Using EV/ebitda of 11x for Adda52.com (based on global peers) and adjusting for cash, the market is allocating Rs 8 billion to Delta's casino, land and hotel business (implied EV/ebitda of 4.3x, a deep discount to global peers).
Delta’s casino business has been severely hit by Covid-19 and we expect it to recover gradually after it opens. However, its online gaming business has recorded strong growth. Delta’s online poker asset, Adda52.com, leads in the space and, according to its management, has had a substantial jump in traffic. We expect Adda52.com’s revenue to grow ~50% in FY21 and its ebitda, aided by operating leverage, to grow around 80-100%. We expect Adda52.com to become a significant part of Delta’s earnings, amid increasing popularity and network effects. Using EV/ebitda of 11x for Adda52.com (based on global peers) and adjusting for cash, the market is allocating Rs 8 billion to Delta’s casino, land and hotel business (implied EV/ebitda of 4.3x, a deep discount to global peers). We believe the market is not pricing in a big online gaming opportunity and expecting significant delays for casinos to pick up in revenue.
Management has highlighted that it has lowered the monthly fixed cost of the casino segment to Rs 80-90 million (excluding licence fees) through various measures and expects licence fees to be applicable from the date casinos open. The company has a healthy cash balance of ~Rs 5 billion to navigate the current situation. We believe Goa’s gaming policy changes will get further delayed amid the Covid-19 lockdown in the state, along with the upcoming state elections in early 2022. Since the policy is a politically sensitive topic, it’s unlikely to get clearance in state parliament in the near term.
Delta’s casino business has been a strong cash flow generator but the company’s capital allocation strategy hasn’t delivered the expected returns, in our view. Impairment of ~Rs 0.56 billion towards the recent investment in Jalesh Cruise, an investment of more than ~Rs 1.4 billion in land in Goa in anticipation of gaming policy changes and investment of ~Rs 4.5 billion towards a hotel in Daman in anticipation of a casino licence are some examples. On the flip side, its investment in Adda52.com has resulted in superior earnings.
We cut FY21E/FY22E earnings by 60%/31% factoring in Covid-related lockdowns and considering a gradual recovery after reopening. Reflecting our revised estimates and using a multiple 1.5 SD below Delta’s three-year average historical multiple, we value Delta at 20x FY22E PE and 12x FY22E EV/ebitda to arrive at our new PT of Rs 150.00.