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Pick of the Week: Buy Talwalkars at CMP and add on dips to Rs273-277 band - IndiaNotes.com
Pick of the Week: Buy Talwalkars at CMP and add on dips to Rs273-277 band
HDFC Sec | Published: 31 Jul, 2017  | Source : IndiaNotes.com

Talwalkar Better Value Fitness Ltd (Talwalkar) is one of the largest organised fitness companies in South Asia with 211 fitness centres spanning 80 cities across the country and a growing customer base that is currently more than 2 lakhs. Talwalkars offers a diverse set of fitness services including standard gymming and fitness, Zumba (aerobics and Latin dance-inspired fitness programme), Transform (holistic fitness program), Reduce (diet-based, easy diet program, Nuform (time-efficient weight loss program), spa, massage, aerobics and yoga.


Investment Rationale:


- Demerger of its business into fitness and wellness to unlock potential of both businesses in near future,


- Focus on premium or large format Gym and concentrating in 10-12 main cities could improve margins,


- Straddling across age group and income group by different format creates value,


- Acquisition of PWG will help in expanding footprints beyond India and acquisition of Force Fitness India Pvt Ltd could help to expand its presence,


- Club business could provide new business opportunity,


- Recent announcement of preferential allotment to promoters of 13 lakh shares brings confidence in the future of the company,


- With sound financials and demerger, company is on track to significantly improve return ratios,


Concerns:


- Seasonality in revenue and expenses


- High competitive intensity and Trainer’s high attrition rate


- Low dividend payout, two group of promoters and pledge shares by promoters


- Club business diversification, Regulatory Risks


View and Valuation:


Talwalkars is focused on improving revenue per client by offering newer products/services. The company continues to grow through organic and inorganic expansion. Apart from this, Talwalkars is taking various measures to reduce operating cost and improve productivity like consolidation of gyms, reduction in rentals, utilizing time slots more efficiently and widening bouquet of value-added services, which could boost margins in the coming years. Upcoming corporate event demerger could be win-win for both companies by ensuring better profitability and return ratios going forward. Separating the two businesses could result in growing the total valuation enjoyed by the combined entity so far and also help in attracting investors who are interested in either of these two businesses.


We feel investors could buy the stock at the CMP and add on dips to Rs. 273-277 band (8.0x FY19E EPS) for sequential targets of Rs 360.5 (10.5x FY19E EPS) and Rs 395 (11.5x FY19E EPS). At the CMP of Rs 325 the stock trades at 8.9x FY19E EPS. Post demerger, the combined valuation could inch up to 14.0-15.0xFY19EPS over time.

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For more information please write in to editor@indianotes.com


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.

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