Investment in securities market are subject to market risks. Read all the related documents carefully before investing

India's Third Giant Leap
Discover the Best Category of Stocks to Ride this Mega
Opportunity at Our Upcoming Special Event




**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a daily newsletter from Equitymaster
covering exciting investing ideas and opportunities in India.


AD

Delta Corp: Is it Time to be Greedy When Others are Fearful?

Sep 26, 2023

Delta Corp: Is it Time to be Greedy When Others are Fearful?

When it rains, it pours.

If you don't believe in this phrase, just ask the Delta Corp management. They will tell you from their first-hand experience that the phrase is pretty much valid and can make life very, very difficult.

The share price of Delta Corp has certainly made life very difficult for its investors and management.

As I write this, the share price is down a little over 40% from its 52-week high, which is a huge decline.

And this is especially at a time when the smallcap and midcap indices are near their all-time highs and when other stocks have doubled in a few months.

In fact, the stock is down close to 60% if you consider the highs of April 2022. Losing 60% of your capital when most of the stocks around you are going up is not a very good sight. It's very difficult to digest.

But why has the stock lost so much wealth over the last 16-17 months and why is it giving its investors sleepless nights?

Well, as I said earlier, the bad news is not just raining for the stock but it is pouring. And it is pouring down hard.

The Goods and Services Tax (GST) council was the first major blow to the company when it imposed a GST of a whopping 28% on the full value of online gaming, horse racing, and casinos.

The issue was pending for a couple of years and when the council finally took its decision, it dealt a huge blow to companies like Delta Corp by imposing a 28% tax. This news did not go down well with investors. The stock price crashed around the day of the announcement.

Then came the news of the company putting its plans of IPO of its online gaming unit on hold. This was because of the uncertainty around the GST issue and the poor sentiments for such stocks.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Buy This Lithium Stock Asap

Yesterday, our co-head of research, Tanushree Banerjee, shared full details of this mega opportunity in EVs.

Tanushree research says a smart way to tap into this big opportunity is through India's 2 best lithium stocks.

Due to sharp market rally, one of these two stocks has already rallied. Don't miss the another one.

Watch this video to know how to get Tanushree's full research on India's best lithium stocks.

Click Here to Watch Now
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

The IPO size was pegged at Rs 5.5-6 billion (bn) and would have led to a good amount of value unlocking for shareholders.

Within few days of this announcement, there came the news that the company's Chief Financial Officer (CFO) has tendered his resignation. The CFO was a 15-year veteran of the company. So his resignation was another blow.

And if all this wasn't enough, there comes the latest news that the company has been slapped with a tax notice that amounts to a huge Rs 168.22 bn.

To put this figure into perspective, it is almost 4 times the company's current marketcap and more than double the company's revenues for the last decade. This is a huge figure by any stretch of imagination.

So it's no surprise the stock price has crashed after this announcement. The stock currently trades a PE multiple of 14.3x, a discount of close to 50% from its 52-week high PE ratio of 26x. Even from a long-term perspective, the current PE ratio is almost half its long-term median of around 25-30x.

So what happens next?

You see, there are two kinds of investors that I have come across.

The first kind believe in buying the best quality merchandise or the best quality stock and don't want to come anywhere close to a controversial stock like Delta Corporation.

They won't touch the stock even with a 10-foot pole no matter how bright its growth prospects or how attractive its valuations. They like buying companies which have strong competitive advantages, which are easy to understand, and which are run by top class management teams.

So for them, it doesn't matter whether a stock like Delta Corp is down almost 60% from its top. It can be down 90% and they still won't consider it. If you belong to this category, then Delta Corp is certainly not for you.

The second category of value investors are those that believe that most stocks are worth buying at a certain valuation and can be sold if the valuations become expensive or go beyond a certain threshold.

Make: Your Investing Stress-free with Value for Money Stocks

Although Delta Corp is going through troubled times right now, its historical track record has been quite decent. It has managed to nearly double its topline as well as bottomline over the last five years and has ambitious plans for the future as well.

More importantly, it's almost a zero-debt company for many years now and has also paid out a small percentage of profits as dividends on a consistent basis.

Therefore, the company does know how to make profits and how to grow its business.

Now, to the most important question? What is the price point or what is the valuation below which the risk-reward equation turns in favour of the investor and what is the valuation beyond which the risk-reward turns adverse or unfavourable?

Well, this is subjective to be honest but here's how I see the whole thing.

You see, I have a simple thumb rule. Do not pay anything more than 10-12x PE multiple for a stock with fundamentals similar to Delta Corp.

I think this PE multiple incorporates a decent margin of safety and leaves good room for any upside over the next 1-2 years.

Second, either consider the latest earnings as its earnings power, if it's a growing company, or consider the average of the last 3-5 years as the earnings power.

Now, multiply this PE multiple of 12 with the earnings power of the company and voila, you have your maximum buy price, the upper limit. Beyond this limit, the risk-reward is no longer favorable.

Does this mean that you are guaranteed to make money on every stock you buy using this simple formula? Definitely not.

What it means is that if you buy a group of stocks using this formula then there's a strong chance you could potentially make money on this group over 1-2 years.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Small Businesses Set for Huge Potential Long-Term Growth

Would You Like Details on Such Stocks?

Discover More
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------

There will be a few individual stocks that will not perform as per expectations. However, as a group, you may still end up making good returns.

The beauty of this approach is you don't have to burn the midnight oil trying to figure out whether the tax penalty on Delta Corp will have an impact on the share price or how to account for such developments.

The margin of safety that we seek in valuations by insisting on a PE multiple of not more than 10-12x and our group-based approach, takes care of all such uncertainties.

You see, 'margin of safety' is the most powerful concept in investing. However, you have to use it correctly and on the right stock.

It should be applied to proven earnings power of the company. You can't just apply it to any stock and hope to compensate for the extra risk by demanding a higher margin of safety.

I believe that it can be applied to a stock like Delta Corp to a good degree of reliability. This approach makes investing simple and this is how it should be.

Let me know what you think.

Happy Investing!

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

Recent Articles

Lesser Known Smallcaps with Big Potential February 23, 2024
Caution, and not greed should be the sentiment while investing in smallcaps in the ongoing rally.
Bluechip Powering India's Green Hydrogen Megatrend February 22, 2024
The shift to hydrogen for fuel is simply a shift away from depleting finite sources of fossil fuels.
Google Competitor in India's Tech Revolution February 21, 2024
A homegrown, secure GPS technology helps the economy in a significant way.
Why 2024 is an Inflection Point for Spactech Economy February 20, 2024
Some lesser known companies that could follow the rise of spacetech economy.

Equitymaster requests your view! Post a comment on "Delta Corp: Is it Time to be Greedy When Others are Fearful?". Click here!

1 Responses to "Delta Corp: Is it Time to be Greedy When Others are Fearful?"

Biswarup Majee

Oct 12, 2023

Good evening sir. You are correct about Delta corp analysis. It is the best time to invest in this stock.

Like 
  
Equitymaster requests your view! Post a comment on "Delta Corp: Is it Time to be Greedy When Others are Fearful?". Click here!