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MOSL: DELTA CORP (Buy)-Annual fee hike may prompt DELTA to shuffle its cards

Delta Corp: Annual fee hike may prompt DELTA to shuffle its cards; No material impact seen on financials

(delta IN, Mkt Cap USD1.3b, CMP INR250, TP INR332, 33% Upside, Buy)

 

Event update: On 27th March 2018, the Goa government approved the revised fee structure for onshore and offshore casinos, which will be applicable from 1st 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.