Star India won the rights for cricket for the next five years. And it has paid the price for it; whopping. It must have done the homework alright. But then people are asking whether it can recover its costs. And there are people who say it will be a goldmine for Star India. Who's right?
Let's check the math.
It's a total of Rs.353 b that Star India has contractually committed. That works like debt off its books; nevertheless a debt to be honored.
Now, Star India needs not only to recover its costs, but also make some money. Contrary to this report which asks for recovery of Rs.65 b every year over the next five years to justify its price, Star actually has to earn more than that. How much more depends upon its opportunity costs. If we assume 15% rate of return, and further assume that both cash outflows and inflows are evenly spread across the next five years, Star has to make Rs.105 b each year.
It looks like Star India has done its numbers.
I am not too sure how Rs.45 b each year becomes a breakeven point, though.
For 12% rate of return, cash earnings will have to touch Rs.98 b each year; and for 10%, they have to be Rs.93 b annually. Let's say Star India took the commitment for prestige, and expects to make only 7.5% like on the government bonds. Even then, it has to earn Rs.87 b each year to justify that price. Without any return, it has to earn over Rs.70 b each year as opposed to Rs.65 b suggested by this report.
But then as in cricket, you never know until the last ball is bowled, and it ain't over until the fat lady sings. Heck, it's business after all, not sports. Who cares, let's enjoy the game.
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