence in the online gaming segment and is likely to be EPS accretive in the second year of acquisition, estimate analysts. Adda52.com enjoys similar margins as Delta and hence is an additional avenue to drive profitable growth. But more importantly, the scalability of an online business is much higher than of physical capacity, and hence it can drive up Delta's revenues much faster than anticipated.

These catalysts could continue to support the rally in Delta’s scrip, believe analysts. While delay in launch of Daman casino is an immediate downside risk, any tightening of regulations around casinos could over the medium to long term could also affect Delta's prospects meaningfully.