The Gameplan

Jaypee Sports, the local organiser of India’s  Formula 1 extravaganza, will have a hard  time making money. What the group is  banking on is a real estate blueprint

For the past several weeks, Sameer Gaur has refused to give any exclusive interviews to the media. He even said ‘No’ to The New York Times. Instead, the managing director & CEO of Jaypee Sports International Ltd (JPSI) worked 15-20 hours a day to micro-manage the completion of Buddh International Circuit, the venue of the first Formula 1 race in India. “Gaur personally checked the air-conditioning, water supply and furniture in the grandstand,” says someone involved with the project. With little time left before race day, 30 October, Gaur was, in effect, racing against time to ensure that his track and stadium were in perfect condition. After all, the future of JPSI rides on the success of the Buddh Circuit; the F1 could propel the company into the fast lane of business within a few short years. The $400 million racing circuit could become the motor sporting hub of India, and also the realty nucleus for an entire sports city in Greater Noida, a satellite town of Delhi.

For JPSI, bringing F1 to India is not just an ego trip, nor even just an attempt to introduce the country to the world’s third largest sporting event after the football World Cup and Olympics. Gaur’s huge investment in the Buddh Circuit is part of a grand multi-billion dollar strategy to drive several revenue streams in the near future. Selling the motor sport experience is just one aspect of the plan; what he really intends to do is market an entire lifestyle around various sports such as racing, golf, hockey and cricket.

Sanjay Sharma, who works for JK Tyre and has been involved with almost all motorsport events in India for the past two decades, explains how JPSI plans to rake in huge profits. First, consider the different ways in which the race track itself can earn money. “Once the company has hosted F1, the world’s biggest race, it will have no difficulty convincing other global (Grand Prix, MotoGP and so on) and domestic events to come to Greater Noida,” he says.

Going by the experience of other international F1 race tracks, the 5.14 km Buddh Circuit, designed to be the fastest in the world with top speeds of 325 kmph, may be able to host 15-20 events by 2013-14. Since JPSI will rent out the track for a cool Rs 10 lakh per race, the company can earn upto Rs 2 crore every year from this. If it rents out the other race-related infrastructure, the figure may double. In addition, the track can woo the world’s leading car manufacturers in several ways.

For example, JPSI has already announced a tie-up with Mercedes-Benz to “set up a performance driving academy… [that] will offer structured programmes, cars [and] trainers” to eventually provide a “high-octane experience to motor enthusiasts in India” and groom fresh car racing talent. (Indian F1 drivers Narain Karthikeyan and Karun Chandhok are products of the Chennai race track.) Sources contend that similar agreements may in the offing with others like Audi.

However, it will be more critical for Gaur to get automakers interested in setting up retail showrooms around the track for their high-end models. Many of them, who have their manufacturing units in north and central India, can even use the Buddh Circuit for testing purposes. “Since all manufacturers procure components from large and small vendors, new models have to be rigorously tested for overall quality, performance and consistency,” explains Sharma.

At the broader level, the company’s blueprint is much more ambitious. It plans to construct an entire sports city that will sprawl across 2,500 acres or more and include residential and commercial complexes around sports—not just the Buddh Circuit, but 9- and 18-hole golf courses, a cricket stadium (with a capacity of 100,000), hockey stadium and sports academy. According to JPSI’s spokesperson, the overall cost calculations of the township have not been done yet. “We will work out the investment after the F1 race,” he says.

Designed by the US-based SOM, a leading architect and planning firm, India’s “first fully-integrated megacity [will be] built around sporting lifestyles and feature premium residential and commercial spaces.” Through another of its subsidiaries, Jaypee Greens, the Jaypee Group has already built several residential complexes that overlook golf courses in the same area. The same could be done with the racetrack and other sports stadia over the next few years.

Gaur has taken his cue from similar townships overseas, like Dubai’s $950 million MotorCity, which is based on the motorsport theme. Most of MotorCity’s attractions are already up and gleaming, including the 5.39 km Dubai Autodrome (similar to the Buddh Circuit), UpTown MotorCity (low-rise residential apartments), Green Community MotorCity (luxury condominiums and villas, townhouses and bungalows) and Business Park MotorCity (high-rise office towers and retail space).

But the F1-X Dubai, a Formula 1 theme park and arguably the mega project’s biggest lure, is yet to see the light of day, with the 2008 global financial meltdown having taken a toll on its finances. The 5 million sq ft park, as planned, is supposed to house a hotel, F1 Museum, F1 Pavilion, various F1-related thrills like rollercoasters, F1 grid experiences, simulator rides and extensive retail/dining outlets, among other things.

The questions that must be asked here are whether Union Properties, Dubai’s third-largest property developer that owns MotorCity, has earned any money on the venture. Less importantly, has the $100 million Dubai Autodrome, which started in 2004 and features several

motorsport events except F1, been able to break even in the past seven years? If the answer to both those questions is ‘yes’, Gaur would seem to be in pole position. If not, JPSI may just be headed for a crash.

Sources in Dubai contend that the Autodrome, which has six tracks along with a go-karting one, incurs huge losses every year. Says one, “Its annual income is not more than $20 million, which is not enough to meet maintenance and administrative expenses, leave alone earn a return on the huge capital invested in the first place.” The largest chunk of its income comes from go-karting, although it holds dozens of global races and offers visitors performance driving experiences (run by car makers).

If that is true, there is no way the Buddh Circuit can make money for a long time. Holding an F1 race itself implies an outgo of $35 million that has to be paid every year to Formula One Management Ltd. Add to this figure annual maintenance and administrative costs of $10 million at the very least, and it is clear why JPSI may struggle as a standalone entity.

“Do the math. At $45 million expenses a year, JPSI will need to earn over $200 a minute if the track is open for 350 days and 10 hours a day. At the Dubai Autodrome, the average number of daily visitors is 100 on weekdays, and 400 during weekends. To make a minimum of $840,000 a week, as the Buddh Circuit will have to, it will need to charge over $650 per visitor if the numbers are similar,” explains the Dubai-based source. Of course, the Buddh Circuit will have other revenue streams, but for it to be profitable, the regular visitor may still have to pay through his nose.

More critically, as is the case with Dubai’s MotorCity, the residential and commercial complexes around the track are expected to drive traffic to the Buddh Circuit. In its 2005 annual report, Union Properties stated that the ‘management considers that… MotorCity is integral to the success of the Autodrome’. Therefore, in 2008, the company transferred its track assets to the township as the ‘main beneficiaries of the Autodrome would be the residents of the MotorCity project’.

Since 2008, after the global slowdown, Union Properties, which incurred huge losses in 2009 and 2010, has admitted that its strategy was wrong. In an interview, its Chairman said that “MotorCity was created around the concept of having a superior race arena and many people would question the wisdom of getting involved in that. The company got involved and it wasn’t a core business.” In retrospect, the project was a ‘poor fit’ in the context of its other real estate businesses.

Moreover, sales of residential and commercial complexes in MotorCity haven’t been too encouraging. Although people have moved into some of the homes, many of them complain of high decibel levels during race weekends. There have also been some cancellations. “Union Properties spent half a billion dollars on commercial complexes to woo auto manufacturers to open retail show rooms. They are completely unoccupied,” says the Dubai source.

Perhaps the F1 outlook will improve as the world economy recovers. But success is far from guaranteed for JPSI, this much is clear. The company will need to tread carefully and take another look at its cost-benefit analysis. It will have to decide whether to commit investments in all its proposed complexes in one go, or take a step-by-step approach. But the latter will delay revenues, and the former may overstretch the company’s financial exposure.

This is the reason why the construction and maintenance of almost all F1 tracks in the world are subsidised by their respective host-country governments. They invariably incur losses. Most are not conceived as part of some township project. Rather, they are billed as magnets to attract foreign tourism and thus indirectly help host cities, nations or federal states.

Take the current debate in Austin, Texas, which has decided to host an F1 race next year. Going by official estimates, any state subsidy can be recovered within the first year itself. Austin expects attendance over a three-day first race weekend (including the practise day and qualifier race) to be 300,000, 1 per cent of which would come just from the 12 F1 teams and associated organisations. Such tourist inflows may boost the city’s revenues by $300 million (in 2010 dollars) in 2012. Of this sum, room rents are expected to contribute $48 million, food and beverages $70 million, retail shopping $48 million, and tickets $32 million.

Unfortunately, such logic will not please JPSI, the only fully-private owner of an F1 track. Even the Dubai Autodrome, which may host F1 races in the future, was granted land by the emirate’s government for the project.

Gaur is surely aware that any indirect gains made by the state of Uttar Pradesh, or by other private businesses (say, hotels and restaurants), are not going to help boost JPSI’s bottomline. In the end, to emerge victorious, he will have to sell thousands of new homes and offices.

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