TALWALKARS BETTER VALUE FITNESS LTD :Spreading Fitness !!!

Scrip Code: 533200 / TALWALKARS

CMP:  Rs. 166.00; Buy at current levels. Short term Target: Rs. 210, 6 month Target – Rs. 250; STOP LOSS – Rs. 152.75; Market Cap: Rs. 400.32 cr; 52 Week High/Low: Rs. 306.80 / Rs. 157.70

Total Shares: 2,41,15,672 shares; Promoters : 1,43,45,856 shares –59.49 %; Total Public holding : 97,69,816 shares – 40.51 %; Book Value: Rs. 51.74; Face Value: Rs. 10.00; EPS: Rs. 6.21; Div: 10.00 % ; P/E: 26.73 times; Ind. P/E: 26.33; EV/EBITDA: 19.00

Total Debt: Rs. 111.38 cr; Enterprise Value: Rs. 511.70 cr.

TALWALKARS BETTER VALUE FITNESS LTD: The Company was founded in 1932 and is based in Mumbai, India.  Talwalkars Better Value Fitness Limited (TBVF) was formerly known as Talwalkars Better Value Fitness Private Limited. The company operates a fitness chain in India. The company offers a suite of services, including gyms, spas, aerobics, nutrition counseling, physiotherapy guidance, yoga classes and health counseling under the ‘Talwalkars’ brand.  The Company has an 8,000 square feet residential training academy at Thane. The training academy offers about 4 to 6 weeks of training program for its staff joining at the new centers.  As of May 11- 2011, it had 102 health clubs in 52 towns and had more than 75,000 members. Its health clubs/training centers are located in Andhra Pradesh, Gujarat, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal.

Investment Rationale: Talwalkar Better Value Fitness (TBVF) is the largest health club player in India and amongst top 20 in the world. It is an early entrant into the health club market in India and has been able to build a strong brand name by providing high quality gym equipment and services. The fitness market size in India is estimated to be US$113 mn. The penetration of fitness market in India is 0.4 % taken for top 7 cities which are significantly lower than other nations like China 2.3 % & Japan 3.1 % & 3.7 % in Asia Pacific region. In India - the total number of fitness clubs are around 765 and number of membership are around 23,00,000. The industry is highly fragmented with many standalone gyms. This industry is in the early growth stages with little differentiation and high price sensitivity. A growing economy, growing income, increasing urbanization, improving lifestyle and higher health awareness in India will result in higher penetration of fitness market. As TBVF is the largest player in the market with a strong brand it will be a major beneficiary of this growing market. TBVF has a strong brand name in the health club market in the country. It has been able to provide high quality equipment with good service which has thus enabled it to be a prominent player in the otherwise fragmented market. TBVF is one of the first movers in the industry and has a pan India presence about 50 towns which will enable it to cater to the widespread market. TBVF will increase its owned gyms by double to 143 gyms by FY13. TBVF had raised Rs. 77.40 Cr in 2010 through an IPO to repay its high cost debt of Rs. 20.6 Cr and to fund its expansion plans for 27 gyms for Rs 50.2 Cr. The company has been able to deploy the funds as per expected use and will now require no further dilution for its future growth plans of 35 gyms each by FY13. With no further dilution required and the benefits of expansions to come, the return ratios are going to improve;It is expected that ROE to be around 20 % & ROIC – 13.7 % by FY13. TBVF had a debt-equity ratio of 2.1 x in FY10. Post the IPO the debt-equity has come down to 0.7 x in FY11.

Outlook and Valuation:

In India, as per United Nations the percentage of urban population is going to increase from 30 % in 2010 to 54.2 % by 2050. Increasing urbanization will result in greater usage of fitness club due to higher health awareness and growing lifestyle diseases. India has a young population and it is expected that the population will continue to remain young for the next two decades. Currently 65 % of the population is between the age of 15 - 64 and it is expected that 68 % of the population in 2030 will remain in this age group. It has been globally seen that the people in the age group of 18-54 tend to exercise more. As per TBVF every city/town with a population of 6,00,000 can accommodate one health club of its kind. The growing urbanization will thus increase the number of towns/cities with a population greater than 6,00,000 whereby further expanding the potential market for TBVF. The combination of a young population, higher literacy and increased awareness will result in increased number of people having membership of fitness clubs. As TBVF is one of the major players in the health club market in India with a pan India presence and has a first mover advantage it stands to gain tremendously. TBVF target markets are geographies where the population is greater than 6,00,000. TBVF gets 800-900 members within the first year of operations of the health club and 1,000 members within 18 months. The membership fee is around Rs. 13,000-15,000 p.a. and the payback period for a health club is around 3-4 years. TBVF besides having its own gyms models also has franchisees models. It has 7 franchisees & it charges 6 % - 8 % of revenues as royalty. The company plans to focus on opening more of its own gyms. TBVF in April, 2011 has announced to enter into the Tier III & Tier IV cities with the launch of HiFi Gyms. These gyms will be priced lower than the existing gyms and will have lesser facilities but will have similar operating margins as the current gyms. TBVF is opening 70 new owned gyms during FY12-FY13 across India and these are expected to contribute to the top line and bottom line. TBVF will be able to show CAGR in Revenue/PAT of 41%/38% during FY11-13. TBFV is a play on the growing healthcare market in India. It has a strong brand name and is now capitalizing, with rapid expansion. There are not any listed comparable players and thus its closest comparable peers are the consumption companies like Jubilant Food works, Page Industries, Titan Industries etc which trades at an average PE of 28 x FY13. 

At the current market price of Rs. 166.00, the stock is trading at 20.24 x FY12E and 13.07 x FY13E respectively. Earnings per share (EPS) of the company for FY12E and FY13E are seen at Rs. 8.20 and Rs. 12.70 respectively. It is expected that the company will keep its growth story intact in the coming quarters also. One could BUY TALWALKARS BETTER VALUE FITNESS LTD with a target price of Rs. 285.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 210.00
PEER COMPARISON OF TBVF WITH OTHER GYMS

METRICS	TBVF	GOLD GYM	FITNESS FIRST	FITNESS ONE
No. of Health Clubs	100	55	03	31
Size of Gym (Sq ft)	4,000 - 5,000	6,000 - 8,000	14,000 - 22,000	15,000 - 18,000
Avg.Fees/per annum (appx.)	14,000 - 16,000	16,000 - 18,000	24,000 - 35,000	16,000 - 18,000

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	66.10	102.30	148.50	203.90
NET PROFIT (Rs. Crs)	8.20	16.00	19.80	30.70
EPS (Rs.)	3.40	6.60	8.20	12.70
PE (x)	48.30	24.50	19.90	12.80
P/BV (x)	9.50	3.10	2.70	2.30
EV/EBITDA (x)	19.00	12.20	9.10	7.00
ROCE (%)	26.40	19.00	14.50	19.40
RONW (%)	11.00	11.10	11.12	13.70

I would buy TALWALKARS BETTER VALUE FITNESS LTD with a price target of Rs. 210 for the short term and Rs. 285 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 152.75 on every purchase.