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Monday, February 23, 2015


Scrip Code: 533200 TALWALKARS
CMP:  Rs. 347.55; Market Cap: Rs. 909.91 Cr; 52 Week High/Low: Rs. 373.40/ Rs. 145.25; Total Shares: 2,61,80,888 shares; Promoters : 1,39,80,923 shares –53.40 %; Total Public holding : 1,21,99,965 shares – 46.60 %; Book Value: Rs. 88.25; Face Value: Rs. 10.00; EPS: Rs. 15.40; Dividend: 15.00 %; P/E: 22.56 times; Ind. P/E: 41.57; EV/EBITDA: 10.47
Total Debt: Rs. 153.85 Cr; Enterprise Value: Rs. 1,059.59 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 came with an IPO on 23rd April 2010, offering 6,050,000 equity shares of Rs. 10 issued at Rs. 128 per share raising Rs. 77.44 Cr. The main object of the issue was to set up additional health clubs, repayment of certain unsecured loans availed by company and to met issue related expenses. 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 2014, it operated 150 gyms in 75 cities in India. The company is locally compared with Powerhouse Fitness ltd, T. Spiritual World, VLCC and globally compared with Life Time Fitness Inc of USA, Town Sports International Holdings Inc of USA, Fitness First PLC of London, Steiner Leisure Ltd of USA, The Sports Club Company of USA, Viva China Holdings Ltd of Hong Kong, Tosho Company Ltd of Japan, Meqalos Co ltd of Japan, 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:
Talwalkars is the dominant player with a market share of 12 % + in the Indian organized health club market which is about Rs. 70,000 Cr & is a play on growing awareness about fitness and a healthy lifestyle. It runs 102 owned Talwalkar centers, from which 15 are run through subsidiaries, 7 through franchise and 6 through trademarks; it also has 15 Hifi centers. Talwalkars has alliance with Zumba fitness - a Latin dance inspired fitness plan which has 1.4 Cr people taking weekly Zumba classes in more than 1,40,000 location across more than 151 countries. The wellness industry in India is poised to touch Rs 1,00,000 Cr (Rs. 1 trillion) by 2015 from Rs. 70,000 Cr presently showing a CAGR of 15-17 %. Despite having the world's second largest pool, less than 1 % of the urban Indian population holds health membership. This is paltry as compared to 3.11 % in the Asia-pacific and about 17.5 % in the US, which demonstrates a huge scope for growth. An IHRSA Global Report 2014 indicates that the global health club industry generated about $ 78 billion in revenues with a total club base of 1,65,300 units and over 13.8 Cr members in 2013. The same report pegs the total industry size by revenue in India at over $53.5 Cr, growing at about 5 % over the previous year, with a total base of 1,234 clubs and a shade of over 4,40,000 members. Talwalkars is the one of the top five fitness brand in India. The emergence of a new middle class which is more educated and aware of the importance of health and awareness and most interestingly, they also possesses a higher share of disposable income, this section of the society is a driving force behind the growth in the wellness segment. The importance of this demographic pool can be accurately appraised when one considers the fact that around 40 % of the Indian population will be between the age groups of 20 and 44 by 2016. The chunk of the population aged 40 years and above is expected to rise from 33 % in 2012 to 43 % by 2041. Also there’s a very low penetration level of less than 1 % of the Indian population in the fitness sector and hence, there exists a massive opportunity on headcounts to be approached by the health industry over the coming years towards raising fitness awareness and driving enrollments. With increasing disposable income and clear fitness aspirations, this set of consumers is more inclined to spend on health, fitness and wellness services. Moreover, the youth population is expected to rise to 42.7 Cr by 2015, creating a strong potential market for alternative sources of fitness like aerobics, yoga, Zumba programme and holistic dietary regimes. With increasing global and media exposure, many consumers today believe that to look good is equals to feel good and hence give more emphasis on a health care and fitness. Wellness today is not just a metro phenomenon but consumers across Tier II and Tier III cities are also seeking wellness solutions to meet their lifestyle challenges. The wellness industry is a field of healthcare focused on improving everyday health and state of wellbeing rather than simply treating a disease or curing illness. With the new government at the centre, the Indian GDP growth is expected to improve significantly over the next two to three years. Improved economic growth will lead to better lifestyle and benefit the wellness industry going ahead. Also Talwalkars plans to set up its First Recreation and Sports Club and has an existing alliance with DLL that was entered into in 2012. The Company has sustained this relationship with DLL, offering consultancy services for setting up clubs in townships and gated communities. Talwalkars has plans to set up clubs in India which will be having facilities like GYM, Sports Training, Entertainment Zone, Banquet hall, Recreation centre, Restaurant, Swimming Pool & Racquet Sports. The target audience for Clubs would be gated communities, high end residential townships, corporates campuses. For this the Company has identified land near Baner, Pune to start the first recreation and sports club. This will be part of a prestigious town ship by a reputed builder in the city. A club, if positioned at a reasonable membership cost could become a great business proposition. The capital investment for the club is around Rs. 53 Cr. It will be set up in area of 45,000-50,000 sq. feet with a built up area of 80,000- 90,000 sq. ft. and the set up time for the same would be around 18 months & will have member’s capacity of around 7,000-8,000. Talwalkars also wants to mark its presence in different geographies and so has partnered with a local partner. A separate 51 % subsidiary is set up and the Capex is shared. The partner pays royalty to the parent for the brand and management of the health club. There are 16 such clubs under operation. Subsidiary format provides Talwalkars with higher ROI due to lower capex. This 51 % subsidiary approach on a franchise basis has been proved successful by the Company’s subsidiaries, namely Denovo Enterprises Private Limited- a subsidiary of Talwalkars, is sharing 38 % of the total gym count under the subsidiaries head. Denovo’s health clubs are operational in Northern and Western India, Equinox Wellness Private Limited - is a step-down subsidiary of Talwalkars (direct subsidiary of Denovo Enterprises Private Limited). Equinox has its health club operational in Eastern India, Aspire Fitness Private Limited - a subsidiary of Talwalkars, is sharing 38 % of the total gym count under the subsidiaries head. Aspire’s health clubs are operational in Western India and Jyotsna Fitness Private Limited - though relatively new entrant in the list of subsidiaries, it is following the same quality footsteps as that of Talwalkars. Jyotsna Fitness’s health clubs are operational in Western India. These subsidiaries of Talwalkars in total, accounts for 14 % of the consolidated net sales & 13.1 % in the net profits in the books of Talwalkars. Denovo & Aspire are the major subsidiaries. Further, the company has recently floated Talwalkars Club Private Limited as its wholly-owned subsidiary company to own and manage recreational clubs by providing all kinds of sports, games, recreational and hospitality facilities. These new initiatives by Talwalkars 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.

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. Talwalkar Better Value Fitness as a company is focused on addressing the fitness deficit in India. Over the years, Talwalkars has enriched its brand through a conscious positioning around fitness, training knowledge, diverse offerings and uplifting health club environment. Company has been prudently positioned as an affordable brand addressing a growing customer base with increasingly diverse requirements. This strategy of company has paid off in terms of company’s ability to reach out to a large potential customer base and attract more members. Nowadays fitness is not only about gymming; it is also about peripheral areas comprising a healthy diet, dance-based fitness program, spa, massage, aerobics and yoga and that is where company is also focusing on, since in a country like India there seems to be huge market for such services. Over the years, Talwalkars has diversified and branded these offerings, and this has helped to enhance the proportion of these value added services from 18-20 % in 2011-12 to 22-23 % in 2013 -2014, going ahead they expect to enhance the proportion of these value-added offering. The company also being able to retain its renewal rate 70-76 % at a time when there is a fear of membership attrition. The company has added overall 14 new health clubs across India (owned aswellas franchisees) during FY14, taking its total gym count to 149 (103 own gyms, 16 subsidiaries, 13 franchise & licensed gyms and 17 HiFi gyms) with around 1.4 lakh members. Going forward, the company will continue its new health club expansion by carefully choosing locations, which will yield incremental RoCE of 25 % on an ongoing basis. The company will also focus on driving profitability across the system through active marketing of value-added services and improving same-store sales from current 4-5 % to 8-10 %. With favourable demographics and volume expansion, it is expected that the FY15-17E gym count to increase at CAGR of 8.0 % to 175 gyms by 2017E. 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. The Company plans to open 20-25 fitness centres within the next 2 quarters and 100 fitness centres over the next three years and has plans to reach 100 towns in three years. This includes the plans to expand the Hi-Fi gyms to 30 over the next three years. Under the signed master franchisee for establishing 30 HiFi fitness centres in Tier-III and IV towns over the next three years, Talwalkars would be launching soon in Aurangabad, Jalna, Osmanabad, Parbani and Udgir. Going forward fitness centres in the Franchise format has also been initiated in Bhilwara, Jagatpura (Jaipur) and Patna. The company would expand the gyms in a well measured and steady manner through ownership as well as profitable franchise route after carefully assessing the market situation, demand & the extent of profits generated from existing assets (Same Store Sales growth). The company would ensure that the fitness centres would be opened in locations which can yield a higher ROCE of 25 % on an ongoing basis. Along with new gym additions, Talwalkars is expected to continue to focus on improving its SSS growth through higher share of Value added services (VAS) and increase in membership base. Talwalkar’s priority would be to enhancing throughout from each of its fitness centres and growing the proportion of value-added services being provided. In line with this, it expects to increase same-store sales to 8-10 % (H1FY15 SSS growth already at 8.9 % annualized) from around 4-5 % in FY14. Same store sales focus give an indication that value added per store is gaining significance as a driver of sales rather than just being volume driven. Talwalkar's revenue has grown at a CAGR of 26 % over the last 3 years largely driven by volume growth of 17 %, while its net profit has grown at a CAGR of 32 % over the same period on account of margin expansion. It can be expected that company's revenue to grow by 20 % in FY15e and by 22 % in FY16e. Talwalkars maintained healthy momentum in revenues with growth of 29 % yoy in what is seasonally a lean quarter for the company. Same store sales improved to 10.2 % yoy from 8.9 % in a challenging environment for discretionary spending. During the quarter, value added services grew at a healthy pace which led to 0.50 % uptick in margins. An improved operating performance and lower tax rate led to 26 % yoy rise in PAT. Company locked in 8‐9 gym locations across Delhi, Mumbai and other locations at attractive long term rentals. It also completed land acquisition for leisure club in Pune from Kolte Patil group and approvals are expected in the next 4‐5 months. In January 2015, company opened its first premium gym of 10,000 sq ft in Banjara Hills, Hyderabad with basic membership fees of Rs. 22,000 to Rs. 24,000 as compared to the regular Rs. 15,000 to Rs. 18,000 and 80 % of existing customers of Banjara Hills have shifted to the new gym; company would look to open more such premium gyms in metros and Tier I locations with obvious positive implications from a margin perspective. These new initiatives will help 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. Improved economic growth could result in increased spending power and benefit the wellness industry going forward. It is expected that the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also.

SALES ( Crs)209.50256.60314.90386.40
NET PROFIT (₹ Cr)36.6047.1055.7066.90
EPS ()14.0018.0021.3025.60
PE (x)23.5018.2015.4012.80
P/BV (x)3.602.902.502.10
EV/EBITDA (x)11.208.507.005.70
ROE (%)15.2016.1016.0016.10
ROCE (%)15.8016.7018.5019.10

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