THE DEMERGER AND THE MAGIC OF R.O.C.E.
I am pleased to share that for Talwalkars 2016-17 has been phenomenal! Not only did weroll out 20 PWG gyms in a single day but we also launched 10 PWG gyms across our nationalcapital. We continued to spearhead in the Indian fitness industry through our own gyms franchisee and brand associations. We diligently built customer options to provide thebest possible alternatives to reduce weight enhance health and strengthen fitness! Duringthe year under review we also evaluated our true worth and realised our potential. Tounleash this potential we decided to demerge our company into the Gym and Lifestylebusinesses. We believe that this decision will maximise our overall value and growthstreamline our business and strengthen leadership. This is a seminal moment in theexistence of our Company. A few years ago we extended our gym-driven business to aholistic wellness business with the objective to capitalise on the demographic andlifestyle churn within the country. Even as investors trusted us to grow the gym businesswe are pleased to report that we did both we grew the gym business concurrent tocreating a new business within. We utilised our rich cash flows generated from the gymbusiness to acquire a property in Pune and entered into a global alliance with theobjective to create a pan-India club-centric brand.
As a value-focused Company we believe that the period of incubation is over; the timehas come for the lifestyle business to be spun out into a separate company that isadequately
Once demerged our companies (especially gym) will be in a position to reportconsistent growth while remaining asset-light.
A fitness gym or a fitness-driven club is no longer likely to be peripheral to theexistence of most urban Indians; they are likely to remain central as long as there areadequate professional and proximate service providers.
Positioned to generate resources for its sustainable growth.
The demerger is intended to unleash the value of both the business and enhance value toenrich shareholders. The demerger will also enhance focus within the teams managing thesebusinesses. The standalone financial structures will make it possible for investors toderive an informed perspective on the operating models of the respective businesseswhich in turn is likely to result in faithful corresponding valuations of both . As anextension we believe that we will be able to attract focused investors whose riskappetites and investing preferences match the characteristics of the respective models ofthe two companies.
Once demerged the gym company will continue to report consistent growth whileremaining asset-light. The gym business will seek to organically grow while buying outmajority stakes in competing brands a quicker way of addressing the dynamic reality ofthe Indian and global market place. Besides the conventionally asset-heavy lifestylebusiness will engage in a sale and lease back of its physical infrastructure that makes itpossible to liquidate the debt on its books so that the revenues earned from membershipenrolment and fees are more than adequate to service ongoing financial obligations. Thestandalone gym company is attractively placed to capitalise most extensively as it enjoysattractive franchise value reflected in high membership retention and revenue growth.Simultaneously the services included in Lifestyle company are at an inflection pointhighly scalable and profitable while focusing on unleashing the potential of the existinginfrastructure and providing room for revenue value-addition.
The Magic of ROCE
Markets reward companies that generate a superior ROCE; some of the fastest wealthcreators on the Indian markets have been companies with relatively smaller Balance Sheetsand high double-digit ROCEs a consistent ability to sweat your assets optimally coupledwith a high annual payout to shareholders. At Talwalkars we believe in long-term growthsustainability and enhancing our return ratios more specifically ROCE an importantmetric by which corporate performance is appraised. This demerger is intended to bringabout growth sustainability and robust return ratios.
The concurrent reality is that the business landscape keeps getting wider for a numberof unique reasons: the
Indian population continues to add the largest annual population increment over anyother country; India has the youngest population in the world across major countries whenyou take the average population into account the benefits of which are likely to extendinto the long-term; the long-term unemployment graph is declining; personal incomes arerising year-on-year; the greater the prosperity the higher the sedentariness; the higherthe sedentariness the greater likelihood of lifestyle disease and ailments; the greaterthis incidence the more likely that in addition to medical interventions people willturn to health-enhancing alternatives like fitness gyms and fitness-driven clubs. Theresult is that a fitness gym or a fitness-driven club is no longer likely to be peripheralto the existence of most urban Indians; they are likely to remain central as long as thereare adequate professional and proximate service providers.
At Talwalkars we believe that our demerged gym company will be attractively placed torespond to this evident opportunity. The business will be marked by high cash generationand robust ROCE. The demerger will bring a superior complement to this reality; it willempower the Company to grow even faster through organic initiatives and acquisitions; itwill result in focused brand investment and management that enhances membership and feegrowth a volume cum value proposition. In conclusion I must state that we areoptimistic that these fundamentals are likely to augur prosperity in perpetuity enrichingour stakeholders. I would like to thank our partners and stakeholders for their confidencein our Company and our employees for their sincere dedication and commitment.
|Girish Talwalkar |
|Chairman Talwalkars Better |
|Value Fitness Limited |