TALWALKARS BETTER VALUE FITNESS LTD : FITS THE BEST AS VALUE PLAY !!!

Scrip Code: 533200 / TALWALKARS

CMP:  Rs. 118.95; Buy at Rs. 113 - 119 levels.

Short Term Target : Rs. 150.00; Medium to Long term Target: Rs. 190; STOP LOSS – Rs. 110.40; Market Cap: Rs. 314.17 Cr; 52 Week High/Low: Rs. 223.70 / Rs. 109.05;

Total Shares: 2,61,80,888 shares; Promoters : 1,43,40,923 shares –54.78 %; Total Public holding : 1,18,39,965 shares – 45.22 %; Book Value: Rs. 77.25; Face Value: Rs. 10.00; EPS: Rs. 10.69; Dividend: 15.00 % ; P/E: 11.19 times; Ind. P/E: 13.09; EV/EBITDA: 5.58

Total Debt: Rs. 139.97 Cr; Enterprise Value: Rs. 430.34 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.  It has 128 health clubs comprising 15 franchised gyms under HiFi brand and in 68 cities 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. In April 2012, Talwalkars through its subsidiary opened a health club in Gandhinagar. In April 2013, it opened its six new health club one each in Ahmedabad, Hyderabad, Kolhapur, Kalwa, Mira Road and Surat. As of June 2013, it operated 144 gyms in 75 cities in India. The company is globally compared with Misonoza Theatrical Corporation of Japan, Media Create Company Ltd of Japan, Social Ecology project Company Ltd of Japan and with Kaquetsuenkanko Co.,Ltd which is also based in Japan.

Investment Rationale:

The management stated that as of August 2013 it had 102 owned Talwalkar centers, 15 through subsidiaries, 7 through franchise and 6 through trade marks , it also had 15 Hifi centers. Talwalkars has alliance with Zumba fitness - a latin dance inspired fitness plan has 1.4 Cr people taking weekly Zumba classes in more than 1,40,000 location across more than 151 countries. Talwalkar in the current quarter has expanded its presence in different segments like weight loss brand name “Reduce”, alternate form of fitness Zumba and NuForm. The company has extensively increased the number of “Reduce” centres to 44 from 17 in the last quarter, increasing administrative expenses this quarter. Zumba centres have increased to 31 from 29 on a QoQ basis with over 300 certified Zumba trainers. The new initiatives with premium pricing have helped the company to leverage on its current asset and enhance its member base without incurring any major capex. Some of these activities can also be developed as standalone services outside the fitness centre. Currently, large corporates, including MNCs, are availing the Zumba programme and NuForm. The company is actively looking at other avenues like schools, colleges, home based services, etc. TBVF has also extensively increased the number of “Reduce” centres to 44 from 17 in the last quarter. “Reduce” is also offered as “Home based Reduce”, primarily catering to HNI and corporates at their door step. This is an minimal capex required model. Hence, it has an incremental positive impact on the profitability of the fitness centre. These new initiatives have helped the company to leverage on its current asset and enhance the member base without incurring any major capex. Pricing for new initiatives is at a significant premium. This would help the company to improve its margins, going forward. Talwalkars has also tied up with David Lloyd Leisure: which has over 30 years of unmatched experience in the development and operation of leisure and sports clubs. The very same insights and know-how will now be available to Talwalkars for starting and consulting for sports and leisure clubs in India. TBVF’s HiFi gyms capex requirement is about half of a full service gym and their membership rates are 60 % of those for regular gyms. The company is rolling out HiFi gyms through the franchisee route thereby eliminating funding needs for roll out. In return for gym management, TBVF will earn royalty income at the rate of 6 % of revenues for first three years and 8 % thereafter. Talwalkars would also receive a one-time royalty income and equipment supply charge to the tune of Rs.10,00,000 each. HiFi gyms offer faster roll out since each roll out usually takes 8-10 weeks compared to 14-16 weeks for typical Talwalkars gym.

Outlook and Valuation:

Talwalkars Better Fitness Value ltd is a play on the growing healthcare market in India. It has a strong brand name and is now capitalizing, with rapid expansion. Gym is a highly localized business in the sense it needs to be easily accessible to local population at an affordable price (at least from a mass market perspective). Talwalkars has managed to break away from its peers and now leads the scale pack with 145 gyms on consolidated basis. There is a vast opportunity exists for further scale building considering the fragmented nature of industry. For instance, market share of the top 5 players by no. of clubs is just 16 % compared to global top 5 average of about 40 %. Talwalkars has a decent spread-out across the North, West and South regions which together accounts for 94 % of the total gyms. It is also targeting different price segments with roll out of both regular as well as ‘low cost’ HiFi gyms especially in those tier II/III cities which may not support a full service Talwalkars’ gym. Talwalkars Better Value Fitness (TBVF) performed better than the market expectations on the topline front in Q1FY14. The Operating revenues grew by 31 % YoY to Rs. 37.4 crore mainly attributable to new initiatives such as NuForm, Zumba® and Reduce, accounting for around 18-22 % of the turnover. The Operating margins were in line with the markets estimates while the employee costs moderated to 2 % during the quarter. However, one-time administration expenses incurred on the launch of Reduce kept the EBITDA flat YoY. Though finance costs increased 18 % YoY, PAT has increased 22.6 % YoY to Rs. 3.2 crore due to various cost efficiencies. Despite the bad monsoons taking a hit on member additions the company was able to meet expectations and it is expected that there will be a renewed stimulus in demand from the next quarter for both its value-added and flagships products. 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 28x to 36x, internationally the firms owning sports and fitness centers have been valued at an Ev/EBITDA of 6 to 9 times, while Talwalkars enterprise value stands at 5.39 times its EBITDA. At the current market price of Rs. 118.95, the stock is trading at 7.43 x FY14E and 5.53 x FY15E respectively. Earnings per share (EPS) of the company for FY14E and FY15E are seen at Rs. 16.00 and Rs. 21.50 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. 190.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 150.00 

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	130.50	168.80	212.30	267.80
NET PROFIT (₹ Cr)	22.00	30.10	42.00	56.40
EPS (₹)	9.10	11.50	16.00	21.50
PE (x)	14.20	11.30	8.10	6.00
P/BV (x)	2.20	1.60	1.40	1.10
EV/EBITDA (x)	8.50	6.50	5.10	4.00
ROE (%)	15.30	14.40	16.80	18.40
ROCE (%)	14.60	15.50	17.70	20.20

I would buy TALWALKARS BETTER VALUE FITNESS with a price target of ₹ 150 for Short term and for the Medium to Long term the target would be ₹ 190. 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 ₹ 110.40 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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