Delta Corp-2016-17(2017) Annual Report overview

Motilal Oswal has been bullish on Delta Corp (read the below reports  http://www.motilaloswalgroup.com/AnalystVideo/Pdf/227183999DELTA-20170321-MOSL-IC-PG042.pdf and also the most recent one (http://www.dsij.in/productattachment/BrokerRecommendation/DeltaCorp_BUY_Motilal_31.08.17.pdf)

Having traded in and out of the stock between 145-180 levels, I thought to revisit the annual report to analyze how the business outlook has changed. The 256 page annual report (http://www.deltacorp.in/pdf/annual-report-2016-2017.pdf)

Positives
1)Currently, only 12 Indian states offer lottery, six states allow horse racing, and two states (Sikkim and Goa) and one union territory (Daman) allow casino-based gaming. ..In India, while on-shore casinos are permitted in Goa, Daman and Sikkim, off-shore casinos are permitted only in Goa, and online casinos in Sikkim and Nagaland...Regulatory moat since onshore casinos in Daman/Sikkim can only be set up in 5 star hotels-Delta owns the only 5* hotel in Daman and this business has a long gestation period. Also, Goa presumably would not issue any more licenses. These are however high regulatory risks
2)Management guidance of no further growth capex-However Adda52 M&A deal does not sync
3)Two other listed entities to piggyback-Arrow Textiles and Delta Magnets-latter is a self professed turnaround story
4) Equitable managerial remuneration increase-The average percentage increase made in the salaries of total employees other than the Key Managerial Personnel for Financial Year 2017 is around 11% to 14%, while the average percentage increase in the remuneration of the Key Managerial Personnel is NIL.
5)Conservative revenue recognition: As per the company's policy, gaming revenue is recorded based on net gain/loss at the end of each day. The revenue recognised includes gaming related taxes and duties which the Company pays as a principal but excludes amount collected on behalf of third parties such as entry tax.
6)Pedigree in promoters, auditors and board: Promoters are the Mody family(noted lawyer Zia Mody's husband). Audit committee has renowned audit partner Chetan Desai, and auditors are Grant Thornton.

Points to see further
1) In case of one of the subsidiary company there is a default in payment of Interest to FCD-A, FCD-A1 holders since April 2010.
2) Nearly all the promoter shareholding(40%) held in the form of trusts potentially to ensure smooth inheritance for the owner's daughters. Is this good(ensure continuity) or bad?
3) Normalize shareholders equity numbers-As per the IND-As reconciliation, 318.6 million Rs is the increase in retained earnings/equity as at 31-03-2016(Date of IND-AS). This is due to ~770 M INR goodwill offset mainly  by investment markdown ~383 MINR.
4) Sikkim not material from financial perspective-Key revenue driver seems gaming positions which is 1500 at present. Sikkim contributes to ~12% of this. While Daman approval awaited for ~1200 positions which will rampup capacity by 80%, this is therefore key number to watch.

Risks disclosed in QIP Document
1) Relocation of Goa casino ships out of river Mandovi: The company claims on-shore casinos are more profitable however this risk factor Pursuant to the letters dated April 7, 2017 of the Government of Goa each issued to our Company, HCEPL, and DPCCPL, we have been asked to submit a fresh undertaking in favour of the Government of Goa to relocate the operations of our Offshore Casinos out of the river Mandovi by June 30, 2017
2) Limited Pricing Power: While they can drive footfalls, they cannot really "hike prices" or show pricing power as the inherent nature of the business is house %.  While we may modify our entry fees and introduce new games or modify existing ones, the ability of our Company to charge our customers for its services offered is limited
3) Natural Disasters-However company claims to have insurance against earthquakes, floods etc