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Delta Corp: Run in true gaming fashion - Outside View by Luke Verghese
 
 
Delta Corp: Run in true gaming fashion

The impression one gets is that Delta Corp appears to be run without any purpose or direction.

Getting a fix on this company aint easy

One has to be tipsy minded to get a fix on what this company is all about. More correctly, on what the intentions of the management really are. Constitutionally the company is 20 years young but it is still a minnow among the investing fraternity. Its chief claim to fame at this point of time, if one may use this axiom, is that the management was able to entice the 'eminence grise' of the stock markets, Rakesh Jhunjhunwala, to take a seat on the board of directors in 2010, and also invest in the equity of the company. What exactly he saw in this company before stepping on board is difficult to fathom, but apparently his bifocals were able to spot a silver lining in what appears to be fast flowing waters.

The chief promoter of Delta Corp, Mr Jaydev Mody we are informed, is a well known businessman with over 24 years experience in the field of real estate development. His alter ego on the distaff side is the better known legal eagle Zia Mody, the public face of AZB Partners, the high profile corporate law firm. Delta may well be the recipient of quite some zany legal advice from AZB, given the very intricate maneuvering that Delta resorts to. The company paid out some Rs 65 m in legal and professional fees in 2010-11 against Rs 15 m previously.

Hospitality and Gaming

The company is in the business of 'hospitality' and 'gaming'. Gaming is a synonym for gambling-a game of chance catering to the high rollers who wish to make a statement Hollywood style. The Chairman in his pontification to the shareholders gets straight to the point: Says he -"We are emerging as India's biggest gaming company with international ambitions. We are at an inflection. The next five years are very exciting and promising." He then goes for the jugular adding that 'gaming is strongly co-related to the economic growth of the country…This new affluent class has both the power and the will to spend on gaming'.

The point is that Delta is already India's biggest gaming company. But given the way the gaming laws are framed in India presently, there is unlikely to be much business forthcoming out of India. The only three regions where gaming is presently allowed in India are Goa, Daman and Sikkim. Here too the laws come with caveats. In Goa gaming has to be operated only on an offshore basis. In Daman gaming is allowed to be established within hospitality. There is no mention in the annual report of the locus standi in Sikkim. It sure as hell appears to be going about its gaming business with gusto, with Delta through its subsidiaries owning and operating three of the six offshore gaming licenses, giving it a dominant leadership. (The two operational offshore casinos in Goa offers a total of 670 gaming positions -whatever that means). But it is the manner in which the parent has chosen to go about its business is what makes it more than a game of chance.

Delta Corp is a holding company

The parent Delta is basically a holding company of sorts. After 20 years of stewardship the company could only muster up revenues of Rs 2.6 bn (excluding other income of Rs 56 m) which again is substantially higher than the Rs 541 m that it rustled up in the preceding year. The revenues that it derived during the year were achieved on a gross block of a mere Rs 37 m - excluding capital works in progress that is! This generous increase in revenue accretal in turn was largely fortuitous. It recorded income from sale of property to the tune of Rs 2.5 bn. Such income generated from sale of property strictly speaking represents capital receipt and not revenue receipt, and is a one off affair in any case. The sale of property led to a capital profit of Rs 1.67 bn. That is to say excluding this well timed capital receipt, the gross revenues for the year was a mere Rs 116 m! This is even lower than the revenues of Rs 541 m that it recorded in the preceding year.

The revenues for the preceding year in turn were spliced with a set of income receipts which are not repeated in the current year-such as the overdependence on 'revenue sharing and consultancy income' and 'lease rentals'. The company does not even appear to boast of a stable revenue regime. The income streams and the change in the pattern of income recognition appear to be 'deliberately' managed.

Issue of capital boosts its fund flows

There was a large issue of capital through equity and share warrants during the year. This issue was principally swallowed up by the chairman and his immediate family, including family trusts on behalf of the three children, as the schedules reveal. The proceeds from the issuance of additional equity amounted to Rs 1.76 bn, while the proceeds from issue of fresh warrants was Rs 272 m or a grand total of Rs 2.03 bn. Post issue of additional capital, the holding of the 'promoter and the promoter group' in the paid up equity capital of Rs 201 m stands at 44.2%. Separately the company has a paid up preference capital of Rs 122 m. Thanks to the issue of additional capital, the reserves and surplus got a healthy boost to Rs 5.3 bn from Rs 2.3 bn previously. The share premium reserves account for a very healthy 70% of all reserves and surplus.

The funds flow of the parent is a lesson in adroitness. There was a fast and furious inflow and outflow of funds during the year. In-spite of the additional issue of capital the company borrowed fresh funds of Rs 203 m but also repaid Rs 1.30 bn. Since the additional capital was issued at a considerable premium of Rs 50 relative to the face value of Rs 1, the share premium reserves accelerated to Rs 3.7 bn from Rs 2.05 bn previously. As the funds flow statement shows, the primary purpose of the issue of additional capital is twofold. On the one hand the company reduced the year end debt to Rs 657 m from Rs 1.74 bn previously. On the other hand the loans and advances to subsidiaries (also shown under the nomenclature of inter-corporate deposits) raced up to Rs 3.52 bn from Rs 1.28 bn. There is a book entry drop in the value of investments to Rs 1.29 bn from Rs 2.44 bn previously.

Modest increase in gross block

Significantly the additions to 'gross block including capital work in progress' rose very modestly by Rs 88 m! The story does not end here. Large sums were splurged into the purchase and sale of investments. That is to say it made cumulative investments of Rs 10.5 bn and cumulative sales of Rs 11.5 bn during the year-apparently in debt instruments. The exact purpose of this exercise is not known, and besides, if this dual flurry added to the revenue kitty there is no obvious sign of it-though it has booked a profit on sale of 'mutual fund' http://www.equitymaster.com/outsideview/detail.asp?date=06/23/2011&story=4&title=Are-you-selecting-your-mutual-fund-advisor-wisely of Rs 0.6 m. It does not appear to have separately sold any mutual fund investment. However on a year end investment of Rs 670 m plonked down in non-trade debt investments, it appears to have been a beneficiary of dividends to the tune of Rs 55 m. This is indeed a very sizeable return on investment.

As stated upfront earlier, the company prefers to power its growth through its subsidiaries and joint ventures. The consolidated entity ponied up gross revenues including other income of Rs 3.82 bn against Rs 1.3 bn previously. Why it has chosen this route has not been clearly spelt out. In what way the public minority shareholders of Delta Corp stand to benefit from such a routing is not immediately apparent either. The subsidiaries and joint ventures are independent entities, and hence the shareholders of the parent company only get to savor any dividends, royalty, and profit on sale of shares and such other such tidbits that may fall their way.

Spate of subsidiaries

By the company's own admission there are 46 corporations constituting a group as defined under the Monopolies and Restrictive Trade Practices Act. The schedules further reveal that it boasts 8 direct subsidiaries -all of which belong to the unquoted category and accounting for a total investment outlay of Rs 617 m. (Separately it has investments in mutual funds to the tune of Rs 670 m). The vast bulk of its investment in its subsidiaries is however concentrated in just one company - Delta Pan Africa Ltd, a Kenya based offshoot. The total equity investment in Delta Pan Africa is Rs 540 m at a price of Rs 607 per share. This company is a 100% subsidiary of the parent. From the looks of it, it is some sort of a dummy investment company and boasts no turnover. (The only other subsidiary of any import is the piddling Advani Pleasure Cruises Company, which is a 51% offshoot.)

The real action takes place elsewhere. Namely, a corporation called Delta Corp East Africa Ltd, which is a 40:60 joint venture investment between Delta Corp and Reliance Industries. This sibling we are informed is developing commercial space in Nairobi. It is also on a roll as according to the management Nairobi has excellent growth potential. But a schedule in the consolidated statement also informs that this company is a 53.65% subsidiary of the parent. The question that arises is how a 40:60 JV (joint venture) could simultaneously be a 50% plus subsidiary of the parent - or have I read it wrong perhaps?

But even more bizarre is the maverick manner in which it creates subsidiaries and then jettisons them for whatever reason. At some point of time during the financial year the company boasted of 13 subsidiaries, but by year end the number had dwindled to 8. (The catch here is that some of the subsidiaries of the preceding year exited during the year and yet others came on board during the year.)Then there are a further 16 step down subsidiaries ---10 of which had the honor of being procreated during the year. There is also one company going by the name Highstreet Riviera Leisure (Goa) Ltd, and which is classified as a joint venture. Then there are a further 16 entities including family trusts which are classified as 'Enterprises over which key management personnel exercise significant influence'. For sure the company must be having a battery of accountants and lawyers to take care of all the book keeping and the legalese.

The many inter-se group transactions

If this is in itself is a fascinating spectacle then one must take a look see at the many inter- se transactions between the group companies, and the manner in which its revenues are derived. It has during the year transferred shares of some of its directly owned subsidiaries to its wholly owned subsidiary companies at cost price. Under a corporate restructuring plan it transferred a large block of shares of Advani Hotels and Resorts to its subsidiary company as per SEBI order thereby incurring a book loss of Rs 260 m. Incidentally, the total loss booked on sales of shares during the year was Rs 324 m for which there is no separate schedule appended.

If these shenanigans are not taxing enough, the company has made a tax provision of Rs 252 m on its book pretax profit of Rs 1.3 bn, but the tax provision has been negatived by a MAT credit entitlement of Rs 218 m. The auditor's in their report to the shareholders state that this MAT credit is based on 'judgment of management' clearly implying that the auditors are not in agreement with the stance of the management. The management on its part in a note to the accounts has given their own version on the MAT credit entitlement. How could the management have an opinion which is superior to that of the auditors, and prevail?

There are some six pages of 'details of transactions carried out with related parties in the ordinary course of business.' They include a medley of transactions on revenue and capital account. It has proferred loans to its siblings, and in turn has availed of loans from them. It is all part of some sort of a game or something. Not all the loans given / taken carry a coupon rate. How the management decides on whether a sibling qualifies to pay interest or whether the parent should itself pay interest on loans that it has availed of from them is not known.

The Peninsula cash cow

The company is invested in a 'chit' of a quoted company called Peninsula Land with a book value of investment of Rs 0.26 m. The aggregate market value of the shares of this company is Rs 2.8 m. In the preceding year Peninsular Land was a cash cow for the parent. The parent earned Consultancy Income of Rs 41 m, and Revenue Sharing Income of Rs 199 m from Peninsula. This is a truly fantastic return on its investment. But in 2010-11 it was bereft of any income from its sibling. Why is this so? What's more it repaid a massive loan of Rs 425 m to Peninsula in 2009-10, on which it paid out an interest of Rs 24 m. What sort of a gold mine is Peninsula sitting on? In 2010-11, the parent even sold a piddling quantity of shares in its sibling!

Besides, we are also informed that the parent has during the year sold shares in three subsidiaries. It sold shares worth Rs 1.8 m in Delta Adventure and Entertainment Pvt. Ltd. But the investment schedule shows that there is no change in the shareholding pattern of the parent in its sibling in the latter year as compared to the preceding year. How is this possible? Further, it sold Rs 7.8 m worth of shares in Delta Hospitality & Leisure Pvt. Ltd. But the investment schedule reveals that it actually bought 9,700 shares of this company for a pittance against a NIL holding previously! The parent has also sold Rs 120 m worth of shares in a company called Delta Leisure and Entertainment (formerly known as Delta Cruises and Entertainment).But here too the shareholding pattern shows no change in the parent's investment schedule. Is this reminiscent of the Great Indian rope trick, or am I not getting the full picture here?

A dekko at the working of the subsidiaries

It has appended the brief working results of 15 subsidiary companies, including step down subsidiaries. (The real highlight of the working results is that none of the 15 has declared any dividend. One may add here that only one of the 15 reported a post tax profit!). The 'maha' high roller in this listing is its former subsidiary and operating currently as its step down subsidiary, Highstreet Cruises and Entertainment. It has a fairly miniscule capital base of Rs 150 m, with reserves and surplus of Rs 565 m. With a total asset base of Rs 1.56 bn, it rolled out revenues of Rs 896 m, and recorded a pre-tax profit of Rs 182 m. But its two big ticket investment outlets are Delta PAN Africa and Delta Corp East Africa. The former has a capital base of Rs 480 m, negative reserves, total assets of Rs 1.1 m, an investment portfolio of Rs 473 m, NIL revenues, and rang up a pre-tax loss! This sure as hell is one swell investment company. The latter company, thankfully enough, is on a much sounder footing. It has a capital base of Rs 882 m, total assets of Rs 2.2 bn, an investment portfolio of Rs 116 m, and toted up revenues of Rs 149 m. But sad to say it too recorded a loss before taxation. This company's financials goes contrary to the directors' report that developing commercial space in Nairobi is nothing short of a pot of gold at the end of a rainbow. But let that be.

The balance list of companies, barring the odd one, is a bunch of floozies whose very purpose of corporate existence is difficult to understand. Take for example Delta Leisure and Entertainment. On capital base of Rs 0.1 m and negative reserves to boot, it boasts a book value of investments of Rs 851 m, total assets of Rs 3 m, zilch revenues and a loss before taxation. Just about anything is within the realm of possibility it appears.

The list of surprises in the offing appears to be never ending. But enough is enough for the moment. RIP.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
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