Subhash Chandra's risky gamble

The Essel Group's largest business -- yes, more even than media and packaging -- is running lotteries. And now Subhash Chandra wants to try his hand at legalised gambling as well.

Subhash Chandra making headlines is no longer news. For some years now it has been for his no-holds-barred feud with the Board for Control of Cricket in India. It started with broadcast rights and took a new turn recently when he set up the India Cricket League.

Every move he makes is countered in equal measure by the BCCI. The stakes on cricket have been driven to a new high. For a cricket-crazy country, Chandra holds the promise of nothing less than a revolution.

Once in a while another group firm, Essel Propack, the world's largest flexible packaging firm, too makes big news. Recently, it hit the headlines for preparing a bid for Alcan's packaging business.

Away from these headlines, Chandra has built up a sizeable business running lotteries. In 2006-07, his lottery brand Playwin did a business of Rs 2,400 crore (Rs 24 billion), more than his media (Rs 1,500 crore or Rs 15 billion), packaging (Rs 1,000 crore or Rs 10 billion), entertainment and real estate businesses. (The last two are closely-held and, therefore, their turnover is not public information.) You got it right -- media and packaging moghul Subhash Chandra's biggest business is now lotteries! This, mind you, is the business he started last -- just five-and-a-half years ago.

And it could get bigger if the plans drawn up by Chandra and his men work out. The Essel Group, as Chandra's business empire is known, hopes to end the current financial year with a turnover of Rs 3,000 crore (Rs 30 billion). Plans are in the making to grow the business abroad, run a casino off the Goa coast in international waters and take betting on horse races to pubs and clubs all over Maharashtra.

"It is not doing too badly. And, yes, we are serious about the lottery business," says Chandra's younger son, Amit Goenka. Like his father, Goenka too goes for regular detoxification exercises at ayurveda health and wellness clinics.

For this article too, Business Standard caught up with Goenka at one such clinic in Bangalore. Detoxification and casinos normally do not go together. But Goenka talks freely from the clinic about the group's plans to run casinos. Clearly, business comes first for him.

The Essel Group recently bought a ship for Rs 15 crore (Rs 150 million) and has applied for a licence to run a casino in international waters off the coast of Goa. The ship will offer machine games as well as live games over 20,000 sq feet of space. The group is spending $12-15 million (Rs 48-60 crore) to re-fit it into a casino by January. Customers will be ferried to the ship on speed boats.

As of now, only Goa permits casinos, and has some ships that offer casino games off the Goa coast, but these are very small in comparison to his scale, claims Amar Sinha, who was hired recently by Subhash Chandra to head Playwin. Other state governments are trying to amend their gambling acts against tremendous political pressure, and players like Kamlesh Vijay of the country's largest lottery operator, Sugal & Damani, says "We would be interested if some of these activities are legally allowed."

While horse racing is legal, Vijay says the government must take cognizance of various forms of "illegal gambling" — other than the lottery and racing, this includes betting on cricket, Internet gaming, TV game shows with prize money, even marketing promotions based on lucky draws.

Sinha, who is the managing director of Pan India Network Infravest, which runs Playwin, says this floating casino will target all Indians who currently go to casinos in Nepal, Macau and Thailand. The large number of foreign tourists who come to Goa, several of them in chartered flights, could also come to the casino.

He adds that several people go on luxury cruises because they throw open their casinos soon after hitting the international waters. They could also be his potential customers. The numbers could be significant.

Depending on the success of this venture, the company could upscale its operations off the Goa coast or open negotiations with other states for a similar initiative. "If the business grows, we could bring in a bigger ship. Casinos will be a part of the Essel Group, though the brand name will be different," says Goenka.

And the group is hopeful that other states too will look favourably at casinos and legal gambling in the days to come. "Recently, the Sikkim government allowed on-ground casinos inside five-star hotels within the state. This clearly shows that the government is slowly opening up to such projects," adds Sinha.

Till that happens, the Essel Group is all set to open another revenue stream. It has bagged the off-course betting rights from the Royal Western India Turf Club. Thus, it will offer betting options all over Maharashtra for horse races organised by the club.

At the moment people can place their bets by listening to radio commentary only. If extended to television, people can place their bets after seeing the horses on the screen -- on one of the Zee channels, of course -- and also watch the races.

Sinha says these betting centres will be opened at upmarket destinations where the well-heeled go. He expects this to result in revenues of Rs 200 crore (Rs 2 billion) straight away. "We have already started identifying properties in clubs, A-class restaurants and bars, three-star hotels and gymkhanas for these centres. The scheduled date to start this project is December 2007," he adds.

Globally, the lottery turnover is estimated at about $190 billion. In India, its annual turnover is around Rs 25,000 crore (over $6 billion). Chandra and his men know legal gambling is a business that will only grow as disposable incomes rise at a scorching pace in the country. Gambling, after all, goes back to mythological times and could well qualify as the second-oldest profession on earth.

Chandra got into the act in March 2002 with a simple value proposition -- offer lotteries through a technologically superior platform. Thus, Playwin customers don't have to buy a paper lottery with a unique number. They can put together their own number electronically at a kiosk or on the Internet.

Also, a number cannot be blocked -- the same number can be played by a large number of people. The draw of each lottery is done in the presence of a government functionary and its result is shown on Zee channels. Each draw is validated by professional services firm Ernst & Young.

Since lottery is a state subject, companies like Playwin bag the mandate to run these lotteries from the states. Playwin is running five Sikkim lotteries at the moment. It has also bagged a Rs 500-crore (Rs 5 billion) contract from the Punjab government for conducting additional lottery draws in the state from 1 September. It has 12,000 gaming kiosks spread over nine states.

Several states have banned lotteries and Playwin cannot put its kiosks in these states. Still, customers can log on to its website from any place as the server is based in Maharashtra, which allows lotteries. At the moment Internet-based and mobile-based lottery is a small part of Playwin's business -- only Rs 20 crore (Rs 200 million).

But the company feels it can be scaled up to Rs 100 crore soon. Still, the venture is yet to make big money for Chandra. For now, Playwin's profit margins are wafer thin. Last year, on a turnover of Rs 2,400 crore (Rs 24 billion), its net profit was just Rs 10 crore (Rs 100 million).

To begin with, the inbuilt costs of running a lottery leave little for the promoters. Almost 85 per cent of the turnover goes as prize money, 1 per cent is the state's share and another 4 per cent goes to the state government as betting tax. That leaves just 10 per cent, which has to accommodate all capital expenditure and commissions to channel partners.

Sinha says one reason for the low profits is that the company has made huge capital expenditure, which has shrunk its profit margins. "We have spent Rs 200 crore (Rs 2 billion) on a state-of-the-art hosting facility at Vashi. All the kiosks are imported from International Lottery and Totalizator Systems of US. The same company maintains the backend for us."

Before signing up with Chandra, Sinha has worked with liquor firms like Radico Khaitan, Shaw Wallace and Herbertsons as well as Sanjay Dalmia's tobacco firm GTC. The Playwin assignment completes his "ring of vice", Sinha loves to joke. But he'll need to pull every trick learnt on his earlier assignments to raise the profitability of Playwin.

For starters, competition has caught up with Playwin. Lottery operator Sugal & Damani, which has a turnover of Rs 5,000 crore (Rs 50 billion) per annum, has set up 20,000 betting terminals against Playwin's 12,000. It has been running lotteries under the Rajshree brand for 40 years and is a big player in the paper lottery market.

"We started online lottery after Playwin but it is nowhere near us now," says Kamlesh Vijay. Sugal & Damani designed and developed its own online lottery software inhouse. It has been so successful that it is now selling its software on system management and applications to lottery operators outside India.

Recently, it even bid for a UK lottery. "We have been appointed 'reserved bidder' for this prestigious lottery. That is, if the winner, which is UK's Camelot, cannot fulfill its promises, the contract will come to Sugal & Damani," says Vijay, adding: "We are close to signing deals with two countries for running their lottery business but I cannot name them yet."

However, Vijay admits that Playwin has managed to survive in the business, while others like Videocon, Apollo, Shapoorji Pallonjee and Essar did not make much headway. Some of these have even shut down. Still, there are other risks Playwin has to contend with.

As lottery is often seen as a social vice prevailing among the politically significant lower-income categories, states are not averse to banning it to earn a few brownie points if it threatens to become a social issue. Goenka is aware of this.

"There have been setbacks when some state governments banned lottery. Tamil Nadu was the first. Haryana, where we were present, also banned it, and a few months ago, so did Karnataka."

Since lotteries do not contribute in a significant way to the state exchequer, the financial cost of the ban is not significant. Chandra and his men especially need to watch out for a ban in Maharashtra from where Playwin hosts its online lotteries.

Much of the damage to the perception is done by illegal betting cartels being run in the country, Goenka says. Illegal gambling, it is estimated, is as big as legalised betting in the country.

All over the world, lottery operators do a lot of high-publicity charity work to remain on the right side of the law. To this effect, the Essel group has set up the Playwin Foundation to take up corporate social responsibility projects in the country. 

Even as its CSR initiatives gather momentum, the company is happy talking about the millionaires it has created. "Till date, we have created 72 jackpot winners, out of which 55 winners are crorepatis. We have also created more than 2,750 lakhpatis," Sinha says, adding: "In the five years since March 2002, we have distributed more than Rs 4,000 crore (Rs 40 billion) as prize money."

Still, in order to hedge itself against unforeseen risks in India, the group is in the process of taking its business abroad. "The lottery business' scalability will come from outside India," says Goenka. Globally, legalised betting is a huge business. So, the possibilities are huge too.

Chandra has set up a company in Singapore to invest in overseas betting businesses. So far, this company has made three investments in Cambodia, The Philippines and Kenya. On his radar screen are countries in the Asia-Pacific region, Africa and Central Asia -- countries where the culture of gambling and casinos exist.

What about the US, the largest such market in the world? "We will go there in partnership with some global leader in the business, but only after we have stabilised our business in these markets," says Sinha. Keep an eye on this space for more.

Using Lottery revenues to fund development project

Lottery may be banned in Delhi but it did not stop Sugal & Damani from writing to the government asking it to reconsider. "Our request stated we could generate Rs 700 crore (Rs 7 billion) as revenue for the government to fund the Commonwealth Games infrastructure,"  says Kamlesh Vijay, head of lottery at Sugal & Damani. 

They might not have been taken seriously, but Vijay insists that elsewhere in the world lottery revenues are used for major social and development projects. Lottery income in China will develop the infrastructure for the 2008 Olympic Games; the L400 generate in UK will go into old age pension schemes and maintaining heritage buildings.

Though some Indian state governments have banned lotteries, they stand to lose revenue on that account. Punjab, for instance, makes Rs 200 crore (Rs 2 billion) from lottery while the Maharashtra government makes Rs 100 crore (Rs 1 billion). 

The Lotteries Regulation Act, 1998 states that "no lottery will have more than one draw in a week".  Also, "the number of bumper draws of a lottery will not be more than six in a calendar year". A state government may ban sale of other state lotteries. However, the act allows the state government to sell lottery tickets either itself or through distributors or selling agents. And that is where companies like Playwin and Sugal & Damani come in.