What's On Your Mind, Mr. Buffett ? 2017

The Great Indian circus

With mindless money invested and unrealistic valuations prevailing, what qualifies for a bigger tamasha — the stock market or the IPL?


The Indian Premier League (IPL) is completing its decennial celebrations. For the uninitiated, it is a six to eight-week long and eight-team strong T20 cricket tournament held during peak summers in India. A 20-over match with all the 10 wickets available per side, T20 is a hybrid between the Double Wicket that used to be played more than a decade ago and the normal One Day International (ODI). IPL started off in its old avatar as the Indian Cricket League without the blessings of the Board of Control for Cricket in India (BCCI) and it was, therefore, grounded within a couple of years to make way for BCCI’s own product. It was a defining moment in Indian cricket. A sport was transforming into a tamasha. The odds were heavily loaded in favour of the batsmen with dollops of Bollywood glamour and sprinkles of masala thrown in. Purists who treat sport as a form of recreative expression or a hobby or an exercise or a gentleman’s game may kindly take a backseat. As it’s now a form of entertainment bigger than one’s imagination, much like it used to be in the Colosseum. Thank God! It’s not gruesome, except for the bowlers!

The economics

In the case of IPL, the BCCI holds all the rights (including title sponsor and media), which it sells to various advertisers and platforms. It shares some of these revenues with the team owners and keeps the rest for itself. It was born in the pre-independence era at the behest of our rulers to coordinate with various state cricket associations to organise matches. It somehow earned the divine right to (mis)govern anything to do with organised cricket in the country. Such authority was not very valuable then, but has become highly valuable now, so much so that we have people from different walks of life drooling over each other flexing their muscle up the ladder.

If we were to look at the ‘value chain’ of IPL, BCCI is the originator whose sources of revenues are the fees it collects for team ownership, title sponsorship and media broadcast rights. The team owners have a symbiotic relation with the national governing body for cricket in India — paying it fees and sharing revenue from other sources as above, while having expenses and some other income of their own. For instance, Sony Pictures Networks being the official broadcaster of the league pays a hefty fee to the BCCI and earns its revenue from advertisers. The franchise owners collectively are barely breaking-even (some make money, some lose). Sony manages to make some money by bundling few other sister-channels with the one showing IPL. But on the whole, the sponsors/advertisers are paying BCCI for having the right to hold the event with the other constituents acting as conduits.

I don’t have the statistics but I suspect that most of these advertisers are related to the mobile telephony industry including both handset makers and service providers. This industry globally is known to be pretty notorious, and yet we have this industry funding this tamasha. The two main Chinese handset makers pouring money into the IPL are both privately-owned with not much information available in the public domain (at least not for the English-reading world). Nokia once ranked among the top five brands in the world but its market share was eroded to such a large extent that it had to ultimately be sold off to Microsoft; similar fates were suffered by Ericsson, Motorola, Siemens, Alcatel and Sony (all early movers and deep-pocketed players in handsets). They have either sold out by virtue of nearly going bankrupt, have negligible market share or have vanished from the scene. It would be interesting to know if any one of them made any money selling mobile phones for a good part of a decade. The latest entrant in the mobile services space is the lion of the Indian industry in general but not in telephony until recently; and it has got all the incumbents running for cover. It’s such a serious move that even the RBI has asked banks to make provisions for some loans given to this industry.

Same pitch, different sport

All in all, loads of private capital is being burnt into an industry known to have a bottomless pit; and the money is going to the BCCI, who has no owner as such and which just happened to be bestowed with the divine right by a stoke of luck decades ago. That’s capitalism at its destructive and somewhat ambiguous best. As for the franchise owners, they are happy sinking in capital too in the garb of creating a brand value, never mind they haven’t made money in a decade. That’s another nouveau capitalism concept where brands are created without making money in perpetuity (well for a country where the risk-free rate is 7-8%, 10 years is akin to perpetuity); or maybe creating brands takes much longer and all of them are waiting for that glorious day; or maybe its just a trophy asset many would like to own. Or is it that money is indeed being made by underhand wheeler-dealers, which is what ensures that the show goes on? Afterall, we have had the original IPL convener absconding, two teams have been suspended so far while the original owners of two other teams are under investigation and since then their ownership has changed, (one team’s owner got bust and that team has a new owner and one team has been relegated for non-payment of fees). Not just this, the impropriety was so rampant that some heads had to be rolled even at the BCCI. However, despite all this the juggernaut seems to roll along stronger than ever. There is as much masala on the pitch as there is off it in this potboiler. Neeraj Pandey, are you listening?

Coming to the stock market, promoters of businesses are akin to the BCCI who own the rights to a product or service. The difference is that these businesses are owned privately and many of them are managed better. Another difference is that the business owners themselves double up as advertisers. Then we have the intermediaries (brokers, distributors, advisors, merchant bankers etc.) who are the story tellers. They are akin to the broadcasters in the IPL model. The difference here is that they get mostly paid by business owners (and in parts also by investors) unlike the IPL where it’s the other way round. And finally we have the investors who are akin to team-owners and who (directly or indirectly) ‘invest in businesses. Outside this whole system are speculators who are like the crowd who enjoy the action and the gossip. The big difference here is that unlike the crowd in matches, the speculators in the stock markets take part in the shadow (shares) of the main action (businesses).

When (too much) money chases (relatively fewer) ideas (or business opportunities), its not the reasoning that wins, it’s the guy with the money bags who does (till it lasts anyway). Mutual fund industry veteran John Bogle’s Expected Return Formula has three elements — dividends, earnings growth, and P/E re-rating (or de-rating). The first two elements are fundamentals and the third is more speculative, in his own words. Most of the recent returns in the stock markets are coming from the third element. It is futile to get into a sensible debate about the current state of the markets. Enjoy the ride, while it lasts; and it may last for another decade for all you know. That’s the mysterious beauty about this beast — it always keeps you enthralled and excited without always promising to oblige, just like the IPL! But beware, while the next round of IPL broadcast rights may fetch an even higher price so long as the headless Chinese are lining up to capture the ecstatic Indian mobile user, bear markets are an integral part of the stock market. Caveat Emptor.

The writer is CIO, Renaissance Group