News Analysis

Fundamental analysis: For Sajniv Goenka's RPSG group, running an IPL team will be hard work on a sticky wicket

Hari Viswanath | Updated on October 27, 2021

Sanjiv Goenka, Chairman, RPSG Group

The current plan is to fund the IPL franchisee with cash infusion from RPSG Ventures and other private ventures of the promoter

The RPSG Group, which won the IPL bid for the Lucknow team, is no debutant to the IPL. The group has owned in the past, the Rising Pune Supergiant which was the replacement for Chennai Super Kings when it was under suspension. While that stint ended as quick as a Twenty20 match, it now has a chance to show its mettle as one can in a Test match.

The economics

For RPSG Group, the IPL economics are currently small in the overall scheme of things. The winning bid is easily affordable. The current group market capitalisation is at a little over ₹40,000 crore and cumulative EBITDA at around ₹4,500 crore (after eliminations) for FY21 (pandemic impacted year).

Some of the well-known listed companies from the Group are RPSG Ventures, CESC, Saregama, Philips Carbon Black, Firstsource Solutions and Spencer’s Retail. Of these, CESC and Firstsource are the leading companies, together contributing to around 85 and 60 per cent of Group EBITDA and market cap respectively. Further, the Group also has private unlisted ventures and personal wealth of the promoter that will add up to the overall group tally. While as per terms, the company has won the bid for ₹7,090 crore (to be paid over the next 10 years), what they are actually required to pay is only the net amount after what is due to them from BCCI every year from the IPL revenue pool (that is, money BCCI makes from sources of revenue like media rights, title sponsorship etc).

According to Group Founder and Chairman – Sanjiv Goenka, that likely means paying around ₹500 crore in the first year, ₹250-300 crore between 2 and 6 years, and much lower after that. Running a team will have other expenses like players fees and operational expenses, but it also brings with it other sources of revenue like advertising and ticketing revenues. Given these, the winning bid is a small ask, even if the economics overshoot versus his overall estimates.

Further, the Group Chairman, in a television interview, mentioned that amongst the listed entities of the Group, only RPSG Ventures will be involved with the IPL. He categorically said that none of the other listed companies will be involved.

RPSG Venture, which was spun from CESC as part of a scheme approved in 2018, is in the business of providing IT consulting and support services to its clients. Currently its clientele is primarily its group companies. It also owns 53.7 per cent in Firstsource (current market cap about ₹14,000 crore) and has business interests in ayurveda, real estate and restaurant segments. It reported consolidated revenue of ₹5,663 crore (Firstsource being a major contributor), reported PAT of ₹58.38 crore (loss of ₹72.88 crore after adjustment of minority interest) and net cash from operating activities of ₹900 crore in FY21.

Funding the franchisee

The current plan is to fund the IPL franchisee with cash infusion from RPSG Ventures and other private ventures of the promoter. While the exact ratio/split between these two was not mentioned. He hinted that in the first year, RPSG Ventures will pay around ₹200 crore of the expected ₹500 crore to be paid in year one. This indicates that RPSG Venture could end up owning around 40 per cent of the Lucknow IPL franchisee

In the stock markets on Tuesday, the first day of trading post the news of winning the bid, RPSG Venture shares initially opened up by around 5 per cent, but ended the day down 5 per cent. Both reactions appear unwarranted given the current expected insignificant impact from owning the franchise when compared to the financials and activities of the company as mentioned above.

Sanjiv Goenka sounded very optimistic on the value proposition of the franchise. He expects it to be worth around ₹10,000 crore in another five years, versus the net present cost of ₹2,300-2,400 crore (based on net annual payments to BCCI). Those betting on that outcome must consider a few factors.

For example, one of the most popular sports team franchise in the world – Manchester United has market cap of $2.62 billion, which is around ₹19,500 crore. However, even after being in business for decades, it is unprofitable today. Its shares have hardly given any returns in the last five years. Another example, right in the same turf, is the CSK franchise, which is said to be worth around ₹4,200 crore in the private markets for unlisted securities. And this is after being in business for 13 years and having to pay much lower franchise fees versus the recent entrants which gives the older teams a head start in terms of lower costs. Investors betting on significant value creation from sports franchise must study more examples of listed/private market valuations of sports franchise teams and then place their bets for indirect holdings via listed group companies.

Published on October 26, 2021

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