Why an IPL team is a coveted asset

Several factors contributed to that wide difference in price tag. The first was market size: the population of the Greater Mumbai region was about six times that of Jaipur in 2011. The second was disposable income: the total amount of deposits held in Mumbai banks is about 17 times that in Jaipur. The third was cricketing culture: Mumbai is the spiritual home of cricket-crazy India.

Those considerations, endemic to the Mumbai-Jaipur contrast, are once again in play for a big IPL announcement that is set to be unveiled next week.

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On 25 October, the Board for Control of Cricket in India (BCCI), which runs the IPL, is scheduled to announce two new IPL teams.

Reportedly, while the base price for a team is ₹2,000 crore, the expectation is upwards of ₹3,000 crore. Ahmedabad, Pune and Lucknow are the front-runners to be the base for these teams. And the bidders include the Adani Group and the Sanjiv Goenka Group.

Besides, consumer and cricketing catchments, Ahmedabad, Pune and Lucknow are closer to Jaipur than Mumbai. In other words, at ₹3,000 crore, the new entrants would be paying about 11 times of what Rajasthan Royals cost 13 years ago. Conversely, if the new price is a valuation benchmark for the older franchises, the worth of Rajasthan Royals has appreciated by 11 times—a compounded annual growth rate (CAGR) of 20%.

Owning an IPL team is about many intangibles: visibility, glamour, mobility. On the tangible side, in spite of the viewership the IPL commands, owning a franchise has not translated into swift financial growth or profitability, as is typical in any other sunrise industry. Such is the business model that while the revenues of the franchises tend to be stable, they move to a higher trajectory only when the IPL broadcasting deal is renewed at a significant hike. In effect, owning an IPL franchise is all about soaring valuations, which stem from the ownership of an asset that is finite and that is prized for its established nature and low-risk business model.

If the ₹3,000 crore mark is hit, it would catapult IPL franchises further up in global sporting valuations. Earlier this year, the Forbes magazine’s ranking of the most-valuable European football clubs valued Dutch club Ajax Amsterdam at number 20, with a valuation of $413 million or about ₹3,000 crore.

Revenues, however, convey an altogether different story. Ajax reports about thrice the revenues of an average IPL franchise. In other words, as is the case with many other asset classes in India, the valuation of IPL franchises might be running ahead of revenues.

Valuation spurt

Shareholding in the existing IPL franchises hasn’t changed hands much to establish a true valuation benchmark. Mukesh Ambani still owns the Mumbai team, Shah Rukh Khan and Jay Mehta the Kolkata team, Diageo the Bengaluru team, and Mohit Burman, Preity Zinta and Ness Wadia the Punjab team.

There have been changes in shareholding in the Rajasthan and Chennai franchises, which draw more from the necessity to keep things going and don’t adequately provide firm valuation benchmarks. There are two other transactions, however, that provide some measure of how valuations of IPL franchises have increased.

In March 2018, the JSW Group bought 50% from the GMR Group in the Delhi franchise, reportedly valuing the Delhi franchise at ₹1,100 crore. But this was just prior to the first big revision in the IPL broadcasting deal, which was effectively about 3.6 times the previous one. The BCCI shares proceeds from the sale of broadcasting rights with the franchises, and it is the biggest component of their revenues.

In 2019-20, as revenues of IPL franchises moved to a higher trajectory, the company that owns the Punjab side bought back shares worth ₹20 crore from its four promoters. This buyback exercise valued the Punjab franchise at ₹1,200 crore—about six times its revenues that year.

As IPL franchises go, neither Delhi nor Punjab has been in the same league as a Chennai, Mumbai, Bengaluru or Kolkata in on-field spectacle and success. Thus, in the event of a complete sale, an IPL franchise is likely to command more.

The last broadcasting deal moved the franchises from a revenue trajectory of ₹100-200 crore to ₹300-400 crore. On annual revenues of ₹400 crore, a ₹3,000 crore entry cost means a revenue multiple of 7 times. An entry cost of ₹4,000 crore means a revenue multiple of 10 times.

Revenue dependence

The older IPL franchises have found it the hard way that the real commercial power—in terms of revenue kickers—rests with the BCCI. The teams are mostly beneficiaries of what trickles down.

In the revenue pattern of franchises, two things stand out. One, revenue expansion possibilities are limited. For example, the Kolkata franchise crawled from revenues of ₹123 crore in 2011-12 to ₹174 crore in 2017-18—a CAGR of just 6%. Only in 2018-19, when the new TV deal kicked in, did it rise to a higher trajectory ( ₹448 crore). This is true for all franchises.

Two, most franchises operate in a similar revenue band, which is currently ₹300-400 crore of annual revenues (see Chart 1).

For IPL franchises, the business model is broadly the same. They have four major revenue heads: share of the BCCI ‘central pool’, sponsorships, ticket sales and prize money. Of these four revenue heads, one towers above the others: share of the BCCI central pool, which accounts for nearly three-fourth of a franchise’s revenues. Other than the central pool, there is no other revenue stream—team’s own sponsorship revenues or ticket sales—that has been able to provide a kicker to revenues and profits.

The central pool is where all the receipts from the broadcasting deal and umbrella sponsorships struck by the BCCI are accumulated. Half of these collections go to the BCCI. The remaining 50% is distributed between the franchises, equally.

Receipts from the sale of broadcasting rights—television, streaming, internet and radio—are the significant piece in the central pool. Thus, each time a new broadcasting deal is struck, more money flows down to the franchises. So far, there have been three TV deals. The first was when the IPL commenced in 2008. This was a 10-year deal with Sony and was worth about ₹911 crore per year.

In 2017, Star upped it to ₹ 3,270 crore each year for five years. This deal ends with the 2022 IPL. Along with the two new teams, the BCCI is also expected to announce a new broadcasting deal for the next five-year cycle from 2023 to 2027. The expectation is that it could be worth upwards of ₹6,000 crore a year, which will again provide a bump to franchise revenues.

The sale of two new franchises and the new TV deal are essentially feeding off each other. Adding two new teams means an increase in the number of matches, which means more hours of content for the broadcaster. And given that three-fourth of a franchise’s revenues comes from the central pool, a new TV deal means greater revenues for the franchises. For the new franchises, it’s a carrot to enter. For the older franchises, it’s another step up on the revenue ladder.

It’s an important step, as it can finally place them on the path to sustainable profits. None of the franchises have made profits that are significant or sustainable. Dividend payouts, too, have been rare. The only such year was 2018-19, when the new broadcasting deal kicked in and the scheduling of the 2019 general elections meant that one full IPL and part of another edition got squeezed into that financial year. All franchises reported a revenue lift and healthy profits. The Kolkata and Punjab teams paid out dividends of ₹72 crore and ₹60 crore, respectively.

While the new broadcasting deals are the catalyst on the revenue side, a rule change on the expense side is also improving prospects for franchises. The franchise buyers in 2008 did not pay the entire amount upfront to the BCCI. They did it over 10 years, in equal instalments. Thus, Mumbai Indians had to pay a fixed amount of $11.1 million ($111.9 million divided by 10) each year between 2008 and 2017. This annual franchise fee—the main expense head—was akin to a licence fee, de-linked from revenues. When teams were operating in the ₹100-200 crore revenue band, this cost in their expense pool would be stiff, and push them into losses.

As the IPL completed 10 years, the BCCI changed the basis of how franchises would pay the annual franchise fee. Now, it is linked to a franchise’s revenues—specifically, a 20% share. For franchises, this works better. For the Kolkata team, for example, franchise fees as a share of total revenues fell from 24% in 2015-16 to 18% in 2018-19.

Smaller catchments

For older teams, the running economics are improving. Their asset is gaining in value. The new teams face greater questions of risk. Their choice of base is one question. As a consumer catchment, the drop-off from Mumbai to Jaipur is steep. The options before them—for example, Ahmedabad, Pune and Lucknow—all have a population that is less than half that of the leading franchises such as Mumbai, Delhi and Kolkata. The silver lining for them is that the IPL is still predominantly a made-for-TV phenomenon (see Chart 2).

Another question relates to growth, and how much more game time can the BCCI squeeze out of the IPL without eroding its novelty value or sparking off a conflict with other cricketing boards.

At present, cricket is a country-first sport. International bilateral series and multilateral tournaments take precedence over franchise tourneys. A window of 50-60 days in a year for the IPL is a given now. Compare this to a prominent league such as the English Premier League or EPL, which is the annual centrepiece in English football running for nine months a year, featuring 20 teams and hosting six times as many matches as the Indian Premier League.

Trying to add more days, while preserving the IPL’s novelty and improving its economics won’t be easy. The more the IPL grows, the more it will test the club-country fault line in cricket—and that will have a bearing on how IPL franchises grow in revenues and in valuations.

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