Talwalkars Better Value Fitness: CD Equisearch retain 'buy' rating with raised target price

CD Equisearch Pvt Ltd | Jan. 16, 2017, midnight

With profound changes in the lifestyle and income levels of people, the wellness industry in India has become a sunrise sector; it was estimated at close to Rs 85,000 crore in financial year 2014-15 and is expected to grow at a CAGR of nearly 12% for the next five years and can achieve about Rs 1.5 trillion by FY20, according to a recent report by FICCI and EY.

The optimistic growth of the Indian fitness industry shall enable Talwalkars to grow its business in a sustainable and profitable manner. Enhanced market presence, strong brand equity and competitive advantage over its peers bode well. A preventive approach to healthcare has accelerated demand for Talwalkar’s services and has translated to strong market presence and dominance in the Indian fitness industry. Talwalkars has added 35 gyms in 2017 which increased its revenue by 13.8% (y-o-y) and expects to increase the number of gyms to ~300 in the next few years which should drive the revenue growth at a CAGR of 15.2%.

Talwalkars has managed to obtain sanction of Rs 100 crs ($15.5m) from Axis Bank for expansion of gyms thanks to its strong financials and ratings (AA from Care & Brickworks and AA- from ICRA). Its intention to reduce debt by repaying at least Rs 100 crs ($15.5m) over the next few years through internal accruals and unlocking the value of properties should further improve its rating and help it procure funds at lower borrowing cost. The company made capital expenditure of Rs 90.5 crs ($13.5m) in FY17 and still managed to generate positive free cashflow. Going forward, the company aims to keep capex lower than its internal cash accruals.

Talwalkars opened 10 PWG (Power World Gyms) in Delhi in Q4, thus becoming one of the top players in the capital city. 10 new zorba centres were opened in Q4, increasing the total number of zorba centres to 31 pan India. TBVF also announced opening of 20 PWG gyms in Bangalore with a capacity of 800-1000 members in Q3 with an aim to leverage on the low capex model (Rs 1.75-2.25 crs vs Rs 3.7 crs for Talwalkars orginal format) and thereby enhance return on capital. It has signed a MoU to acquire 50.01% stake in Force Fitness India Pvt Ltd. (SNAP; India’s third largest gym company and the exclusive master franchise in India of ‘Snap Fitness Inc.’, USA) which will lead to an addition of 60 SNAP gyms into an existing nationwide gym network of Talwalkars (211 outlets) and access to a strong management team of SNAP India with considerable experience in franchising.

In order to have better management and clear focus of its business activities, Talwalkars has proposed to demerge into two companies – Gym Co. and Lifestyle Co. Both the companies will be listed on NSE and BSE. The Gym Co. will retain the name as Talwalkars Better Value Fitness Ltd. (TBVFL) while the lifestyle company will be named as Talwalkars Lifestyles Ltd. The Gym Company will be into core gym based fitness and personal training and will not venture into the wellness segment. Post the demerger, the financial parameters will improve significantly; debt in this Company will reduce as debt for the property, club and for other non- gym business will be transferred to the Lifestyle Company, thus improving the Debt Equity ratio of Gym Co. to 0.69 with ROCE and ROE of 15.1% and 14.8% vs 0.94, 7.4% and 9.8% of Lifestyle Co.

The stock currently trades at 10.6x FY18e EPS of Rs 27.01 and 8.4x FY19e EPS of Rs 33.94. With the number of gyms increasing and improvement in SSS growth, Talwalkars should be able to retain its dominant position in the Indian fitness industry. Its cautious effort to control its operating expenditure, gradual repayment of debt and keeping its capex within its cash accruals are worthy of attention. With benefits of mergers and acquisitions to continue in the next couple of years - currently 20% stake in Growfitter and MoU signed to acquire 50.01% stake in Force Fitness India Pvt. Ltd. (although not considered in our projections)Talwalkars would expand its presence pan India and internationally. Demerger into Gym Co. and Lifestyle Co. should help it achieve incisive focus on business operations and better management. We retain our “buy” rating on the stock with revised target of Rs 373 (previous target of Rs 338) based on 11x FY19e EPS of Rs 33.94 – (peg ratio 0.5) over a period of 9-12 months.

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