I had written about Economics of IPL on my other blog some time ago.
Yesterday, one of my acquaintances reached out to me and informed that he was working on a case study for valuation of IPL teams. He had read my IPL economics post and enquired if I could help him with the right valuation technique for IPL teams and thereby make an investment decision (investment time frame 3-5 years). Here was my response (feel free to add any other inputs on this). Presumably, he has all the revenue and cost structures of all IPL teams and since he didn’t share that with me, what follows is more ‘gyaan’ than actual numbers. Let me know your thoughts.
Interesting exercise on valuing IPL teams.
Discussing Economics of IPL is pretty straightforward. Valuation though is a different beast because, a) there is the element of ‘price you pay’ and b) every assumption/step can be challenged since there is no ‘correct’ common way.
Anyway, here are my brief thoughts on the exercise -
a) Using DCF/Free cash flow yield methods is essentially GIGO in this case. In my view, to use any of the two methods, you need atleast 10 yrs of data (and I am assuming 10 yrs covers an entire business cycle of bull/bear and see how your market works). Else, the result is complete bullshit (irrespective of using the concept of ‘margin of safety’). You can do a ton of weird stuff with excel (with CAPM, Royalty rates, Projected sales etc., but as they say, just because we can be excel gods, doesn’t mean we can become good investors).
b) Using ‘comparable sales’ is a good option. As long as you have the sales data and cost structure, profitability is easy. But comparing across teams might be difficult. Sales for a CSK might be higher, but the cost structure of CSK is also significantly different. But this is a good starting point.
c) Price multiples would seemingly make it quite easy (along with the sales data). But the deal is how do you get to the price vs value equation? (or EV for that matter, where price is critically important). Let me flip this equation by comparing it with a listed security on the Indian markets. Let’s say CSK = HDFC Bank on the bourses. We know HDFC Bank is expensive at current valuations (on almost every parameter), but people stick to HDFC Bank and it deserves the current multiple because of the sales, risk mgmt, profitability, management strength etc. (and hence comparable to CSK in terms of winnings, sponsorships, star players etc.). So, the issue we might have to deal with here is ‘if I pay a higher price, will I get a correspondingly higher value’?
d) And I would say if you are using a multiple, rather than P/S, EV/Sales would be a better option just because these folks might just have a ton of debt on their B/S.
e) Financial stmt analysis is absolutely important (esp. some bit of forensic analysis) since multiple things can go wrong here. Working cap mgmt (of when you pay money to BCCI, when you get money from sponsorships etc.), Earnings vs Cash flow (am I just booking sales, or is there some cash to show for it etc) needs to be checked. I mean, that’s like a given (if you have access to those figures that is).
f) One other parameter that we need to consider in this valuation is something to do with a asset (player) sale/transfer. How likely is one team to trade a player for another, or just sell a player for money? This has had some wonderful windfall profits for a few teams, so this is not just ‘extraordinary income’. Over a period of 5 years, I see atleast 3 yrs of this ‘extraordinary income’ coming into play.
g) You can assign ‘brand/royalty’ value using any of the goodwill calculation methods. But really, beyond CSK/MI/RCB, I wouldn’t assign any royalty value for any other teams in the competition.
h) Also be aware of changing cost structures every 2-3 years because of the auctioning and re-auctioning.
Hope that helped in some tangential fashion. Let me know how your analysis comes out and if you can share it with me once you are done with it.