Annual fee hike may prompt DELTA to shuffle its cards
No material impact seen on financials Event update:
On 27th March 2018, the Goa government approved the revised fee structure for onshore and offshore casinos, which will be applicable from 1 st April 2018. The move is intended to increase the state’s revenue collection from casinos (refer Exhibit 1).
Business rationalization in the form of smaller casino closures may be an option for DELTA, although accompanied with some revenue loss…
* Delta Corp (DELTA) operates three floating casinos (Deltin Royale, Deltin Jaqk and Deltin Caravela) and one onshore casino (Deltin Casino – part of Deltin Suites) in Goa.
* Deltin Royale and Deltin Jaqk are DELTA’s major casinos with vessel passenger capacity of 200-400. Deltin Caravela and Deltin Casino are relatively small with passenger capacity of 200 or less. DELTA incurs INR370m as license fee to operate the four aforementioned casinos. However, the outlay for the four licenses would increase to INR1,050m once the revised fee structure becomes effective.
* We believe the increased license fee would have a significant impact on Deltin Caravela and Deltin Suites, as they operate on a relatively small scale (accounting for 6% of DELTA’s overall revenue for FY19E). This would likely make it unfeasible for DELTA to operate these two casinos.
* In our view – and also based on our communication with management – DELTA has two options to rationalize cost: (1) phase out the licenses for both Deltin Suites and Deltin Caravela and (2) phase out the license for Deltin Suites. This should help DELTA to minimize the impact of the revised fee structure, and thus, limit losses. We conducted a scenario analysis of both the options (refer Exhibit2).
which can be mitigated by diverting traffic to Deltin Jaqk/Deltin Royale and rationalizing entry fee
* We believe that, whichever option the management choses, some traffic is likely to shift to Jaqk and Royale. This will help recoup EBITDA – ~INR106m under option 1 and INR53m EBITDA under option 2 – over a period of time, assuming 50% of the traffic is diverted.
* Additionally, DELTA may look to pass through the increase in license cost in a phased manner. This can be done by increasing the entry fee or reducing the amount of non-refundable chips offered against the entry fee. To fully mitigate the impact, the entry fee will need to be increased by INR755 under option 1 and INR1,217 under option 2, based on our estimates.
Cutting PAT for FY19E/FY20E; Maintain Buy
* In our view, the visibility of DELTA choosing option 2 is more at this point in time, but we await further clarity from management. Nevertheless, we cut our PAT estimates by 11%/7% for FY19/FY20 to factor in the impact of higher license fee. We believe that the move may dislodge some casino operators, but do not see it having much impact on DELTA. In fact, it may increase traffic to DELTA’s casinos. We value the stock at 32x FY20E earnings of INR10.4/share. We reiterate our Buy rating with a revised target price of INR332/share.
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