Three months from now, India will resume its latest annual cricketing festival – the Indian Premiere League. And the buzz has already started with the IPL auctions and all eyes are on the franchises looking to create their teams for this year by participating in the bidding process. (In case you have not been following the news, Yuvraj Singh has been bagged by Bangalore for Rs. 14 Cr and Dinesh Kartik by Delhi for Rs 13.5 Cr). In the 7 years since its inception, the IPL has always been surrounded by hoopla, glitz and its own share of controversies.
The IPL has been subject to much economic and strategic analysis. This article, however, looks at the accounting aspect of IPL with a focus of explaining the financial side of the event to a novice.
IPL: The Business
The primary participants in the IPL are the franchises which bid for the players and form a team which competes to win the coveted title. All the teams are predominantly owned by different companies, for e.g. Chennai Super Kings, the most successful IPL team till now is owned by India Cements. There are lot speculations around the finances of these franchises with allegations of unaccounted foreign money being poured into these franchises in violation of FEMA provision. The Enforcement Directorate (ED) has already registered a case against the Indian Premier League (IPL) under Foreign Exchange Management Act (FEMA) to inquire into unauthorized transfer of foreign funds. Read here to learn more about it http://www.eircoficwai.com/Articles/8908-ipp.pdf
The operating finance of the franchises is much less opaque as compared to their funding but they are far from transparent. The financial data for Chennai Super Kings, for e.g., are not available in public and the numbers are absorbed in the financials of its parent company.
Sources of Income for a franchise
The largest portion of revenue for a franchise comes from the BCCI through central sponsorship, of which the majority is contributed by the television broadcast rights followed by the digital broadcast rights. A part of the sponsorship revenue accrued by BCCI is shared with the team franchises for 10 years. Gate collections form the home matches are other source of income, the tickets for the matches range from Rs. 200 to Rs. 5000 and after paying a share to the BCCI, the remaining amount is directly accrued as revenue for the franchise. The in-stadium advertising also adds to this pool of income.
The other big source of income for a franchise is the merchandise like T-shirts and apparels which are sold through multiple channel s such as its own website to online and brick and mortar retailers. Franchises which are able to build a loyal and long term fan base can generate lot of income through this route. There is also possibility of income through capital gain where the player from a franchise could be sold at a higher price to other franchise but this could very well be offset by the amount spent on acquiring a new player.
And finally, the prize amount that the team may win will add to the income of the franchise for the year. Mumbai Indians, who were the champions in the last edition of the IPL got Rs. 10 Cr as prize money.
What do the franchises spend their money on?
The biggest and the most visible spend that a franchise does is the acquiring the player for each year. The bidding process for IPL is a spectacle in itself and the teams prepare elaborate strategy to create a team that can win matches, create a fan following and bring in the spectators for the home matches. Acquiring the players through the auction is the big annual investment that each franchise indulges in and which gets media headlines. As mentioned above, Yuvraj Singh, a prolific all rounder who was part of the erstwhile Pune team has been acquired by the Bangalore franchise for a whopping Rs. 14 Cr.
The other expenditure is in the form of infrastructure that is provided to the team for practice and skill development. The Mumbai Indians team has a support staff which is consists of a spate coach for batting, bowling and fielding apart from the physical trainers and sport consultants. The coach of the team is a prime position and franchises are willing to spend huge amount to acquire big names to build their team. There may be other operational expenditures such as cost of goods of merchandise and branding cost.
How well have the franchises performed?
As per a report in Mint, most of the IPL franchises are still not able to generate profit. Below are few excerpts from the article:
“The financial data for seven other franchises present a mixed trend. Holding companies of four franchises—Mumbai Indians, Delhi Daredevils, Kings XI Punjab and Royal Challengers Bangalore—have made losses for the last four financial years ending 2011-12.”
It seems Kolkatta and Rajasthan are the two franchises which have been able to report a profit of Rs. 10.42 Cr and 5.72 Cr respectively in 2010-11.
What bodes for the future?
Media speculations abound about the declining viewership and sponsorship of the successive IPL with each passing year. Yet IPL remains one of the most awaited annual event in our cricket obsessed nation. There are other such championships across the world in T20 cricket but none has been able to close in on IPL in terms of popularity. If it’s not the game then it is the peripheral activity around it which keeps the IPL in news. With the franchises settling around a more stable team, we can expect a loyal fan base to be formed around them which indicate a huge potential for revenue in the form of merchandizing and sponsorship.
IPL is as much about business as it is about the sport. The people who have invested in this gala event are some of the most capable business leaders in India and there needs to be no doubt that they have put their money where they can foresee returns. The IPL is as much about the assets and ROIs of the franchise’s balance sheet as it is about the team composition and the betterment of the game. But on a parting note, let us not forget the love for the game that drives us crazy as a nation and hope that India gets a reputed cricketing event that it deserves.
Learn more about accounting outsourcing at Aristotle Consultancy.