talwalkars better value fitness rating: buy best...

Sector: Miscellaneous

Sector view: Positive

Sensex: 18,714

52 Week h/l (Rs): 195/107

Market cap (Rscr) : 434

6m Avg vol (‘000Nos): 96

Bloomberg code: TALW IN

BSE code: 533200

NSE code: TALWALKARS

FV (Rs): 10

Price as on Oct 15, 2012

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Promoters FIIs Others

Rating: BUY Target: Rs235

CMP: Rs180

Upside: 30.6%

Company ReportOctober 16, 2012

Research Analyst: Bhavesh Gandhi

[email protected]

Change in Estimates Rating Target

Best Fit Talwalkars Better Value Fitness (TBVF) offers a unique opportunity to play the growing importance of fitness combined with increased penetration of organized players. TBVF itself has been on a strong growth momentum as reflected in 1) ~2x jump in owned gym base and 2) robust revenue/PAT cagr of 36%/68% over FY10‐12. In addition, company has unveiled fresh initiatives like ‘HiFi’ gyms (for rural reach), ‘NuForm Studios’ (standalone high street studios aimed at upper end of consumer strata) and ‘Zumba’ (aerobics) which would increase penetration and raise brand awareness. We project consolidated gym base of 199 by end of March 2014 of which 13%/17% would be housed in subsidiaries/HiFi gyms. Stock currently trades at the lower end of its historic 1‐yr fwd PE range; valuations are supportive at ~11x FY14 PE given an estimated 35% PAT cagr over FY12‐14. We retain our BUY rating with a revised 9‐mth target of Rs235 (earlier Rs190). Healthy growth to continue in core gym business TBVF has managed a robust 27% gross revenue cagr in its owned gym business over past two years on the back of ~2x jump in owned gym base to 90 in FY12. Although, the pace of owned gym expansion would not mimic FY10‐12 rise, we still expect standalone gym revenues to post a 22% cagr over FY12‐14 on an owned gym base of 122 by FY14. New initiatives to ensure revenue buoyancy continues A slew of steps undertaken in FY12‐13 would ensure that revenue momentum continues beyond FY13. These include 1) HiFi gyms introduced as no‐frills gyms in rural areas that would not support full‐fledged Talwalkars gym 2) NuForm studios at premium locations aimed at upwardly mobile for weight loss though Electro Muscle Stimulation. We expect these initiatives to account for ~15% of gross revenues in FY14 from a negligible level in FY12. Key risks to our reco include higher than estimated rental costs and lower per unit revenue from gyms in rural areas.

Financial summary Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Revenues 928 1,194 1,572 2,001

yoy growth (%) 43.0 28.6 31.7 27.3

Operating profit 401 543 725 926

OPM (%) 43.1 45.5 46.1 46.3

Reported PAT 160 221 283 403

yoy growth (%) 106.0 37.5 28.4 42.3

EPS (Rs) 6.7 9.1 11.7 16.7

P/E (x) 27.1 19.7 15.3 10.8

P/BV (x) 3.5 3.0 2.6 2.1

EV/EBITDA (x) 13.2 10.5 8.1 6.2

Debt/Equity (x) 1.0 1.1 0.9 0.7

RoE (%) 19.1 16.3 18.1 21.5

RoCE (%) 16.4 15.2 17.8 21.3 Source: Company, India Infoline Research

Talwalkars Better Value Fitness


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HiFi gyms to accelerate rural roll out In order to accelerate roll out in Tier II & Tier III cities, Talwalkars has conceptualized gyms under the ‘HiFi’ brands. These would be rolled out in areas with population of 0.3‐0.5mn which otherwise may not have supported a full fledged Talwalkars gym. These are typically ‘no frills’ gyms with area of ~2,500‐2,800sq ft, about half of that for a regular gym. 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 would roll 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. HiFi gyms offer faster roll out since each roll out usually takes 8‐10 weeks compared to 14‐16 weeks for typical Talwalkars gym. Moreover, rental costs in these locations are more than proportionately lower when compared to the (reduced) membership fees, which can create enough potential for margin upside in such a format. Comparison of gym formats Parameter Talwalkars HiFi

Area (sq ft) 4,500‐5,000 2,500‐2,800

Capex (Rs mn) 17.5‐20 7.5‐9.5

Fee (Rs) 13,000‐15,000 8,000‐9,000

Cities Metros, Tier I & II Tier III & IV

Positioning Health, Fitness & Wellness Health & Fitness

Upfront royalty NA Rs2mn

Ongoing royalty NA 6‐8% of revenues Source: Company, India Infoline Research

Talwalkars to incur no capex for HiFi gyms Business model for HiFi gyms

Talwalkars capex Nil

Royalty to TBVF on revenue

For 1st 3 years 6%

Royalty thereafter 8%

One time income (Rs mn)

Upfront royalty 1

Equipment supply 1 Source: Company, India Infoline Research

Revenue forecast: HiFi gyms HiFi gyms FY13E FY14E Revenue/gym (Rs mn) Mature 9 9 New 4 4 Gym base Existing 4 20 Addition 16 14 Total 20 34 HiFi franchisee revs 100 236 HiFi royalty revenues 39 45 Upfront Royalty from Franchisee 32 28 Royalty from Franchisee 7 17

Source: Company, India Infoline Research

HiFi gyms to improve rural brand awareness with faster roll outs, lower pricing and no commensurate funding needs (as roll outs through franchisee route)


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NuForm to expand brand reach Talwalkars has launched the concept of NuForm gym studio which uses various technological tools for focused weight loss though Electro Muscle Stimulation (EMS) and diet counseling along with food products. The EMS sessions are for just 20 mins per week (52 sessions in a year’s membership fee) and utilize Miha machines which have been used by users at more than 1,500 centres across Germany and rest of Europe. The target segment consists of upwardly mobile customers in metro and Tier I cities that avoid gyms due to shortage of time, ageing or health issues. The company currently operates 6 NuForm studios in Mumbai with a member base of ~360. Each studio is housed in an area of ~1,200 sq ft with a staff of about 7‐8 that has been trained specifically for the job. Both revenues and capex for NuForm studio is pegged at ~Rs10mn and business can generate robust RoCE as indicated below. Since the membership fee at Rs42,000 pa is ~2.3x that of regular Talwalkars gym and comes with fixed timings, we expect NuForm studios to operate on standalone basis at premium/central locations.

NuForm can operate at ~37% RoCE NuForm financial working Rs mn

Revenue/NuForm studio 10

Operating costs 5.3

Rent 2.0

Salary 2.0

Electricity & others 0.8

Marketing 0.5

EBIDTA 4.7

EBIDTA margin (%) 47.0

EBIT 3.7

EBIT margin (%) 37.0

RoCE 37.0 Source: Company, India Infoline Research

NuForm gym studio Details

Capex (Rs mn) 10

Opex 5.3

Revenue/member (Rs pa) 42,000

Capacity/studio 500

Current no of studios 6 Source: Company, India Infoline Research

Revenue forecast: NuForm studios NuForm FY13E FY14E

Revenue/Store (Rs mn)

Mature 10 10

New 5 5

Existing ‐ 7

Addition 7 3

Total 7 10

NuForm revenues 35 85 Source: Company, India Infoline Research

Aimed at the upwardly mobile market, NuForm is a new initiative that focuses on weight loss through electrical simulation to muscles along with diet counseling and food products


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Owned expansion to continue at steady pace Talwalkars would continue to expand its core gym base on onwership basis even as it looks to expand brand reach/awareness through franchisees, HiFi and NuForm studios. It ended FY12 with about 90 owned gyms and we expect it to add another 32 owned gyms in the next two years. We continue with our assumption of ~Rs17mn/Rs5mn in per gym revenues in the mature/new (<1 year of operations) phase.

Revenue forecast: owned gyms Owned gyms FY12 FY13E FY14E

Revenue/gym (Rs mn)

Mature ‐ 17 16

New (<1 year of ops) ‐ 5 5

Existing 67 90 108

Addition 23 18 10

Total 90 108 118

Standalone revenues (gross) 1,031 1,361 1,543 Source: Company, India Infoline Research

Growth in gym base FY10 FY11 FY12 FY13E FY14E

Talwalkars 44 67 90 108 122

Subsidiaries ‐ 10 10 18 26

Franchisees 5 7 7 7 7

Trade mark licenses* 10 10 10 10 10

HiFi ‐ 4 20 34

Total 58 90 121 163 199 Source: Company, India Infoline Research * includes 6 legacy gyms + 4 gyms of Life Fitness India

Standalone gym base to expand at 16.4% cagr over FY12‐14 which would support ~22% compounded rise in revenues over the same period

Trend in owned gym additions Standalone rev cagr of 22% over FY12‐14

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Subsidiaries’ share to improve in next 2 years Talwalkars has 4 subsidiaries namely Denovo Enterprises, Aspire Fitness, Equinox Wellness and Jyotsna Fitness. The FY12 subsidiaries’ revenues amounted to Rs208mn with total PAT of Rs57mn derived from a gym count of 10. We expect subsidiary revenue share to increase yoy in FY14 as company owned gym expansion enters a stable growth phase. We assume 8 gyms to be added between the four subsidiaries in each of the next 2 years taking total subsidiary gym count to 26 by March 2014.

‘Zumba’ initiative to aide revenues at existing sites Along with NuForm, company has also embarked on another initiative called ‘Zumba’. It is a fitness program, first introduced in 2001, that has become the largest dance‐fitness program. It is practised by more than 12mn people taking weekly Zumba classes in over 110,000 locations across 125 countries. The company has introduced Zumba fitness pogram at its existing gym base. Unlike NuForm, Zumba requires much less area (~200 sq ft with 3‐4 sessions/day) and is currently operational at 15 sites for a monthly membership fee of Rs2,500 and nominal capex of Rs1.5‐2mn per site. TBVF eventually plans to cover all its owned gyms in a phased manner though for now Zumba would not be offered in its franchisee gyms. Zumba offers an opportunity for increased brand awareness amongst existing customer base with little incremental capex.

Revenue forecast: Zumba Zumba FY13E FY14E


Mature 5 5

New 3 3

Existing ‐ 25

Addition 25 30

Total 25 55

Zumba revs 63 200 Source: Company, India Infoline Research

Subsidiaries to add a total of 8 gyms in each of next two years and account for ~14% of consolidated revenues in FY14

Zumba is a form of dance‐fitness program and does not require much upfront investments

Owned gym count share to reduce over FY12‐14 Trend in subsidiary revenue share

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Talwalkars revenue forecast Owned FY12 FY13E FY14E

Revenue/gym (Rs mn)

Mature ‐ 17 16

New (<1 year of ops) ‐ 5 5

Existing 67 90 108

Addition 23 18 14

Total 90 108 122

Standalone gross revenues 1,031 1,361 1,543

Subsidiaries

Existing 10 10 18

Addition ‐ 8 8

Total 10 18 26

Subsidiaries revenues (gross) 208 211 306

HiFi gyms

Revenue/gym (Rs mn)

Mature 9 9 9

New 4 4 4

Existing ‐ 4 20

Addition 4 16 14

Total 4 20 34

HiFi franchisee revs ‐ 100 236

HiFi revenues ‐ 39 45

Upfront one‐time fee ‐ 32 28

Royalty ‐ 7 17

NuForm


Mature 10 10 10

New 5 5 5

Existing ‐ ‐ 7

Addition ‐ 7 3

Total ‐ 7 10

NuForm revs ‐ 35 85

Zumba


Mature ‐ 5 5

New ‐ 3 3

Existing ‐ ‐ 25

Addition ‐ 25 30

Total ‐ 25 55

Zumba revs ‐ 63 200

Consolidated revenues (gross) 1,305 1,727 2,198 Source: Company, India Infoline Research


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Capex/sales to decline as own gym additions slow Expect TBVF to be free CF +ve by FY14

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Operating cycle to remain stable; expect free CF by FY14 Working capital cycle eased slightly in FY12 to 72 days from about 80 days in the previous year. We built in a similar level of operating cycle duration over the next two years. On the cash flow front, company is set to be free cash flow positive by next year as operating cash flow of Rs516mn suffices for FY14 capex leaving ~Rs125mn in free cash flow.

Working capital cycle to remain stable WC days FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Debtors 6 9 4 18 80 61 61 61

Loans & advances 101 75 61 61 87 68 69 69

Creditors 36 64 87 66 42 12 12 12

Other curr lia ‐ ‐ ‐ ‐ 27 14 15 15

Provisions 8 14 17 32 17 31 29 30

Net WC days 63 6 (38) (18) 80 72 74 74

Margin to remain stable, return ratios to improve Operating margin has gained 447bps over the past two years as rise in staff costs expectedly lagged gym growth. Although, we expect the trend to continue, the pace of OPM expansion could be slower as incremental rise in marketing costs eat into lower staff expenses. However, improved asset turnover and EBIT/PAT margin would support RoE, RoCE expansion.

Working capital cycle eased slightly in FY12 and we build in similar level of duration in FY13/14

OPM to remain stable as gains in staff expenses could be largely countered by higher marketing expenses Return ratios to increase driven by improved asset turnover and EBIT/PAT margins

OPM to remain stable Return ratios to inch up

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Valuation support, high growth phase support our BUY Talwalkars has build up scale in the gym business with about 130 gyms on a consolidated basis in ~69 towns and cities. It offers a unique play on the fitness market and the scope of opportunity is immense considering the low share of organized market. TBVF has posted a strong 36%/68% cagr in revenue/PAT over FY10‐12 driven by ~2x rise in total gym base. Operating margin too has increased 447bps as staff costs have expectedly seen slower rise compared to growth in gym base. Over the next two years, we expect new initiatives like HiFi, NuForm and Zumba to be the new growth drivers even as owned gym business chugs along at a steady pace. Based on 65% jump in total gym base, we factor in 29%/35% revenue/PAT cagr over FY12‐14. The stock is available at 11x FY14E earnings which places it at the lower end of historic 1‐yr fwd range. Attractive valuation, sustained high growth phase and a 6.4% upward revision in FY14 EPS continues to support our BUY reco for an updated 9‐mth target price of Rs235 (earlier Rs190). Key risks to our recommendation include higher than anticipated rent costs (which forms ~8‐10% of revenues) and marketing expenses (due to unorganized nature of the market which may entail higher spends for brand awareness).

TBVF offers a unique opportunity to play the fast growing fitness market New initiatives like HiFi, NuForm and Zumba to help diversify from a standalone gym business and support revenue buoyancy beyond FY13

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Company background TBVF is amongst the largest fitness chains in India offering a wide range of services including gyms, spas, aerobics and health counseling under ‘Talwalkars’. Co‐promoted in 2003 by the Talwalkar and Gawande Groups, it has pioneered the concept of gyms in India. TBVF enjoys healthy brand recall which helps in breaking the competitive clutter within the industry. The history of the brand ‘Talwalkars’ can be traced to the year 1932, when the late Mr. Vishnu Talwalkar set up the first gym in Mumbai. The company currently operates ~130 gyms in 69 cities/towns serving over 126,000 members. The company accounts for largest market share in the organized health club market in India which itself is just 10% of the total, presenting huge opportunity for growth. It has recently taken steps to migrate from being gym‐centric to fitness by introducing new initiatives such as NuForm studios with a focus on weight loss and Zumba fitness program. The company has its own 25,000 sq ft training academy in Thane (near Mumbai) which helps create professional trainers thereby forming a basis for uniform service experience to all its members.

Amongst the largest fitness chains in India with ~130 gyms in operation spread across 69 cities with ~126,000 members

Talwalkars group structure Source: Company, India Infoline Research


Aspire Fitness(4)

Equinox Wellness (1)

Denovo Enterprises (6)

Owned gyms (92)

Subsidiaries (11)

Franchisees(7)

HiFi (franchisees) (10)

50.1%

50.0%

66.7%

Trade mark licenses (10)

Jyotsna Fitness

50.1%


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Membership posted robust 34% cagr over 5 years Talwalkars gym membership has posted a strong 34% cagr over the past years on a 33% compounded growth in gym base. Each Talwalkars’ gym can accommodate ~900‐1,000 members and historically the company has managed a 70‐75% retention rate, a healthy indication of brand strength and service quality. In terms of geographic mix, western and northern regions account for ~70% of the gym base with several cities hosting >2‐3 gyms each. A look at the city vs rural break up shows that 45% of the gyms are located in Tier II cities highlighting the strength of demand in such areas.

Trend in consolidated gym additions Trend in membership growth

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Geographic mix: West & North dominates Break up of consolidated gym base

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Owned gym business can generate impressive margin Talwalkars’ owned gym business has generated impressive margin and healthy return ratios (RoE/RoCE); for instance, over the past three years, avg OPM has been ~43.2% while return ratios have hovered in a healthy 15‐25% range. A typical full fledged Talwalkars’ gym is spread over a 5,000sq ft area and has about 900‐1,000 members with most of them on six‐month or annual memberships. On a capex of Rs18‐20mn and gestation period of ~4 months, a typical gym can earn RoCE of ~35‐40% after it attains maturity (after 1‐1.5 years of operation).

Proforma gym working Parameter

Area (sq ft) 5,000

# of members 900‐1,000

Annual membership fee (Rs) 15,000

Revenue/gym (basic) 13.5

Value add services 3‐4

Total rev/gym (gross) 16.5

Operating costs 9.2

Staff 3.7

Admin, rent & other expenses 5.0

Marketing 0.5

EBIDTA 7.3

EBIDTA margin (%) 44.3

EBIT 6.4

RoCE 35.6

Capex 18 Source: Company, India Infoline Research All figures in Rs mn except other wise mentioned

TBVF gym business remains highly seasonal Gym business is highly seasonal in nature with Q2 and Q4 of the fiscal year accounting for ~64% & 81% of consolidated revenues and PAT respectively in FY12. The seasonality is explained by the timing of company’s membership enrolment drive and in‐built demand quirkiness. The company runs two membership drives, an annual one in August with a membership fee of Rs15,000‐18,000 and another one in January for six months. Hence the membership fees surge as the company gets maximum members in those two quarters.

Quarterly snapshot: Q2 & Q4 account for bulk of revenues/PAT Period to (Rs mn)

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

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Q1 FY13

Gross sales 161 351 236 424 244 417 287

Service tax (14) (32) (21) (39) (22) (30) (30)

Service tax (%) 9 9 9 9 9 7 10

Net sales 147 318 215 385 222 387 257

Op. expenses (87) (172) (136) (206) (136) (173) (163)

Op.profit 60 146 79 179 87 214 94

PBT 24 104 29 125 40 160 36

Tax (7) (35) (6) (38) (16) (45) (5)

PAT 17 69 23 87 23 116 31

Minority int (3) (3) (3) (4) (1) (20) (3)

Reported PAT 14 66 20 83 22 95 28 Source: Company, India Infoline Research

Owned gym business has impressive margins, healthy return ratios

Highly seasonal business with Q2 & Q4 accounting for 64% and 81% of revenues & PAT respectively


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Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Revenue 928 1,194 1,572 2,001

Operating profit 401 543 725 926

Depreciation (90) (118) (137) (153)

Interest expense (86) (91) (144) (137)

Other income 21 16 10 10

Profit before tax 246 350 453 646

Taxes (74) (104) (140) (200)

PAT 172 245 313 446

Minority int (8) (29) (30) (43)

Extra items (4) 4 ‐ ‐

Net profit 160 221 283 403

Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Equity capital 241 241 241 241

Reserves 1,017 1,202 1,450 1,818

Net worth 1,258 1,443 1,691 2,059

Debt 1,219 1,552 1,602 1,522

Minority Interest 22 50 80 123

Deferred tax lia 107 143 143 143

Total liabilities 2,606 3,188 3,516 3,846

Fixed assets 2,060 2,576 2,919 3,157

Investments 51 176 176 176

Net working capital 495 437 421 514

Sundry debtors 203 201 263 334

Cash 292 200 101 111

Other current assets 221 224 299 380

Sundry creditors (108) (39) (52) (66)

Other curr lia (69) (47) (63) (80)

Provisions (42) (101) (127) (165)

Total assets 2,606 3,188 3,516 3,846

Cash flow statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Profit before tax 246 350 453 646

Depreciation 90 118 137 153

Misc. exp w/o 8 ‐ ‐ ‐

Def.tax lia 59 36 ‐ ‐

Tax paid (74) (104) (140) (200)

Working capital ∆ (237) (33) (83) (83)

Other op.items (4) 4 ‐ ‐

Operating CF 88 370 367 516

Capital exp. (858) (634) (481) (391)

Free cash flow (770) (264) (114) 125

Equity raised 697 ‐ ‐ ‐

Investments (1) (125) ‐ ‐

Debt fin/disp 247 333 50 (80)

Dividends paid (28) (35) (35) (35)

Net ∆ in cash 167 (91) (99) 10

Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E

Growth matrix (%)

Revenue growth 43.0 28.6 31.7 27.3

Op profit growth 50.5 35.5 33.5 27.8

EBIT growth 61.3 32.8 35.5 31.1

Net profit growth 106.0 37.5 28.4 42.3

Profitability ratios (%)

OPM 43.1 45.5 46.1 46.3

EBIT margin 35.7 36.9 38.0 39.2

Net profit margin 17.3 18.5 18.0 20.1

RoCE 16.4 15.2 17.8 21.3

RoNW 19.1 16.3 18.1 21.5

RoA 7.2 7.1 7.9 10.2

Per share ratios

EPS 6.7 9.1 11.7 16.7

Dividend per share 1.0 1.3 1.3 1.3

Cash EPS 10.9 15.1 18.7 24.8

Book value per share 52.2 59.9 70.1 85.4

Valuation ratio (x)

P/E 27.1 19.7 15.3 10.8

P/CEPS 16.6 12.0 9.6 7.2

P/B 3.5 3.0 2.6 2.1

EV/EBIDTA 13.2 10.5 8.1 6.2

Payout (%)

Dividend payout 17.5 15.9 12.5 8.7

Tax payout 30.0 29.8 31.0 31.0

Liquidity ratios

Debtor days 80 61 61 61

Creditor days 42 12 12 12

Leverage ratios

Interest coverage 3.9 4.8 4.1 5.7

Net debt / equity 0.7 0.9 0.9 0.7

Net debt / op. profit 2.3 2.5 2.1 1.5

Du-Pont Analysis Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Tax burden (x) 0.65 0.63 0.62 0.62

Interest burden (x) 0.74 0.79 0.76 0.83

EBIT margin (x) 0.36 0.37 0.38 0.39

Asset turnover (x) 0.42 0.38 0.44 0.51

Financial leverage (x) 2.64 2.30 2.28 2.11

RoE (%) 19.1 16.3 18.1 21.5

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between ‐10% to +10%

Sell – Absolute return below ‐10%

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talwalkars better value fitness rating: buy best...

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