Why an IPL team is a coveted asset

Several factors have contributed to this large price difference. The first was the size of the market: the population of Greater Mumbai 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 of Jaipur. The third was the culture of cricket: Mumbai is the spiritual home of cricket-mad India.

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

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

Apparently, while the base price for a team is ??2,000 crore, the wait is over ??3000 crores. Ahmedabad, Pune and Lucknow are the favorites to be the base of these teams. And the bidders include the Adani group and the Sanjiv Goenka group.

In addition, the Consumption and Cricket Pools, Ahmedabad, Pune and Lucknow are closer to Jaipur than to Mumbai. In other words, to ??3000 crore, new entrants would pay around 11 times what Rajasthan Royals cost 13 years ago. Conversely, if the new price is a valuation benchmark for older franchises, the value of Rajasthan Royals has appreciated 11 times, or a compound annual growth rate (CAGR) of 20%.

Owning an IPL team involves many intangibles: visibility, glamor, mobility. On a tangible level, despite the number of viewers the IPL commands, owning a franchise has not translated into rapid financial growth or profitability as it typically does in any other sunrise industry. from the sun. The business model is such that although franchise revenues tend to be stable, they only move to a higher trajectory when the IPL broadcast deal is renewed at a significant increase. Indeed, owning an IPL franchise is synonymous with skyrocketing valuations, which stem from owning a limited asset that is prized for its established nature and low risk business model.

If the ??The 3,000 crore mark is reached, which would catapult IPL franchises higher in world sports ratings. Earlier this year, Forbes magazine’s ranking of the most valuable European football clubs in Europe valued Dutch club Ajax Amsterdam at number 20, with a valuation of $ 413 million or so. ??3000 crores.

Income, however, is a whole different story. Ajax brings in about three times the revenue of an average IPL franchise. In other words, as is the case with many other asset classes in India, the valuation of IPL franchises could be ahead of income.

Valuation boost

Ownership in existing IPL franchises has not changed 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 the shareholding in the Rajasthan and Chennai franchises which are more inspired by the need to keep things running and do not provide enough firm valuation benchmarks. There are however two other transactions that give some measure of the increased valuations of IPL franchises.

In March 2018, JSW Group purchased 50% of GMR Group in Delhi Franchise, valuing Delhi Franchise at ??1,100 crores. But that was right before the first big overhaul of the IPL broadcast deal, which was effectively about 3.6 times the previous one. BCCI shares the proceeds from the sale of broadcast rights with franchises, and this is the largest share of their revenue.

In 2019-2020, as IPL franchise revenues moved to a higher trajectory, the Punjab-owned company repurchased shares worth ??20 crore from its four promoters. This buyback exercise has valued the Punjab franchise to ??1,200 crore, or about six times his income that year.

As IPL franchises disappear, neither Delhi nor Punjab has been in the same league as a Chennai, Mumbai, Bengaluru or Kolkata when it comes to showmanship and success on the pitch. Thus, in the event of a full sale, an IPL franchise is likely to order more.

The latest broadcast deal took franchises off a revenue path of ??100-200 crore to ??300-400 crores. On the annual income of ??400 crore, one ??An entry cost of 3,000 crore means income multiple of 7 times. An entry cost of ??4000 crore means income multiple of 10 times.

Income dependency

Older IPL franchises found the hardest part of the business, in terms of increasing revenues, to BCCI. The teams are for the most part beneficiaries of what is happening.

In the franchise income scheme, two things stand out. First, the possibilities for income expansion are limited. For example, the Kolkata franchise leveraged revenue from ??123 crore in 2011-12 to ??174 crore in 2017-18, a CAGR of just 6%. It wasn’t until 2018-2019, when the new TV deal was launched, that it hit a higher trajectory ( ??448 crores). This is true for all franchises.

Second, most franchises operate in a similar revenue bracket, which is currently ??300-400 crore in annual income (see graph 1).

For IPL franchises, the economic model is broadly the same. They have four main revenues: the share of the “central pool” of the BCCI, sponsorships, ticket sales and cash prizes. Of these four heads of income, one dominates the others: part of the central pool of the BCCI, which represents nearly three quarters of the income of a franchise. Other than the central pool, there is no other source of income – team sponsorship income or ticket sales – that has been able to boost revenues and profits.

The central pool is the place where all revenues from the broadcast agreement and umbrella sponsorships entered into by the BCCI are accumulated. Half of these collections go to the BCCI. The remaining 50% is divided among the franchises equally.

Receipts from the sale of broadcasting rights (television, streaming, Internet and radio) constitute the important element of the central pool. So every time a new broadcast deal is made, more money flows into franchises. So far there have been three TV deals. The first IPL start date in 2008. It was a 10 year deal with Sony and was worth approx. ??911 crores per year.

In 2017, Star increased it to ?? 3,270 crores annually for five years. This deal ends with IPL 2022. Along with the two new teams, BCCI is also expected to announce a new broadcast deal for the next five-year cycle from 2023 to 2027. It is expected to be worth more than ??6,000 crore per year, which will increase franchise income again.

The sale of two new franchises and the new TV contract essentially feed off each other. The addition of two new teams means an increase in the number of matches, which means more hours of content for the broadcaster. And since three-quarters of a franchise’s revenue comes from the central pool, a new TV deal means more revenue for franchises. For new franchises, that’s a carrot to grab. For older franchises, it’s a new step up the income ladder.

This is an important step, because it can finally put them on the path to sustainable profits. None of the franchises made any significant or lasting profits. Dividend payments have also been rare. The only such year was 2018-19, when the new broadcast deal was launched and the 2019 general election schedule meant that a full IPL and part of another edition were inserted into that exercise. All franchises have seen an increase in revenue and healthy profits. The Calcutta and Punjab teams paid dividends of ??72 crores and ??60 crores, respectively.

While the new broadcast deals are the catalyst on the revenue side, a rule change on the spending side also improves the prospects for franchises. Franchise buyers in 2008 did not pay the full amount upfront to BCCI. They did it over 10 years, in equal installments. Thus, the Indians of Mumbai had to pay a fixed amount of 11.1 million dollars (111.9 million dollars divided by 10) each year between 2008 and 2017. This annual franchise fee, the main head of expenditure, s’ akin to a license fee, separate from revenues. When the teams were operating in the ??Band of income from 100 to 200 crore, that cost in their expense pool would be steep and cause them to incur losses.

As IPL wrapped up its 10 year anniversary, BCCI changed the basis of how franchises would pay the annual franchise fee. Now it’s tied to a franchise’s income, specifically a 20% share. For franchises, this works best. For the Kolkata team, for example, franchise fees as a percentage of total revenue increased from 24% in 2015-16 to 18% in 2018-19.

Small watersheds

For older teams, the racing economy improves. Their assets are growing in value. New teams face bigger questions of risk. Their basic choice is a question. As a consumer basin, the descent from Mumbai to Jaipur is steep. Their options, for example Ahmedabad, Pune and Lucknow, all have populations less than half that of major franchises such as Mumbai, Delhi and Kolkata. The bright side for them is that IPL is still primarily a made-for-television phenomenon (see Figure 2).

Another question is about growth and how much more playing time can BCCI get out of IPL without eroding its novelty value or triggering conflict with other cricket boards.

Cricket is a national sport today. International bilateral series and multilateral tournaments take precedence over franchise tournaments. A window of 50 to 60 days per year for the IPL is now acquired. Compare that to a top league such as the English Premier League or EPL, which is the annual centerpiece of English football that lasts nine months a year, with 20 teams and hosts six times as many matches as the Indian Premier League.

Trying to add more days, while preserving the novelty of IPL and improving its profitability will not be easy. The more the IPL grows, the more it will test the club-country fault line in cricket, and this will affect the growth in revenue and valuations of IPL franchises.

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