Talwalkars' strong show likely to continue

Good response to its new, high margin products to drive performance going forward

Talwalkars Better Value Fitness, a leading gym chain, posted better-than-expected results for the quarter ended March. The stock rose a little over two per cent on Thursday, to close at Rs 157 a share as against a flattish Sensex.

Net sales were Rs 49.8 crore, up 30.7 per cent over the March 2012 quarter, driven by a strong response to three new businesses — Zumba (dance fitness programme), Reduce (weight loss programme) and NuForm (electromuscle stimulation training). These pushed up same store sales. Also, the higher pricing of these initiatives will boost  margins. The company opened another seven fitness centres in the quarter, largely in Tier-II and Tier-III cities, getting good response.

The earnings before interest, taxes, depreciation and amortisation (Ebitda) margins expanded 122 basis points to 55.9 per cent over the March 2012 quarter, due to higher cost efficiencies. While employee costs grew 48.3 per cent (as the company hired Zumba trainers and raised marketing efforts for Reduce), the administration and other expenses growth was modest at 17.2 per cent.

A saving of about 25 per cent on finance costs fuelled net profit growth of 32 per cent, to Rs 12 crore.

Lower debt also reduced the FY13 debt to equity ratio to 0.75, from one in FY12. Talwalkars’ debtor days (the ratio showing the average number of days required for a company to receive payment from customers for invoices issued) reduced to 43 in FY13 from 62 in FY12. For the full year, net sales grew 26.4 per cent to Rs 151 crore and net profit was Rs 30 crore, up 38.5 per cent.

During the quarter, Talwalkars launched an online site for Zumba merchandising, nutritional supplements, fitness accessories and gift vouchers.

High growth, better margins
The plan is to open 100 Zumba centres by FY14 as against 29 centres now and about 75 fitness centres as against 17 currently. The management expects to turn positive on free cash flow (operating cash flow minus capex) by the end of FY14. Most analysts remain bullish on Talwalkars, given the high growth potential for its core business of gyms.

“The FY14 operating profit is up by 5.3 per cent on the back of higher margins from new services such as Reduce and Zumba. Talwalkars is currently trading at 9.06 times FY14 estimated earnings of Rs 17.1. We continue to value the stock at 13 times one-year forward and increase our target price of Rs 266 from Rs 258 earlier,” says Ankit Kedia, analyst at Centrum Research. He expects the margins to expand by 137 basis points in FY14 to 49.5 in FY14 over FY13.

However, the company’s plans to open a club could pull down its return ratios in the near term.

“The management has guided (forecast) for Rs 20 crore capital expenditure in both FY14 and FY15 on developing the club. We believe as no significant revenue from this business is likely over the next two years, it will remain a drag on the already muted return ratios till FY15,” says Arun Baid, analyst at IDBI Capital.