Talwalkars: Value for money

Since FY08, the company?s turnover has jumped six times and profits have grown manifold

One company not affected much by the economic downturn is Talwalkars Better Value Fitness. The company operates 130 gyms across 68 cities in India with an active member base of 125,000. It has seen turnover grow over six times and profits manifold since FY08.

Even in the past two quarters, the revenue growth has been strong at about 25-30 per cent on a year-on-year basis. This was possible largely with the help of expansion or addition of new gyms. Going ahead, the trigger is not only expansion — as the company wants to add over 250 gyms by the end of FY15 — but also increase in same-store sales.

More important, the capex of the last several years has started to generate cash, which will improve its cash flow. In addition, its recent tie-up with Europe’s premium sports, health and leisure group, David Lloyd Leisure, should lead to robust revenue growth and profits over the long term. While the stock has lost 12 per cent over the last couple of weeks, analysts believe it is attractively priced at 11 times FY14 earnings.

Value creation
The company is now planning to leverage the existing business. Steps such as HiFi Gym in rural areas, NuForm studios at premium locations for weight loss and Zumba fitness programme, Personal Trainer and Reduce (weight-loss solution) at existing gyms are estimated to result in increasing revenues from same-store sales.

HEALTHY SCORES
Growth (%)	FY11	FY12	FY13E	FY14E
Revenue	43.0	28.6	31.7	27.3
Operating profit	50.5	35.5	33.5	27.8
Net profit	106.0	37.5	28.4	42.3
Source: IIFL E:Estimates

Analysts expect these initiatives to form about 15 per cent of revenues in FY14 and increase thereon. Importantly, the company is looking to expand through the subsidiary model, as well as the franchisee model, which will lead to lower capex at a time when the existing gyms have started (especially the new ones) to contribute to overall cash flows.

Shaping up for the future
The cash flow from operations is expected to jump from about Rs 40 crore to over Rs 80 crore in FY14. This should take care of future capex and turn the company into positive cash flow after the capex.

The company's business model is such that it needs money to expand but if the existing cash flow can take care of the future capex, that is good news for shareholders because it will allow the company not to rely on dilution or borrowed money.

Also, there is a good chance of the remaining cash being paid back to the shareholders in the form of dividends. Besides, it has recently formed the strategic alliance with David Lloyd Leisure.

“David Lloyd is the second-largest in the world and there are huge opportunities in India in terms of operating, managing and the advising for the club business. This may not contribute in FY14 but beyond the next two years, one can see that contributing significantly to the company's growth and earnings,” says Ankit Kedia, who tracks the company at Centrum Broking.

To infuse funds which will be required for the formation of the wholly-owned subsidiary and other purposes like expansion and creating clubs, the company has recently closed a qualified institutional placement issue of Rs 42.37 crore, issuing shares at Rs 205.18 as against the current share price of Rs 187.5 a share. This has led to about eight per cent dilution. However, even factoring in the dilution, the stock is trading at 11 times its FY14 earnings.