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Ben Franklin famously said "Time is Money". It is a statement that has had timeless relevance. Unfortunately, it seems to losing some of that pertinence among heads of Corporate India. How else does one explain the disproportionate amount of time spent by these owner-executives on their IPL teams?
The fact that IPL is a scandal is not new. The tricks being played around would make even Al Capone smile. But that would be irrelevant if the companies owning these teams were private bodies not answerable to anyone except itself.
First, let's examine the scope of the IPL with regards to its potential benefit for the owners. Valuation of any enterprise is tricky business. In the case of valuation of sporting teams, the task becomes even tougher. But let's try to simplify it.
Major football clubs have now seen valuations like any other commercial entity. Real Madrid, the most valuable soccer team in the world, is valued at USD 3.3 billion according to Forbes. The club generates an operating income of USD134 million. This implies a current price-to-earnings (where earnings are operating income) ratio of 25x - not the multiple that will make an investor grovel.
It gets trickier when one is looking at baseball clubs in the US. New York Yankees, the highest valued club by some distance, are touted to have a valuation of USD 2.3 billion while operating income is a measly USD 1.4 million. L.A Dodgers are assessed at a valuation of USD 1.6 billion and operating income is USD 3.2 million. Besides these two clubs, there is sanity in the valuation of other baseball clubs ranging between 25x-30x.
So - what is the scope when it comes to IPL? Executives of almost all franchisees concede they are in a loss or at best have just about broken even. The two key sources of revenue are fixed for franchisees - broadcasting and central sponsors. These two sources provide close to Rs 70-75 cr in revenues for the franchisees. It is the other sources that differentiate the profitability levels. These comprise primarily local sponsors, stadium sales and merchandise revenues. Local sponsors add up between Rs 20-30 cr in revenues. The two main expenses for the teams is the annual franchisee cost (bid amount that is to be paid annually for 10 years) and player expense. For a team like Mumbai Indians and RCB, these costs equal over Rs 100 cr. Besides these expenses, there are travel & hotel expenses and marketing costs. Even with the assumption of reasonable stadium ticket profits (sales minus rent) and merchandise profits - profits are always likely to be minimal from the entire venture. If anything, with the continuous scandals engulfing the IPL - the biggest sources of revenues, broadcasting and sponsorship revenues may actually come down.
Commentators claim the brand also contributes to the overall valuation for a team. Given the subjectivity associated with brand valuation it is tough to make a realistic estimate of it. Already, cynics point out that there is brand dilution with teams associated with the IPL.
Meanwhile, the stocks of the companies associated with the IPL are languishing over a 5-yr period. (IPL started in April, 2008)
Ofcourse, there are several critical factors that are on play for the economy and some are company specific which have dampened the stock price of the companies involved with the IPL. The only one that has risen and risen significantly is United Spirits. Perhaps, they can take a cue from United Spirits which has seen a massive gain after Vijay Mallya exited some part of its stake and gave it to a more competent entity (Diageo) to run. Others should follow suit, exit the IPL and focus on the business that shareholders expected them to manage in the first place.
The writer is President, Achelous Advantage
India Cements stock price
On October 31, 2014, India Cements closed at Rs 111.55, up Rs 1.30, or 1.18 percent. The 52-week high of the share was Rs 134.30 and the 52-week low was Rs 46.00.
The latest book value of the company is Rs 131.97 per share. At current value, the price-to-book value of the company was 0.85.
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