Friday, February 24, 2012

>Talwalkars Better Value Fitness

We spoke to Talwalkars’ CFO to gauge the near term outlook for the company. TALW has rolled out 19 gyms in nine months so far and expects to open another 16 gyms in the current quarter. Management also stated that a plan for roll out of clubs has been put on hold and it would retain focus on gym expansion. Mgmt targets FCF +ve in FY14 as a large chunk of gym base would then be operating in the mature state and expansion through franchisees would gather pace. Roll out of HiFi gyms through franchisee route will ensure deeper penetration without concurrent capex needs. Company expects benefits of operating leverage to kick in considering the large share of fixed costs which would help improve margins. We revise lower our estimates and now expect a 33% EPS cagr over FY12-14; retain BUY with revised 9-mth tgt of Rs190.

■ Club roll out plan put on hold; to focus on gym expansion
Talwalkars Better Value Fitness (TBVF) mgmt stated that plans to roll out clubs - a different format compared to gym requiring much larger investments and longer gestation periods - has been put on hold. It would continue to focus on gym expansion where it remains bullish on the opportunity in the market given the low penetration rates for organized players.

■ To end FY12 with total gym base of 126
TBVF has rolled out 19 gyms in 9M FY12 and it is slated to launch another 16 gyms in Q4, a traditionally strong quarter for the fitness business. This would take its total gym base to 126 of which about 90 would be owned and rest would be through a combination of subsidiaries, franchisees/JVs and HiFi gyms. Company plans to add 8 HiFi gyms in the current year through franchisee route which would not entail any capex for the company. We also revise lower our owned gym addition count to 18 in each of next 2 years.

■ Cut earnings on reduced owned gym count but retain BUY
We cut earnings forecasts for FY12/13 as we reduce owned gym additions and now expect ~18 gyms to be added in FY13/14. Expansion in HiFi gyms through the franchisee route would gather momentum over next 2 years which would lower overall capex intensity and generate free cash flow in FY14. Retain BUY rating with revised 9-mth tgt of Rs190.

To read full report: TBVF