IPL 2014: Money-making media beast or financial drain?

The IPL roadshow rolls into town this week, laden with star names and corporate sponsorship. Thanks to the faster-paced Twenty20 format the sport’s popularity is growing and companies are keen to get aboard.

Virat Kohli bats as Kumar Sangakkara keeps wickets during the final of the 2014 ICC World Twenty20 between India and Sri Lanka in Dhaka. Getty Images

When cricket stars such as Virat Kohli, Chris Gayle and Kevin Pietersen take to the pitch for this year's Indian Premier League (IPL), which begins in Abu Dhabi on Wednesday, it is not just the fans who will be cheering them on.

The owners of the teams in the world’s richest cricket tournament, including Indian corporates such as Sun TV and United Spirits, remain confident that profitability is in sight for the franchises and that their hefty investments are paying off in exposure. This is despite most of the IPL teams incurring financial losses in past years, raising questions over whether the tournament actually makes business sense for owners.

Other companies that have invested in buying IPL teams include the Bangalore-based infrastructure firm, GMR Group, and the conglomerate Reliance Industries. The Bollywood star Shah Rukh Khan is also among those who own franchises in the tournament.

“Revenues are increasing and franchises will increase in profitability and value exponentially going forward,” says Prakash Mirpuri, the vice president of corporate communications at UB Group, which is the Indian business tycoon Vijay Mallya’s empire, best known for its Kingfisher brand. UB Group bought the IPL team Royal Challengers Bangalore in 2008 for an estimated $112m.

“The IPL is a mega sporting league which is growing both in value and popularity,” says Mr Mirpuri. “Franchises also help build great communities and fan following.”

The company remains confident despite controversies plaguing the tournament, including alleged match-fixing, and reports which suggest that television viewing figures have dipped over the past couple of years. There are also positive signs for the value of the tournament, including Pepsi in November 2012 buying the title sponsorship rights to the IPL for five years for US$71 million — almost double the amount the Indian property firm DLF paid for the title rights for the first five years of the tournament.

The latest annual report from UB’s subsidiary, United Spirits, shows that its Royal Challengers Sports entity, which runs the cricket team, posted a loss of 78.85 million rupees (Dh4.81m) in the financial year which ended in March 2013, compared to a loss of 70.75m rupees the previous year.

The IPL launched in 2008, loosely based on the United Kingdom’s Premier League football championship and the NBA. It is a Twenty20 tournament, which means that the matches are fast-paced, lasting about three hours each, helping to give the sport more popular appeal.

“The governing bodies of this sport in India and globally, over a period of the last seven to 15 years have experienced annualised growth of 19 to 35 per cent in their media/central rights,” according to United Spirits’ last annual report. “The commercial exploitation of the shorter version [of cricket] is on an increasing scale and is expected to reach the scale which other games like football have reached.”

Sun TV in 2012 bought the Hyderabad IPL franchise for 4.25 billion rupees, renaming the team Sunrisers Hyderabad. Sun TV last year issued a forecast that its IPL franchise would lose 300m rupees in the financial year that ended last month, but predicted it would break even in the current financial year.

Revenue streams for owners include a share of sponsorship and television broadcasting rights, as well as cash generated from ticket and merchandise sales, and prize money. But the costs for team owners are huge, particularly when buying star cricket players, and they have to pay a franchise fee, rent stadiums and cover travel expenses.

Much of the value for owners, however, is in the brand.

“The total value of the various franchise brands in the IPL is over US$400m,” according to a recent report on the IPL published by American Appraisal. “This does not represent the value of the IPL brand as a whole, and only represents the value of individual franchise brands. We estimate that on average, brand value could represent anywhere between 30 per cent and 40 per cent of the business value of individual franchises, depending on the performance and brand rank of the franchise.

“As part of our analysis, we realised that while brand value is a significant component of business value of individual franchises, there are several other factors which drive business value in the IPL,” it adds. “We have seen several transactions where new IPL franchises were bought and sold at premiums of over 100 per cent to values originally bid for during the first auction.

“Would these valuations make the IPL franchise a viable business for a serious investor or is it just a place where ‘ego valuations’ rule and business takes a back seat?” the report asks.

India Cements, which owns Chennai Super Kings, says that its investment paid off by generating exposure nationally for the company, which led to business deals.

“We were finding it tough to find an opening in north India. It was an alien market for us and it was difficult to challenge the clout brands from these regions had on local dealers,” Rakesh Singh, the joint president of marketing at India Cements, told The Economic Times, an Indian business newspaper, last year. “Brand CSK [Chennai Super Kings] did wonders for us. We managed to pull off in months what would have taken years.”

Similarly, Muthoot Group, a gold loan company based in Kochi, which has been the primary sponsor of the Delhi Daredevils team for the past three years, says it managed to boost its presence across the country through its association with the tournament.

“Although, we had a fairly large number of branches in the north, we were perceived to be a south Indian company, and we wanted to change this perception,” says Cherian Peter, the chief marketing officer for Muthoot Finance. “The association with IPL has helped our company to establish the true pan-India presence and enhanced the trust and credibility of our brand.”

He adds that while the company is happy with its investment, it has decided not to renew its role as the main sponsor of the Delhi Daredevils this year, partly because many of the matches are going to be held in the UAE while the general elections continue in India.

American Appraisal believes that the tournament still has enormous scope, including a merchandising market which it says has significant untapped potential for franchise owners.

“Within a short lifespan of just six years, the IPL has metamorphosed into a media beast that could soon rival the likes of the English Premier League,” it says. “Driven by the digitisation revolution in the TV sector as well as greater TV penetration and increasing per capita income of the large and cricket-crazy Indian population, it is only likely that the IPL is at the cusp of something larger and bigger that anyone could have ever imagined when the idea was first conceptualised in 2007 and franchises were first awarded to an unsuspecting group of corporates, individuals and celebrities.”

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