Spreading Its Wings - Delta Corp

Delta Corp started as a textile company under the name of Arrow Webtex, manufacturing narrow woven fabric and elastic. It then started expanding into other business areas. Due to these new focus zones, the company demerged its textiles business into a new company called Arrow Textiles. As a part of this process, new shares of the textile company of FV of Rs 10 have been issued for every ten equity shares of FV of Re 1 held in the erstwhile Arrow Webtex.

Fresh Terrritories

The company made inroads into the real estate leasing and consultancy services business in 2003. It now wants to focus on four major segments which include gaming, hospitality, real estate and aviation. In January 2008, the company entered into a joint venture with the Reliance Group (Mukesh Ambani-controlled) for developing real estate projects in East Africa. The total proposed investment of the JV is around Rs 300 crore and will be invested in the ratio of 40:60, AWL and RIL respectively. The JV named as Delta Corp East Africa has acquired approximately 6 million sq feet land with potential development of 10 million sq feet. The countries where it wants to develop properties are Kenya, Uganda and Tanzania. Here, it proposes to have a mix of residential, commercial, retail and hotel projects.

At the same time, the company has also entered into the hospitality business for which it has set up a subsidiary called Delta Hospitality Pvt Ltd. This company, as per the latest annual report of the company, wants to concentrate on premium luxury hotels. Delta Hospitality (along with Delta Corp) recently acquired a 34.87 per cent stake in Advani Hotels and Resorts, a BSE-listed company. The company made an open offer to shareholders of Advani Hotels at a price of Rs 103 per share but could not garner the complete quota. Advani Hotels owns five-star deluxe beach-front properties at Caravela in Goa that has 192 rooms, 4 suites and 6 villas.

The financial performance of the Advani Hotels has not been so good in the latest quarter as its losses increased to Rs 4.6 crore from Rs 1.89 crore of September 2007. With the recent terrorist attack in Mumbai, we have a feeling that the inflow of tourists into India will take a beating and this would hamper the room occupancy of Advani Hotels. We expect their losses to move much higher in the coming quarters. What is to be noted is that Delta Corp does not have any management control in Advani Hotels despite its stake in the company.

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The company, at the same time, has joined hands with the Mumbai-based Peninsula Land Limited to develop properties in the western part of the country and at a later stage expand to northern parts for its hotels business. Here each party would hold a 50 per cent stake in a JV that is called PLL Delta Hotels. We do not know the progress of this joint venture since the company has not made any announcement in the public domain. Delta Corp gets its revenue from Peninsula Land Limited for real estate consultancy fees. Also, Urvi Piramal who owns Peninsula Land is the sister of Jaydev Mody, Chairman of Delta Corp. Urvi is also on the board of Delta Corp.

Getting Into Gaming
The company is also exploiting the nascent gaming market through its 80 per cent subsidiary, Highstreet Cruises & Entertainment Pvt Ltd. As of today, the company has three licenses of casinos. Advani Hotels too has a casino business. At the same time, the company, through its subsidiary, has acquired a 100 per cent stake in Victor Hotel and Motels. This was owned by India Bulls and sold for a 10 per cent stake in Highstreet Cruises & Entertainment. The balance 10 per cent stake was sold through a preferential issue for Rs 23.5 crore, valuing the company at Rs 235 crore. We do not know what kind of assets Highstreet Cruises owns at the present moment apart from three casino licenses but we do have details about the casino project of which two would be in Goa and one in Daman. One of the Goan casino would also have dolphin-shaped 40 key hotels attached to the casino. The Daman casino would have 100 key hotels attached to it. As per the previous announcements, the company’s two projects were expected to go on stream by October 2008 but till date no announcement has been made on whether these projects are live or not. With a slowdown in the economy and the imminent possibility of the tourism business suffering a blow, we are not expecting substantial revenue from this segment for Delta Corp in the near future. But the casino business would have novelty value in the country and hence this may help the company to command a premium on the bourses if it is able to roll out all the three casinos in the near future. All the three casinos put together would have an area of 32,000 sq feet.

Our attempt to find out from the management details about the status of various projects and more information on the company’s functioning proved futile, as no one replied to our phone calls or the questionnaire sent to them. This is despite the company having a good board of directors.

On A Flight Path

The company also has a presence in the aviation sector through its 90 per cent subsidiary called AAA Aviation. The company has a Beechcraft King Air and a Robinson R-44 helicopter. The company is in the process of acquiring a Bell B-407 helicopter too. At present, it provides charted flights but the company plans to expand this business by including activities like training with flight simulators, air charters and transportation, fixed-base operation, etc.[PAGE BREAK]

The company’s current year performance cannot be compared with the previous year’s results due to the de-merger of its textile business. In the first six months of the current year, the consolidated turnover (excluding textiles) stood at Rs 42.10 crore and profit after tax at Rs 8.97 crore. A company like Delta Corp cannot be value-based on financial performance as it has various subsidiaries and various future plans that would generate business. Right now, the scrip is trading at Rs 23.60 having a market cap of Rs 320 crore. The company’s equity can go up over the next six months as Rs 1.50 crore warrants have been issued to Jaydev Mody (promoter) which can be exercised for equity shares at a price of Rs 40.50. We are of the opinion that Jaydev Mody would exercise the rights to convert warrants into equity shares.

As on March 2008, it had consolidated debts of Rs 327 crore. On the other hand, it has MF investments of Rs 72 crore and immovable commercial property at Prabhadevi in Mumbai whose book value is at Rs 82 crore. In fact, this property is providing steady revenue in the form of lease rent which stood at Rs 24 crore for the last year and at Rs 12.65 crore in the first six months. This segment will continue to maintain a good cash flow to the company during uncertain times.

Looking at the investments it has made in Advani Hotels and other businesses, we feel that the scrip may not go down any further from the present level. It is already down by 78 per cent from its January peak. Another factor that goes in favour of the company is that in January 2008 it divested 14.99 per cent of its equity to India Advantage Fund III at a rate of Rs 40.50 per share. Also, the company has a very limited floating stock in the market as 78.26 per cent of the company’s equity capital has been locked in. We feel that despite its exposure to real estate business and the hospitality sector, which would not attract investors’ fancy, its gaming and aviation business and its exposure to African real estate market would help grow its earnings and appeal in the coming quarters. We would expect a 25 per cent appreciation from its present level in the next 12 months.