Indian Premier League, popularly known as IPL, the much followed and the much maligned T20 cricket tournament is in its tenth edition now. Having managed to survive a string of high profile corruption cases, censure from the Supreme Court, change of administrators, churning of franchises and temporary banishments from India, the prospect of the league currently looks as bright as it ever was.
In its current edition, eight different teams are contesting in the IPL. Six of these – Mumbai Indians, Royal Challengers Bangalore, Kolkata Knight Riders, Sunrisers Hyderabad, Kings XI Punjab and Delhi Daredevils are regular franchises. Two new comers – Rising Pune Super Giant and Gujarat Lions have been inducted temporarily to take the places of Chennai Super Kings and Rajasthan Royals, which have been suspended for two years in the wake of some of the officials of these teams being involved in a spot fixing scandal. Both Chennai and Rajasthan are expected to return in next year’s IPL.
With the businesses of the franchisees having stabilized now, it is time to take a long, hard look at their financials and find out if the investments were actually worth it.
Source of Revenue:
Before looking at the financial numbers of these businesses, it is important to know the source of revenue for them. For an IPL team, the revenue comes typically from the following sources:
- The BCCI auctions off the broadcasting and digital rights of IPL to the television networks, 60% of the proceeds of which are then distributed to the participating IPL teams. The proportion of each IPL team in the pool depends on its standing in the IPL.
- The BCCI also auctions off the sponsorship of IPL. For example, Vivo is currently the lead sponsor of IPL. The sponsorship amount is also contributed to the central pool 60% of which is again divided among the various teams with teams better placed in the league getting a higher share of the revenue pie.
- The individual franchises also look for sponsors. Usually, each team has multiple sponsors and the amount paid by each sponsor depends on the relative size of their respective logos as well as the placement of these logos in the jerseys of the teams. For example, Kolkata Knight Riders currently has a number of sponsors like Gionee, Reliance Jio, Lux Cozi, Exide, SRMB TMT, Colors Bangla, Greenply Industries Limited and Khadim’s. Gionee though is the lead sponsor as is apparent from the fact that its name is emblazoned prominently at the centre of the KKR jersey. Thus, among these sponsors, Gionee also has to pay the highest amount to KKR.
- The teams also obtain gate receipts from their respective stadium for the tickets purchased by the spectators who attend the home matches.
- Apart from this, there is substantial prize money to be owned by the franchises in case they manage to make it to the play-offs.
- The franchises, especially the better known ones, also earn some revenue through sale of merchandise.
As against these, the main expenses incurred by these franchisees include the following:
- Back in 2008, when the IPL rights of the various cities were auctioned off to the franchisees, they agreed to pay a quoted amount to BCCI for these rights. This amount to be paid is spread over a period of ten years. For example, at the time of auction, the management of Delhi Daredevils had quoted a price of Rs. 336 Crores which means it has to make a payment of Rs. 33.60 Crores to BCCI every year till 2017. Post 2017, the franchisees will have to share 20% of their respective income with BCCI.
- Apart from the fees to BCCI, the major operating expense of these franchises includes the payment of salaries to players, coaches and support staff. Salaries to players constitute the largest chunk of these. In IPL, of course, the players do not come cheap and almost all the players are bought through open auctions. A certain percentage of prize money also has to be distributed in the form of incentives to the players.
- The franchises have to make payment to the respective cricket associations for using the stadium during the period of IPL.
- The IPL franchises also incur significant promotional activities. During March-May, you may find large banners popping up in the cities hosting IPL matches, asking you to support the respective IPL team based out of that city. This is mainly to ensure that high attendance in the IPL matches (which translates into gate receipts), create higher brand awareness (thus resulting in more interest from sponsors) and more sale of merchandises.
- Other than that, the teams also have to incur travel and lodging expenses during the length of the tournament, various legal and administration expenses, and interest expenses, in case they have availed loans from banks or other entities for funding part of their working capital requirement.
The Structure of the Franchises:
Not all IPL franchises are structured alike. Some of them like the erstwhile Deccan Chargers, Chennai Super Kings (before 2015) and the Sunrisers Hyderabad are part of bigger companies (Deccan Chronicle Holding Limited, India Cements Limited and Sun TV Network Limited respectively). These companies have miscellaneous other assets apart from the franchise rights of these IPL teams. On the other hands, most of the remaining other IPL teams are owned by special purpose vehicles i.e. companies which have been formed only in order to hold these assets. For example, Mumbai Indians is owned by a company named Indiawin Sports Private Limited which is a 100% subsidiary of Reliance Industries Investments & Holdings Limited which is again a 100% subsidiary of Reliance Industries Limited. Similarly, Royal Challengers Bangalore is owned by Royal Challengers Sports Private Limited which is a 100% subsidiary of United Spirits Limited. The newly formed Rising Pune Supergiant is owned by a company named New Rising Promoters Private Limited which is a subsidiary of Crescent Power Limited which is in turn a subsidiary of CESC Limited, the flagship company of the RP-Sanjiv Goenka group.
In some cases, the shareholding is slightly complicated. Kings XI Punjab is owned by KPH Dream Crocket Private Limited which has equity stakes from four individual investors – Mohit Burman (46%), Ness Wadia (24%), Preity Zinta (24%) and Karan Paul (6%). Kolkata Knight Riders is owned by Knight Riders Sports Private Limited which used to be a subsidiary of Red Chillies Entertainment Private Limited till February, 2010. In 2010, the ownership was changed and currently 55% stake in the entity is held jointly by Shahrukh Khan and Gauri Khan, while 45% stake is owned by Sea Island Investments Limited, a Mauritius based overseas entity owned by Jay Mehta, the business man husband of Juhi Chawla. In fact, this sale of ownership attracted the attention of the Enforcement Directorate which has issued show cause notices to the concerned parties, alleging that the sale of shares was done at a price below the market rate, resulting in loss of foreign exchange to the exchequer and contravening the provisions of the Foreign Exchange Management Act. GMR Sports Private Limited, the owner of Delhi Daredevils, has a rather curious, hybrid structure, with 51% of its ownership being held by GMR Enterprises Private Limited and the remaining 49% owned by four individuals, all promoters or executives of the GMR group.
Based on the revenue and profit generated, the franchises may be categorised into the following four broad categories:
For the purpose of comparison, the average revenue and profit after tax of the various franchises over the last three years available have been plotted in the following chart:
The amount of investment made by the owners into the respective franchises (in the form of either debt or equity) as on 31st Mar, 2016 has also been compared below:
Kolkata Knight Riders:
Kolkata Knight Riders might be the only franchise which is not part of any well known business group or does not have majority stake owned by investors from strictly business backgrounds. Kolkata Knight Riders, however, is also among the best managed IPL franchise and a look at the financials of Knight Riders Sports Limited, the company owning the franchise tells you why.
Ever since the franchise went through a makeover in the 2011 IPL season, disbanding almost the entire previous team and recruiting new players like Gautam Gambhir, Yousuf Pathan, Shakib Al Hassan, Sunil Narine, etc., KKR has become a force to reckon with in the IPL. After finishing sixth, eight and sixth respectively in the first three seasons, the franchise has made it to the play-offs in the four of the next six seasons and has even managed to win the league in 2012 and 2014.
The improved performance of the KKR on the field has been reflected in the financial numbers of the franchisee as well. It has posted profits in all years since 2011-12, registering aggregate profit of Rs. 46 Crores in these five years. At the same time, its balance sheet has also improved. It has now repaid all debt obligations from banks and is the rare franchisee to have a positive book value of around Rs. 40 Crores as on 31st Mar, 2017. In other words, its owners have already been able to recuperate the investment of Rs. 20 Crores made in the franchise and have a tidy profit of around Rs. 20 Crores on top of it.
The good financial results of KKR are partly a result of the fact that its owners had bid for it cheaply at the time of the auctions, thus resulting in lower burden in the form of annual franchise fee. While the support base of KKR is possibly higher than that of franchises based out Hyderabad, Bangalore, Delhi and Punjab, the rights of it were acquired at a lower price (USD 75 Million) compared to the franchises based out of the aforementioned cities. The star power of Shah Rukh Khan also helps in attracting more advertisers. Thus Knight Riders Sports Private Limited has annual revenue at par with or higher than these franchisees, while it pays a lower franchise fee to BCCI. This along with its efficient bidding techniques and improved performance in the league has made this franchisee financially the most sound in the entire IPL fraternity.
Kings XI Punjab:
On the face of it, Kings XI Punjab has a lot going against it. It is not owned by a deep pocketed corporate house, which means it does not have access to the funds of a cash rich parent entity which can fund any loss that it might be making. Being a standalone corporate entity, it also does not benefit from any cost synergies with a larger, parent company. The lack of backing of a corporate also reduces its attractiveness in the debt market. It is owned by four separate individuals, two of whom are not in the best of terms with each other. Being located out of Chandigarh, it does not have access to a large supporter base, unlike Mumbai or Chennai. And finally, its performance on the field has been middling at best. It has been one of the least successful franchises in the IPL, making it to the knockouts only twice in nine attempts, and failing to win the league even once.
A look at the financials of KPH Dream Cricket Private Limited, the owner of KXP, however, shows that it is much better placed than most of its more heralded peers. While its revenue in a relatively bad year is only around Rs. 105 Crores (its revenue increased in 2014-15 to Rs. 130 Crores largely because of it finishing among the top two in that year), the company has been able to eke out tiny profits in three of the last four years, including in the last two. While KPH Dream Cricket still bears accumulated losses, on account of losses made in the earlier years, its book value has increased from a negative Rs. 48 Crores to a negative Rs. 35 Crores in the last four years.
Part of the losses posted by the company in the initial years has been funded by unsecured loans from the owners. But with profit accruing in the last few years, KPH Dream Cricket has been able to pay off part of these unsecured loans, and the outstanding unsecured loans as on 31st Mar, 2016 stands at Rs. 58 Crores. The company is also availing working capital borrowings from RBL Bank Limited. While the sanctioned limit is Rs. 35.00 Crores, the outstanding amount near year ends has been at around Rs. 15 Crores.
In terms of operational expenses, KXP has been one of the most frugal sides. Apart from the franchise fee of Rs. 30 Crores that it has to pay to BCCI annually, it has incurred average operational expenses of around Rs. 72 Crores in the last four years, most of which is in the form of player expenses. Part of the reason why KXP has been unwilling to chop and change its player combination in spite of not getting great results in the tournament is that its existing player base does not come with a very high price tag. In fact, it does not have a single expensive domestic player in its roster and most of its overseas players have also been picked up quite cheap. It currently pays around 30% of its revenue in the form of franchise fee to BCCI and completion of the ten year period in 2018 shall see the percentage share get reduced to 20% and thus enable the company to register more profits.
In business terms, Kings’ XI Punjab is the equivalent of a low cost, no frills, economy only airline. The downside, of course, is that the team’s on-field performance has been erratic and the supporters do not have much to cheer for. It remains to be seen how long the team can retain support of fans and advertisers, given the poor record on field. Also another challenge in front of the management shall be maintaining this cost competitiveness at the next years’ auction when most players will again be up for auction again.
The fortunes of the Delhi Daredevils, owned by the GMR group, have gone into a tailspin over the last few seasons. Initially a formidable side, it made to the play-offs of IPL in three out of the first five seasons, but has struggled badly since then. It finished last in both the 2013 and 2014 seasons and came close to finishing last in 2015 and 2016 as well. The franchise has been let down by muddled strategic thinking and propensity of the management to bid for players at sky high prices and then release them without persisting with them. A list of the players released by Delhi Daredevils would make a formidable XI on its own – David Warner, Gautam Gambhir, AB De Villiers, Tillakaratne Dilshan, Kevin Pietersen, Shikhar Dhawan, Aaron Finch, Glenn Maxwell, Yuvraj Singh, Imran Tahir, Andre Russell, Amit Mishra, Umesh Yadav, Ashish Nehra, etc. As recently as 2016, the franchise bought Pawan Negi for a whopping Rs. 8.5 Crores and then let him go after just one season.
This random chopping and changing of players and inexplicable buys at the auctions have not only affected the performance of the franchise on the field, but has also impacted its financial numbers. GMR Sports Private Limited, the company that owns Delhi Daredevils, has registered losses in six of the last seven years, the only exception being 2013-14.
The main issue with the company has been the poor showing on the field (which has prevented the company from reaping the benefits of a relatively sizeable fan base) and high operating expenses, ranging between Rs. 100 Crores and Rs. 125 Crores, excluding the franchise fee. Its operating expenses have usually been higher than the franchises based out of Kolkata, Chandigarh and Bangalore. The franchise did show some signs of improvement in 2015-16, with the losses narrowing down to Rs. 6.2 Crores.
However, the liquidity issues being faced by the company have also affected the conduct of the company with banks. It has availed a loan facility of Rs. 45 Crores with Yes Bank. Disclosures in the financial statements show that it has made multiple instances of delays in the servicing of the debt in 2015-16, with the number of days of irregularities extending to 69 days in one instance (if the number of days of irregularities goes beyond 90 days, an account becomes a non-performing asset or an NPA in the parlance of Reserve Bank of India).
It is not that the management has not been cognizant of the issues. For example, its annual reports over the last few financial years have contained the following clarification:
Your management has taken the continuous weak performance of the team seriously. Major changes are being made to ensure better performance on the field and rationalization of costs keeping in mind the revenue potential of the franchise. As a first step, the player salaries will be rationalized in the upcoming auction without compromising the core of the team. We are also actively looking at pruning the support staff costs to ensure a better financial performance.
In spite of making such statements though, the management has gone on to splurge Rs. 16 Crores on Yuvraj Singh and Rs. 8.5 Crores on Pawan Negi and then release them the next season.
In order to register profits, GMR Sports Private Limited needs to get a number of acts right. It needs to trim its player and staff expenses, as identified rightly in the financial statements. And at the same time, it needs to deliver results on the field, which will not only increase its revenue from the BCCI central pool, but also attract advertisers, and increase attendance at its home matches. Currently, it does have a promising, young team; however, its strategy at the 2018 IPL auctions is going to be crucial. The franchise must also be hoping for a much higher premium at the time of allotment of revised broadcasting and digital rights which increase the kitty of the central pool. Finally, the end of the fixed royalty payment to BCCI and switching over to a variable payment regime may also save some cost for the franchise at the margin.
By most measures, Mumbai Indians is to the Indian Premier League what Chelsea is to the English Premier League or Real Madrid is to La Liga. It is owned by Indiawin Sports Private Limited which is a step down subsidiary of Reliance Industries Limited, currently the most valued company in India with a market capitalization of close to Rs. 4.6 lakh crores. It is based out of Mumbai, the commercial capital of the country. It has been the franchise hosting iconic players like Sachin Tendulkar, Ricky Ponting, Sanath Jayasurya, Lasith Malinga, Harbhajan Singh, etc. And its performance over the last few seasons has been impressive, with the franchise notching up two IPL wins (2013 and 2015) and two more Champions League wins (2011 and 2013).
As a step down subsidiary of Reliance Industries Limited, money is not much of a concern for this franchise. In fact, it is the costliest franchise in IPL, the rights of which were acquired at a price tag of USD 112 Million i.e. Rs. 447.6 Crores (at the then exchange rates) to be paid over a period of ten years. But this is still small change for Reliance Industries Limited which registered consolidated revenue of Rs. 3.3 lakh Crores and profit after tax of Rs. 30 thousand Crores in 2015-16. Till 31st Mar, 2016, the holding companies have infused Rs. 226.74 Crores in the form of debt and equity into the company. Just for the purpose of comparison, RIL spent a grand total of Rs. 1.12 lakh Crores in capital expenditures in 2015-16 alone.
Having said that, the franchisee has become gradually improved its financial management over the last few years. While in the first five three of its operations, the entity incurred cumulative loss of Rs. 90 Crores, it has since incurred only accumulated loss of Rs. 15 Crores in the next five years. While its stellar performance on the field has helped, leading to more central pool revenue, prize money as well as sponsorship income, it has also become more judicious in its expenses and selection of players. From a franchise that used to chase every shining object available in the market, it has now evolved to become a launching pad for some of the most exciting domestic T20 talents, including Jasprit Bumrah, Hardik Pandya, Krunal Pandya and Nitish Rana. This is reflected in the decrease of player and support staff fees from Rs. 99 Crores in 2013-14 to Rs. 80 Crores in 2014-15 and Rs. 71 Crores in 2015-16.
Funded mostly through a zero coupon optionally fully convertible debenture subscribed to by its holding company, Indiawins Sports Private Limited does not have any external borrowing on its balance sheet. Being based out of probably the most lucrative market of IPL, and having a successful track record, it also registers among the highest revenues among the franchises. The one dubious item in its balance sheet is the outstanding receivables of around Rs. 66 Crores as on 31st Mar, 2016, around Rs. 24 Crores of which has been outstanding for more than six months. This naturally raises questions on the recoverability of these receivables. The financial statement does not contain any other detail pertaining to the receivables.
Royal Challengers Bangalore:
The most surprising fact about that the financials of Royal Challengers Bangalore is its subdued revenue figure. Between 2010 and 2015, the total income registered by Royal Challengers Sports Private Limited (RCSPL), the company that owns this franchise, did not reach Rs. 100 Crores even once, falling mostly in the range between Rs. 80-100 Crores. In terms of revenue, this squarely puts it in the league of smaller franchises like Kings XI Punjab and Rajasthan Royals; however, unlike them, RCB has not shown any willingness or ability to cut corners in expenses and make the franchise a profitable venture.
The accounting practices followed by Royal Challengers Sports Private Limited also do not inspire too much confidence. They have amortized the value of their franchise over a period of fifty years, unlike other franchisees which have done so over a period of ten years. In effect, they have understated the losses they have incurred relative to other franchisees; even then, the cumulative losses posted by the company between 2010 and 2016 has amounted to an eye popping Rs. 205 Crores.
Another jarring number in the financials is a write-off of receivables amounting to Rs. 84.80 Crores in 2013-14. Detailed breakup of the receivables is not given; however, around Rs. 30 Crores of receivables are probably in the form of dues outstanding from United Breweries Holdings Limited, then a group company of United Spirits Limited, the owner of Royal Challengers Sports Private Limited.
The franchisee has been kept floating mainly through unsecured loan of Rs. 375.96 Crores (outstanding as on 31st Mar, 2016) taken from United Spirits Limited, the holding company. No other franchise owner has invested so much in any IPL franchise; furthermore, going by the financials of RCSPL, it is not likely in a position to repay the unsecured loan any time soon.
With the ownership of United Spirits Limited having changed hands, from Vijay Mallya to Diageo, the current owners may not have much interest in running this loss making IPL franchisee. Instead, they may be looking to off load the stake to some other business house. The new owners would have their task out in instilling a sense of financial discipline in a franchisee so far marked by too little income and too many expenses.
Sun Risers Hyderabad:
The history of Sun Risers Hyderabad is a little different from other franchises. The franchise of Hyderabad was earlier owned by Deccan Chronicle Holdings Limited. On account of breach of contract terms, the franchise right of Deccan Chronicles was terminated by BCCI in October, 2012. A fresh auction was held and the rights of the Hyderabad franchise were bought by Sun TV Network Limited. Thus, Sunrisers Hyderabad came into being and it has been representing Hyderabad in IPL since 2013.
Since the franchise rights of Sun Risers Hyderabad are part of a larger balance sheet of Sun TV Network Limited, the detailed financials of the same are not available separately. Instead, only the topline numbers are available. The IPL team registered revenues of Rs. 106 Crores, Rs. 100 Crores and Rs. 96 Crores in the first three years of its operations, since 2013-14.
Being a latecomer into the IPL family, when the league was already up and running and the risk associated with it had subsided to a large extent, SRH has to shell out a larger fee in the form of franchise fee to the BCCI compared to the other franchises. Its annual franchise fee is Rs. 85.05 Crores, which is nearly double the sum of Rs. 44.8 Crores that Mumbai Indians, the next most expensive franchise, has to pay every year. Of course, from 2018 onwards, its payout to BCCI will become 20% of the total income, like that of other franchises.
Given annual revenue of around Rs. 100 Crores, and a franchise fee of Rs. 85 Crores, the franchise is clearly not profitable currently. Even if we conservatively consider other operating expenses of Rs. 75 Crores, it is currently making annual losses to the extent of around Rs. 60 Crores.
The financials of SRH can only improve from here on. For starters, it just won the last season of the Indian Premier League which shall give a significant boost to its revenue. The franchise has done well so far in this year’s Indian Premier League as well. With consistent performance and bankable stars, the franchise shall gradually be able to cultivate a devoted fan base, which shall increase its gate receipts, sale of merchandise as well as attract more sponsors to it. More importantly, from 2018, the payment to BCCI shall reduce to only 20% of its income, far less than the 85%-90% figure it is paying currently. Also with the broadcasting rights under negotiation, the total kitty of the central pool may increase further, contributing to increased revenue for SRH.
Thus SRH has the potential to increase its revenue to around Rs. 140 Crores, in which case the payout to BCCI shall be around Rs. 28 Crores and even with other operating expenses of around Rs. 90 Crores, it shall be in a position to rake in profit before tax to the extent of around Rs. 22 Crores. Of course, this improvement in financials is contingent on a lot of factors and is easier said than done.
Facing suspension till 2017 on account of some of the owners engaging in betting and corruption, Rajasthan Royals has not been the most transparent franchise when it comes to practices of corporate governance. It has found itself repeatedly in various controversies. In 2010, it was temporarily suspended from the league when it came to the notice of BCCI that its ownership had been changed without any intimation to BCCI. However, the matter was referred to arbitration and BCCI settled for a fine of Rs. 1 Crore. In May, 2013, three players of Rajasthan Royals (Sreesanth, Ankeet Chavan and Ajit Chandila) were arrested by the Mumbai Police on allegations of spot fixing and were subsequently banned by the BCCI. In 2015, the franchise itself was banned for a period of two years, as Raj Kundra, one of the owners of the franchise, was found to have indulged in betting and passing on information to illegal bookmakers. The franchise has also been fined by the Ministry of Corporate Affairs because of violations in following standard practices while entering into business deals with related party entities. There have also been multiple investigations against the franchise for violation of income tax and foreign exchange management rules.
The ownership pattern of Rajasthan Royals is convoluted. The franchise is currently owned by Jaipur IPL Cricket Private Limited which is a subsidiary of EM Sporting Holdings Limited (EMHSL), an entity based out of Mauritius. The ownership of EMHSL is not publicly available; however, as per the last disclosure made by the franchise, stakes in the entity are held by Manoj Badale, a UK based Indian businessman, the Chellarams family based out of Nigeria, the UK based Kundra family (including Raj Kundra and Shilpa Shetty) and Lachlan Murdoch, son of Rupert Murdoch. The Ministry of Corporate Affairs (MCA) website shows that Jaipur IPL Cricket Private Limited has only two directors currently – Ranjit Barthakur and Dalip Pande, both directors with Globally Managed Services Private Limited, a consultancy firm based out of Mumbai.
Jaipur IPL Cricket Private Limited follows an accounting year ending on 31st December. In the MCA website, only the financial results of 2012, 2013 and 2014 have been uploaded. The financial numbers show that the reputation of Rajasthan Royals as a frugal business is not unfounded. In fact, its financials are very much comparable to those of KPH Dream Cricket, the owner of Kings XI Punjab. Despite being based out of a less lucrative market, not being among the best performing teams in the league, dogged by ownership issues and at times, lacking even a proper home venue, both the franchisees have been able to register profits in the recent years.
Like Kings XI Punjab, Rajasthan Royals has been able to manage its operating costs very efficiently; if anything it has done this better than KXP. Its formula has been hiring cheap domestic talents and converting them into valuable, performing contributors by making them play around veteran superstars (Shane Warne initially and Rahul Dravid later). Although the title winning performance of 2008 could not be replicated by the franchise, it has made it to the play-offs twice since then. The fact that this is the cheapest franchise in the Indian Premier League, with a price tag of only USD 67 Million, also reduces the annual payout to BCCI and hence protects the margin. By 31st December, 2014, Jaipur IPL Cricket Private Limited already had a book value of around Rs. 39 Crores, against equity investment made of only around Rs. 1 lakh. Otherwise the balance sheet of the company also looks good and it does not have any external bank borrowings on its balance sheet; on the contrary, it had cash and cash equivalents of around Rs. 19 Crores outstanding as on 31st December, 2014.
Chennai Super Kings:
The other team to have been disqualified temporarily, Chennai Super Kings was owned by India Cements till recently. Since the franchise was part of the larger balance sheet of India Cements till 2015, its financials till that period are not available separately; only the revenue numbers were available. The revenue numbers confirm that after Mumbai Indians, it is the IPL team with one of the highest incomes, at par with Kolkata Knight Riders, and much higher than the rest of the franchises.
In February, 2015, the IPL franchise of Chennai Super Kings was transferred to Chennai Super Kings Cricket Limited (CSKCL), a wholly owned subsidiary of India Cements. Subsequent to that, the shares of CSKCL, owned by India Cements, were transferred to India Cements Shareholders Trust. The transfer was done mainly in order to comply with a Supreme Court order stating that any functionary of BCCI should not have a stake in an IPL franchise. CSKCL has not filed the audited financials of 2015-16 in the MCA website and as a result, profit and loss account of the company is not available. The balance sheet as on 31st Mar, 2015 showed short term loan of Rs. 25 Crores availed in the form of inter-corporate deposit but no bank loans outstanding.
Rising Pune Super Giant & Gujarat Lions:
Rising Pune Super Giant has played its first IPL in 2016 and as a result, it will recognize its first year of operating revenue only in 2016-17. Hence the available financial statement of the New Rising Promoter Private Limited, the holding company of RPSG, for the year 2014-15, is not really helpful in getting much of an insight into the financials of the franchise.
The franchise of Gujarat Lions, on the other hand, is owned by Intex Technologies Limited which itself is not a listed company.
The rights of the Pune and Gujarat franchises were auctioned by BCCI for a period of two years. The two franchises would not receive the revenue from the central pool of BCCI. On top of that, RPSG will have to make a payment of Rs. 16 Crores and Gujarat Lions will pay Rs. 10 Crores to BCCI every year.
Thus, the financial statements of the two franchises will look much different from those of other franchises. Revenue from the central pool constitutes a significant source, perhaps the largest source of revenue for IPL franchises. The breakup of revenue of Mumbai Indians (the only franchise for which revenue break-up is available) shows that the income from the central pool of BCCI was Rs. 67 Crores in FY16, Rs. 58 Crores in FY15 and Rs. 66 Crores in FY14.
Hence, the only sources of revenue to these franchisees shall be sponsorship income, ticket revenue and prize money received. Now, as per the existing plan, these franchises shall have the rights to represent their respective IPL teams only in the 2016 and 2017 season. Further, being new teams with no established following, they may have limited support base. They are also based out of relatively smaller cities, compared to many of the top tier IPL teams. Considering this, the sponsorship income and ticket revenue may be lower than many of the larger, older franchisees.
Given this, it is unlikely that the annual revenue of the two franchisees in 2015 and 2016 shall exceed Rs. 60 Crores. For reference, the annual revenue of Sun Risers Hyderabad, a new franchise, has been at around Rs. 100 Crores, a significant portion of which comes from the central pool which Pune and Gujarat would not have access to. On the cost side, if one is to optimistically assume operating expense of Rs. 90 Crores , apart from the franchise fee they have to pay to BCCI, one may be looking at pre-tax loss of around Rs. 40-45 Crores annually.
At the margins though, the Gujarat franchise may perform slightly better financially. For starters, their franchise fee is less by around Rs. 6 Crores annually. Secondly, they made it to the play-offs in the 2016 edition, thus making them eligible for higher income from prize money and raising the brand value of the franchise. Thirdly, their player expense is more rationalized compared to that of the Pune franchise. But even then, it is unlikely that either of these franchises will make any profit in these two years. Perhaps, a better way to look at the investments would be to consider them marketing expenses incurred by two major corporate houses to raise their respective visibility among Indian customers.
A few other observations:
- Performance on the field matters financially. Better performance leads to higher prize money, bigger share in the central pool revenue, better sponsorship deals and more attendance at the stadium. A plot showing the relationship between revenue of the franchises and their standings in those years in IPL has been mentioned in the following plot:
The relationship is not obviously completely linear, for a Mumbai Indian in its worst year may earn more than a Kings XI Punjab in its best year. However, the above table still proves that a higher standing in the IPL generally translates into better revenue.
The accretion to the bottom line may be limited though as the franchises need to pay a certain percentage of their prize money in the form of incentives to players.
- In fact, around 65% of the variation of revenue of various franchises across years can be explained by two variables only – the rank of that franchise in IPL in that year and the cities they are based out. We can use the following simple equation to estimate the revenue of an IPL franchise in a particular year:
Revenue (in Rs. Crores) = 133.19-5.93*(Rank in IPL)+39.33*(City Variable),
where city variable is a dummy variable which is 1 for metros (i.e. Delhi, Mumbai, Kolkata and Chennai) and 0 for others (i.e. Chandigarh, Jaipur, Bangalore and Hyderabad).
The plot showing the predicted revenue of the franchise obtained from this formula as against the actual revenue of the franchises has been mentioned below:
- In a business where a number of variables are already decided (franchise fee to BCCI) or beyond your control (central pool of BCCI, gate revenues, etc.), getting the right players and coaching staff at the right price is one variable that are in the hands of the franchisees. As a result, the strategy of the IPL teams at the auctions becomes extremely critical. It entails dealing with interesting trade-offs – the lower you pay, the lesser quality of players you get, and the higher the probability of your team finishing poorly on the field. But having said that, there are a number of undervalued players who fly under the radar at the auctions and can be picked up at bargain prices. Some IPL franchises, like Kolkata Knight Riders, has been able to hone the art of bidding well, while others like Delhi Daredevils, are gradually learning the tricks of the trade. The same, at the end of the day, have direct bearing on the financials of the respective franchises.
- Franchises which are owned by corporate houses generally receive financial help from their owners to tide over temporary hiccups. However, this also makes these franchisees financially undisciplined, with profit making in many cases becoming a secondary objective. The teams which are owned by individual or disparate investors, on the other hand, are far more disciplined as they may not have recourse to funding in case things go south. Neither of Kolkata Knight Riders, Rajasthan Royals or Kings XI Punjab – the three franchises that have generated profit in the last few years are controlled by one, large corporate group.
- Yes Bank has funded a number of the IPL franchisees at some point of time. They have extended secured loans to the companies owning Kolkata Knight Riders, Kings XI Punjab, Royal Challengers Bangalore, Rajasthan Royals, Delhi Daredevils and Rising Pune Super Giant. Of these, the loans extended to Kings XI Punjab, Royal Challengers Bangalore and Rajasthan Royals have already been repaid. Kings XI Punjab has in fact managed to repay the loan extended by Yes Bank and replaced them by fresh funding availed from RBL Bank Limited. The account of Delhi Daredevils, on the other hand, has been marked by delays in payment of dues.
- The financials of the franchisees may improve substantially from 2018 onwards. For one, the annual payout to BCCI shall become 20% of their respective revenues. Secondly, the central pool may get expanded if BCCI is able to obtain higher prices for the broadcasting and digital rights. Further, the risks associated with the league have subsided to a large extent. This is reflected in the significantly higher premium at which the rights for the subsequent franchises have been sold.