Talwalkars Better Value Fitness: Buy

Outlets in cities big and small, broadening portfolio of services, a strong brand name and sustained growth even amidst overall spending slowdown, are some of the factors in favour of Talwalkars Better Value Fitness.

The company runs a chain of fitness centres across the country, with Talwalkars its flagship brand.

The stock, which has no listed competitor, has fallen sharply by 35 per cent this year.

At Rs 125, trailing valuations are at a mere 10.8 times, a steep discount to its three-year average of 29 times. Investors with a high appetite for risk, and a medium term perspective, can make the most of this dip and buy the stock. However, a market capitalisation of Rs 328 crore makes it a small-cap stock and thus riskier.

Wide presence

The primary offering of the company is gyms under the Talwalkars brand. In a vastly fragmented market, Talwalkars is among the few national chains. It has, over the years, built up a good name for quality services and equipment.

Renewal rate of memberships was a good 70 per cent in the previous fiscal, even as consumers curtailed spending. Volumes too grew 29 per cent in this period, up from the 26 per cent in FY-12.

The company has undertaken rapid expansion over the past three years – fitness centres number 145 now, from the 54 in March 2010. Plans are on to take this number up to 175 by the end of the current fiscal.

Funds raised through an initial public offer and an institutional offer bankrolled much of expansion with the result that debt burden remains manageable. At the end of March 2013, debt-equity ratio was a little over one time.

The company also uses a mix of franchisees for quicker and cheaper expansion. Around a tenth of the current chain strength is through franchises or licensed centres. The company has also managed to reduce time taken for a centre to turn profitable from five years to about four years now.

Also working in Talwalkars’ favour is its balanced presence across major cities and smaller Tier II and III cities. The majority of its presence – about 41 per cent – is in Tier II cities.

Rapid expansion into smaller locations gives it the first-mover advantage over other national chains, while combating competition from these chains in the large cities.

It also helps tap the rising aspiration demand from smaller towns. The company has used smaller formats and lower pricing, in the smaller cities to encourage memberships.

Adding services

In an effort to reduce dependence on gyms, which call for heavy investment in equipment and floor space, the company increased focus on related fitness services.

It added services such as yoga, Zumba and specialised weight-loss programmes, which deliver better profit margins.

The share of value added services is now at around 20 per cent, from the 8 per cent in FY-09. The company is targeting a 40 per cent revenue share from these services over the next three years, which could help boost profit margins.

Margins improve

Operating margin has steadily improved to 49 per cent in FY-13, from the 43 per cent three years earlier.

The share of related services, plus its franchise mode of expansion has helped the company boost revenues while keeping key cost components — staff, advertising, and maintenance — in check.

Interest costs on debt taken to fund expansion have also been moderating. As a proportion of sales, interest cost dropped to 8 per cent by FY-13 from the 10 per cent three years earlier.

But depreciation cost on equipment remains high – as a proportion to sales, depreciation ranges between 10-11 per cent. With the planned expansion, this cost is likely to rise. Net margin may thus see only a slight improvement from the current 21 per cent.

Sales have grown at a compounded annual rate of 30 per cent in the past three years to Rs 130 crore, while net profits have grown 51 per cent in the same period to Rs 28 crore in FY-13.

The quick expansion in this period, along with a lower base, has fuelled this growth. The June 2013 quarter too saw a healthy 31 per cent expansion in sales matched by a 21 per cent net profit growth.