>Talwalkars Better Value Fitness

Industry in a sweet spot: Fitness and slimming market is Rs40bn industry and is set to grow by 18.9% to Rs80bn over 3 years with fitness services such as gymnasium comprising 50% of this market (Rs20bn). It is an under-penetrated market with less than 5% penetration of the urban population. Key growth drivers being i) increasing young population ii) booming middle class with growing discretionary spends iii) growing number of lifestyle diseases and iv) increasing realization of a need for healthy lifestyles.

Market leader with aggressive expansion plan: TBVFL holds the highest market share (~8-10%) and is the market leader in the organized health club market in India which is highly fragmented. TBVF has aggressive expansion plans over the next 3 years with gym counts increasing by 2.2x over FY12-15E. From the current 128 gyms we expect the count to go up to 281 gyms by FY15E. The share of owned gyms is expected to fall from 70% in FY12 to 50% in FY15E. We expect the company to add 53 owned gyms over 3 years compared to 100 gyms under the subsidiary and franchisee models. This envisages a capital outlay of Rs2.4bn over 3 years.

Low capex and high RoI business model: For Tier-II and Tier-III towns the company plans to expand through the franchisee format and have the benefits of zero capex, faster rollouts, wider customer base along with revenue share & one time royalty income. Under the subsidiary model the company will operate
through the Talwalkars brand and own 51% stake. It would also have an option to buy back the subsidiary health club at any point of time @ 3.5x EV/EBITDA multiple. These business models have helped the company minimize its capex requirement and increase RoCE and RoI.

Focus on increasing same store sales growth: TBVF is increasing its focus on optimizing its product offerings by introducing new services to leverage current asset base and the existing customer portfolio. Services such as spa, personal trainer, aerobics, ZUMBA® and Reduce, are gaining precedence and currently garner 29% of the revenues. New services have been launched to cater to the 16-30-year age group and for those over 50 years.

Robust financials: Net sales will have a CAGR of 32.8% over FY12-15E to Rs2801mn while operating profit will become 2.3x by FY15E to Rs1239mn. Net profit is set to grow at a CAGR of 38% over FY12-15E to Rs578mn in FY15E. RoCE is expected to increase from 10.5% in FY12 to 15.5% in FY15E while RoE would grow from 16.1% in FY12 to 25.2% in FY15E as 65% of gyms added each year will be either in the HiFi format or subsidiaries. TBVF is expected to turn free cash positive from FY14E on the back of strong cash flow from operations on back of negative working capital and with lower capex requirement under the subsidiary and HiFi models.

Valuations: Global fitness companies are trading at an average of 16x CY12E and 13.5x CY13E while Indian retail companies are trading at significant premiums. TBVF is currently trading at 11.6x FY13E and 8.1x FY14E EPS of Rs12.8 and Rs18.3 respectively. We expect the stock to re-rate from current levels and hence value the stock at 12x FY14E (10% discount to international peers) and arrive at a target price of Rs219 (47% upside from current levels).   

Key risks: i) Increasing competition with low entry barrier; ii) Seasonality in business; and iii) Significant investment plans to setup a recreation club could impact financials in near term.

To read report in detail: TBVF