This was the first year when the company generated larger accrual: than thecapital expenditure incurred
Prashant Talwalkar MD & CEO reviews the company's working in 2015-16
Were you pleased with the performance of the Company in 2015-16?
We were absolutely pleased with the working of the company during the year under review- for a number of reasons. The Company has been reporting profitable growth sinceinception. This phenomenon is usually marked by a percentage increase in profits that ishigher than the percentage increase in revenues. When we entered this business andreported our first year of success there was a big question whether we would be able torepeat this. I am proud to state that since inception Talwalkars has been able to reportprofitable growth sending out an unmistakable message that the company's business modelcontinues to remain liquid viable and profitable.
While on this subject I must draw the attention of readers to the way the numbersmoved: we added H316mn in total revenues and we added H249 mn in EBITDA which works outto an incremental EBITDA margin of 79% on the company's incremental revenues comparedwith 58% EBITDA across its topline for the year under review.
Further it would be relevant to indicate that when one analyses the numbers reportedby the company over the last four years our EBITDA more than doubled from H739 mn in2012-13 to H1503 mn in 2015-16 even as total revenues strengthened from H1522 mn to H2581mn.
These numbers indicate that the company is competently addressing the deep potential inits business without compromising its fundamentals.
What other numbers indicate the strengthening health of the company's business?
Over the last few years the company ventured to take selective debt to grow thebusiness convinced that the ability of the company to repay debt and enhance shareholdervalue would be a far prudent strategy.
In this regard I would advise shareholders to read our net interest outflow for thelast three years and examine the number of times this outflow was covered by EBITDA.
For instance interest cover strengthened from around 3.7x in 2012-13 to nearly 5.3x in201516 indicating that the company is generating far more cash than it is able toproductively consume.
As an extension of this reality the year under review was the very first in which thecompany generated larger accruals than the capital expenditure incurred by the company -H1020 mn in cash profit exceeded H891 mn in capex incurred leaving the company with a cashflow surplus of H129 mn.
I am pleased that this improvement has transpired at a time when the country's economywas largely sluggish marked by tentative consumer sentiment. This conclusively indicatesthat the organised fitness sector in India is experiencing a robust positive undercurrentand the company's business model is profitably structured to capitalise.
What were some of the realities that contributed to this attractive improvement?
During the last financial year the company selected to expand. At the close of2013-14 the company had a total of 149 centres which increased to 150 at the close of2014-15 and 176 at the close of 2015-16. This attractive increase after two consolidationyears has another interesting sub-story: at Talwalkars our focus has been to increasefitness centres in selective locations on the one hand and strengthen our average memberrealisation on the other.
This focus translated into interesting numbers: even as membership volumes increased ata CAGR of 4.5% between FY13 and FY16 our average member realisation increased at a CAGRof 9% over FY13 to FY16. The combination of the two translated into an increase ouroperating margins from 46% in FY12 to 58% in FY16. This improvement was derived through anextended five-year H801 mn fitness centre renovation programme including some fitnesscentres that were relocated. I must assure that company's capex cycle is largely over andthat any incremental fitness centre renovation will be in the range of H140 mn and H180mn. This perspective provides the basis of optimism that going ahead whatever surplusesthat are generated from the fitness centres business will be far more than the capacity ofthe business to immediately consume.
What are the various initiatives that the company has taken to strengthen its business?
Much of our growth in the last financial year was derived from the complement of ownedfranchised subsidiary and associate infrastructure - the company's decision to cap thenumber of basic owned assets and explore a complement of value- added and asset-lightfitness centres. Today a significant portion of our fitness centres are through franchiseand JV making it possible for us to liberate precious cash and invest in fitness centreupgradation and value-added offerings. By graduating our investments from the basic to thepremium we have been able to generate a profitability kicker that has set in motion avirtuous cycle of incremental margins and profitability.
The company introduced premium and large formal fitness centres in prominent urbanlocations. This service offering was the result of a growing recognition that a newconsumer class is demanding upmarket well- travelled and willing to pay more forexclusive offerings. The company introduced this format across a larger size comprising awider mix of value-added offerings (Transform Reduce Nuform Group X activities and TRXetc.). This offering comes with internationally qualified fitness trainers and dedicatednutrition experts who customise training programmes around the specific needs of theirdiscerning clients. Memberships at these premium centres are priced 30% to 40% higher thanour usual fitness centre memberships. In the last four years the company launched eightpremium centres and has reported its best ever revenue and profits.
What are the relevant talking points behind the company's improved profitability?
One of the biggest learnings at the company was that individual needs had extended farbeyond plain gymming to wider fitness engagements. A number of our members came back andtold us of the growing importance of nutritional diets that needed to be combined with astrict training regimen that would extend into superior holistic fitness. This insighttranslated into the launch of Reduce which was a programme facilitated by a trainednutritionist. When we launched this service we were reasonably optimistic of prospects;the reality is that Reduce has attracted 70% non-gym members; the offering has helpedconvert a number of on-the-fence prospective clients into members; the product accountsfor 7% to 10% of fitness centre revenues today.
We have had a similar experience with Nuform. This service has been aligned withresearch- based developments transpiring the world over in the space of fitness. It is anelectrical muscle simulation training exercise. When we launched this service we did soin standalone centres; they were subsequently integrated which helped enhance membercrossover and reduce operating costs. And here too 45% of Nuform members are non-gymmembers and we feel that the integration will catalyse the switchover. The success of thisapproach is evident in the numbers: we increased the Nuform offering from a mere sixcentres in 2013 to 10 in 2015 and 43 during the year under review.
So what should be the take-home of the shareholder from the company's performance?
Just one take-home: that we utilised the economic slowdown of the last few years toinvest in the business; this investment was marked by value-added service offerings; thecompany focused increasingly on acquisition-led growth and these strategies was validatedby improved margins decline in the receivables cycle and increased profits. What we havetoday is a far stronger company even though the country is not yet completely out of theshadow of a slowdown auguring improved prospects for when the economy revives.
Has the company been able to unlock business value leading to an enhanced corporatevaluation?
Over the last few years the management has consistently pushed the envelope with theconviction that a combination of asset- light fitness centres value-added offerings andvalue-added infrastructure would translate to enhanced value in the hands of ourshareholders. While the improvement has been reasonable we believe that there existsattractive headroom for the company's valuation to trend in line with some of theprevailing global standards related to the company's sector. As a company whose objectiveis to maximise shareholder reward it will be the endeavour of the management to continueexamining its business construct and the restructuring of the respective businesses withinone company; the primary objective being making decisive improvements in the overallvaluation. The best is yet to be.
What is the outlook for the Indian fitness industry?
The outlook for the Indian fitness industry continues to be optimistic. As per theIHRSA Report 2016 the Indian fitness industry penetration was just 0.12%; in the AsiaPacific the comparable average was 3.8%. Even as India accounts for a sixth of humanityby population it accounts for a mere 2% of health clubs and 0.63% of fitness- enrolledmembers the world over.
At Talwalkars Better Value Fitness Limited we are at the right place at the right timewith the right offerings.
Over the years we have graduated from core gym- based fitness to a more holisticunderstanding of what modern-day fitness stands for: specialised nutrition personalisedattention fitness bordering on lifestyle and technology use to capitalise on advances inscience.
What is the basis of the company's longterm optimism?
At Talwalkars Better Value Fitness Limited we believe that the time is right for us togrow our business in a profitable and sustainable way across the foreseeable future.
India is passing through unprecedented prosperity reflected in a larger number ofpeople with higher incomes and correspondingly higher non-discretionary spending. Besidesthis reality has been underlined by a growth in India's youth population urbanisation andthe incidence of lifestyle diseases triggered by sedentary lives dietary indisciplinestress and pollution.
This brings into focus a growing need for basic fitness infrastructure on the one handand value- fitness cum wellness services (personal training massage and spa servicesbalanced diet and aerobics among others) on the other.
The company is in a sweet spot marked by a strong brand in a growing market enhancedmarket presence robust centre profitability excellent project execution competence andattractive financials.
We believe that this is a sustainable cycle marked by a larger reinvestment of accrualsinto disciplined asset building translating into yet another round of growth andprofitability.