Delta Corp: Game over or will the house win as always?

“Leave aside the short-term impact, a Rs 16,822-crore tax notice is a big negative even in the medium-term,” said Kranthi Bathini of WealthMills Securities, who has been tracking the company for over 15 years.

Furthermore, this comes at a time when Delta Corp has inherent capacity constraints for a long time given high entry barriers and strict regulations on gambling. “Its Daman casino proposal has been pending for many years,” Bathini adds.

That’s not surprising because regulations governing casino licensing in India are challenging for several reasons. Sonam Chandwani of KS Legal adds, “Firstly, gambling laws in India are primarily a state matter, leading to varying regulations and requirements across different states. Secondly, there's a historical and cultural sensitivity towards gambling, which has led to cautious and restrictive policies.”

Considering the enormity of the tax claim, a sharp correction in the stock was inevitable. The day after Rs 500 and Rs 1,000 notes were demonetised in November 2016, the stock had corrected 20 percent. The share price slowly managed to scale past the Rs 370 mark in January 2018 but has been on a downward journey ever since. Another 20 percent blow came after the 28 percent GST announcement in July 2023.

Also read: After second intimation, Delta Corp's GST liability totals to nearly Rs 17,000 crore

According to Abhishek Jain of Arihant Capital Markets, the next six to nine months will be a consolidation phase for the industry and the stock. “Given the tax burden, many small companies are now shutting shop,” he said.

Can the company fight this tax notice?

The consensus view is it can. The amount claimed is based on the gross bet value of all games played at the casinos from July 2017 to March 2022, while the new GST rule came into effect only from October 2023.

Furthermore, the demand for GST on the gross value of chips, rather than gross gaming revenue, has been an industry issue and various representations have already been made to the government.

“The company has been legally advised that the tax demand is arbitrary and contrary to law, and the company will pursue all legal remedies available to it to challenge such tax demand and related proceedings,” Delta Corp said in its exchange filing.

What makes the case stronger for Delta Corp is the backing of Zia Mody, said an analyst who did not want to be named. Zia Mody is married to Delta Corp’s promoter Jaydev Mody and is the co-founder of AZB & Partners, one of India’s leading law firms. “She is among Asia’s largest corporate attorneys,” the analyst said.

Investors’ odds of winning

Over the past five years, the company's sales have compounded at 11 percent, and its net profit at 13 percent. While the new GST rule is a speedbump, the long-term story is intact, believe analysts.

“The long-term view for Delta Corp appears promising given its dominance in the Indian casino industry, strong brand, and loyal customer base. Investors who believe in the company's ability to navigate the challenges, the current stock price dip might present a buying opportunity,” said Sonam Srivastava, founder at Wright Research and fund manager of a quant-based PMS.

Savvy investor Mukul Agrawal holds a little over 1 percent stake in the company and has not tinkered with his stake since September 2022. A look at the overall shareholding pattern shows institutional investors are also betting on Delta Corp. For the quarter ended June 2023, FII holding in the company went up to 6.68 percent from 5.35 percent in the quarter-ago period. DII holding went up to 18.04 percent from 14.50 percent during the same period.

In fact, Quant Mutual Fund has been loading up on Delta Corp for the past three months. It now forms 1.32 percent of its Small Cap Growth Fund’s AUM. Another active fund - HDFC Midcap Opportunities – which has 4.15 percent shareholding in the company has stayed put and not trimmed its holding despite all the bad news.

A major reason behind this is ‘gamblers will gamble just like smokers will smoke despite bump up in costs’. That apart, many tourists wish to try their hand once to see how it goes.

“Despite the Daman hindrance, Delta continues to expand in Goa,” said Jain. A new vessel, set to be operational in FY24, will replace the Deltin Caravela and will increase the company’s current capacity by 2.5x.

And whenever the Daman license comes through, it carries huge option value. “It's an internationally accepted fact that a casino with a 10 million population within a four-hour driving distance is a goldmine. Daman has 50 million," the management had said in an earnings con-call.

Since the tax notice announcement came after market hours on Friday, the stock was a big loser in trade today. It was undoubtedly a stomach-churning day for investors in the stock.

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