Game over or will the house win as usual?


This year, many jokes have been made about the stock markets becoming dens of gambling. According to a study by SEBI, traders are facing huge losses and more than 90 percent are facing losses in trading. But how should investors take Delta Corp., which stands at the intersection of both, and has been hit by a deluge of bad news?

On September 22, a tax notice of Rs 16,822 crore was sent to the casino operator.

A month ago its Chief Financial Officer had resigned. Two months ago the company had informed that the initial public offering of its online gaming business has been put on hold. This follows the government’s announcement three months ago to impose a 28 per cent GST on gross betting value for casinos.

How bad is the bad news, really? The tax department’s Sept. 22 claim is 3.5 times Delta Corp’s last closing market capitalization and more than double the company’s revenue over the past decade. One saving grace is that the company is debt free.

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

Furthermore, it comes at a time when Delta Corp has long had underlying capacity constraints due to high entry barriers and strict regulations on gambling. “The Daman casino proposal has been pending for many years,” says Bathini.

This is not surprising as the regulations governing casino licensing in India are challenging for several reasons. Sonam Chandwani of KS Legal says, “First of all, gambling laws in India are largely a state matter, which leads to different rules and requirements in different states. Secondly, there is historical and cultural sensitivity towards gambling, which has led to cautious and restrictive policies.”

Given the magnitude of the tax claim, a sharp correction in the share price seems likely. The stock had fallen 20 per cent the day after demonetisation of Rs 500 and Rs 1,000 notes in November 2016. The share price gradually managed to cross Rs 370 level in January 2018, but since then it has been in a downward trend. The announcement of 28 per cent GST in July 2023 was followed by another 20 per cent shock.

Also read: After second notice, Delta Corp’s GST liability jumps 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 stocks. “Looking at the tax burden, many small companies are now closing their businesses,” he said.

Can the company fight this tax notice?

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

Furthermore, the demand for GST on the gross value of chips rather than gross gaming revenues 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 challenge such tax demand and related proceedings,” Delta Corp said in its exchange filing. “

What makes the case for Delta Corp stronger is Zia Modi’s support, said an analyst on condition of anonymity. Jiya Modi is married to Delta Corp promoter Jaydev Modi and is the co-founder of AZB & Partners, one of India’s leading law firms. “She is one of the biggest corporate lawyers in Asia,” the analyst said.

Investors’ chances of winning

Over the last five years, the company’s sales have grown at 11 percent and net profit at 13 percent. Analysts believe the new GST rule is a quick blip, but the long-term story remains intact.

“The long-term outlook for Delta Corp appears promising given its dominance in the Indian casino industry, strong brand and loyal customer base. For investors who believe in the company’s ability to overcome challenges, the current stock price decline could provide a buying opportunity, said Sonam Srivastava, founder of Wright Research and fund manager of quant-based PMS.

Savvy investor Mukul Aggarwal holds a little over 1 per cent stake in the company and has not made any changes to his stake since September 2022. A look at the overall shareholding pattern shows that institutional investors are also betting on Delta Corp. For the quarter ending June 2023, FII stake in the company increased to 6.68 percent from 5.35 percent in the previous quarter. DII holding increased from 14.50 percent to 18.04 percent during the same period.

In fact, quant mutual funds have been loading up on Delta Corp for the past three months. It now accounts for 1.32 per cent of the AUM of its Small Cap Growth Fund. Another active fund – HDFC Midcap Opportunities – which has a stake of 4.15 per cent, remains intact and has not cut its stake despite all the bad news.

One of the major reasons behind this is that ‘gamblers will gamble just like smokers despite the increase in costs.’ Additionally, many tourists want to try their hand at it to see how it goes.

“Despite the disruption of containment, Delta continues to expand in Goa,” Jain said. A new ship, scheduled to be commissioned in FY2024, will replace Deltin Caravella and increase the company’s existing capacity by 2.5 times.

And whenever a suppression license comes up, it has huge option value. “It is an internationally accepted fact that a casino with a population of 10 million within four hours driving distance is a goldmine. Daman has 50 million,” the management had said at an earnings conference.

Since the tax notice was announced after the market closed on Friday, the stock will be in focus in today’s trading. This is undoubtedly going to be a stomach-churning day for investors in the stock.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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