TALWALKARS BETTER VALUE FITNESS LTD · This program includes group exercises like Zumba, Yoga, Kette Bell, TRX, Aerobics, etc, average ticket size of Rs. 1500 to 2000 per member p.m

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PICK OF THE WEEK July 31, 2017

TALWALKARS BETTER VALUE FITNESS LTD

Recommendation

Buy at CMP and add on declines

Add on dips to

Rs. 273-277

Sequential Targets

Rs. 360.5-395

Time Horizon

4-6 Quarters

Industry

Wellness

CMP

Rs. 304.50

FUNDAMENTAL ANALYST Abdul Karim [email protected]

HDFC Scrip Code TALBETEQNR BSE Code 533200 NSE Code TALWALKARS

TALWALKARS Bloomberg TALW IN CMP July 28 2017 Rs. 304.5 Equity Capital (Rscr)

29.7 Face Value (Rs) 10.0 Eq- Share O/S(crs) 2.97 Market Cap (Rscrs) 904.5 Book Value (Rs) 165.8 Avg. 52 Wk Volumes

27080 52 Week High 333.2 52 Week Low 209.0

Shareholding Pattern % (June 30, 17) Promoters 38.0 Institutions 20.7 Non Institutions

41.3 Total 100.0

Talwalkar Better Value Fitness Ltd (Talwalkar) is one of the largest organised fitness companies in South Asia with 211 fitness centres spanning 80 cities across the country and a growing customer base that is currently more than 2 lakhs. Talwalkars offers a diverse set of fitness services including standard gymming and fitness, Zumba (aerobics and Latin dance-inspired fitness programme), Transform (holistic fitness program), Reduce (diet-based, easy diet program, Nuform (time-efficient weight loss program, spa, massage, aerobics and yoga.

Investment Rationale: • Demerger of its business into fitness and wellness to unlock potential of both businesses in near future, • Focus on premium or large format Gym and concentrating in 10-12 main cities could improve margins, • Straddling across age group and income group by different format creates value, • Acquisition of PWG will help in expanding footprints beyond India and acquisition of Force Fitness India Pvt Ltd could help

to expand its presence, • Club business could provide new business opportunity, • Recent announcement of preferential allotment to promoters of 13 lakh shares brings confidence in the future of the

company, • With sound financials and demerger, company is on track to significantly improve return ratios,

Concerns: • Seasonality in revenue and expenses • High competitive intensity and Trainer’s high attrition rate • Low dividend payout, two group of promoters and pledge shares by promoters • Club business diversification, Regulatory Risks

View and Valuation: Talwalkars is focused on improving revenue per client by offering newer products/services. The company continues to grow through organic and inorganic expansion. Apart from this, Talwalkars is taking various measures to reduce operating cost and improve productivity like consolidation of gyms, reduction in rentals, utilizing time slots more efficiently and widening bouquet of value-added services, which could boost margins in the coming years.

Upcoming corporate event demerger could be win-win for both companies by ensuring better profitability and return ratios going forward. Separating the two businesses could result in growing the total valuation enjoyed by the combined entity so far and also help in attracting investors who are interested in either of these two businesses.

We feel investors could buy the stock at the CMP and add on dips to Rs. 273-277 band (8.0x FY19E EPS) for sequential targets of Rs 360.5 (10.5x FY19E EPS) and Rs 395 (11.5x FY19E EPS). At the CMP of Rs 325 the stock trades at 8.9x FY19E EPS. Post demerger, the combined valuation could inch up to 14.0-15.0xFY19EPS over time.

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Financial Summary: Particulars, Rs in Cr Q4FY17 Q4FY16 YoY-% Q3FY17 QoQ-% FY16 FY17 FY18E FY19E Net Sales 90.0 80.0 12.5% 53.1 69.5% 258.1 286.5 323.4 374.2 EBITDA 62.7 54.9 14.2% 26.5 136.7% 150.2 171.6 194.3 225.0 APAT 24.6 20.2 21.7% 6.2 298.1% 55.1 65.6 81.6 102.0 Diluted EPS (Rs) 8.3 7.0 18.5% 2.1 298.1% 18.5 22.1 27.5 34.3 P/E (x) 16.4 13.8 11.1 8.9 RoE (%) 12.9% 13.3% 14.4% 15.4%

Source: Company, HDFC sec) Company Profile: Talwalkar Better Value Fitness Ltd (Talwalkar) is one of the largest organised fitness companies in South Asia with 211 fitness centres spanning 80 cities across the country and a growing customer base that is currently more than 2 lakhs. Talwalkars offers a diverse set of fitness services including standard gymming and fitness, Zumba (aerobics and Latin dance-inspired fitness programme), Transform (holistic fitness program), Reduce (diet-based, easy diet program, Nuform (time-efficient weight loss program, spa, massage, aerobics and yoga.

The company has around 5,000 employees. The Company also has a presence in Sri Lanka. The company’s fitness centers operate under four major formats – Talwalkars, PWG, HiFi (budget format located in non-metros) and Zorba – the yoga studios. The company operated 130 centres under the Talwalkars brand, 26 under HiFi, 50 under PWG and 8 under premium Talwalkars. Nearly 43% of the centres are located in Tier 1 locations and the rest across pan- India.

Talwalkars started journey with 1 gym in early 30’s by Talwalkar Family (Madhukar and Sudhakar Talwalkar) and came up with an IPO in 2010 when it had 63 centers. Currently, it manages 211 Gyms in different formats like Talwalkars gyms (owned) including premium gyms, Talwalkars Subsidiary, and Talwalkars franchise, Zorba Studios, Power World (India & Srilanka), Hi-Fi gym.

The company has gradually evolved its personality from one providing core fitness centre infrastructure to one providing holistic fitness to one providing wellness. The result is that Talwalkars is now increasingly recognized as a wellness brand marked by cross-sell and up-sell opportunities across its diverse services.

Business Overview:

Fitness Centre Format: Talwalkars Gyms (owned): Talwalkar’sgym business consists of its own, franchises and subsidiaries model and company has 122 gyms, and typical area of its gym covers around 5,000 – 6,000 Sq. ft. with average capacity of 1,100 to 1,350 members per gym. The capex required for setting up one gym is ~ Rs.3.5 -4 cr, out of which 65 – 70% of cost is incurred for gym equipments and rest is incurred for other value added services and deposits for property. The average realization for basic membership fees is around INR 18,000 – 20,000 per member p.a.

KEY HIGHLIGHTS

Talwalkar is one of the largest organised fitness companies in South Asia with 211 fitness centres spanning 80 cities across the country.

Offers a diverse set of fitness services including standard gymming and fitness, Zumba (aerobics and Latin dance-inspired fitness programme), Transform (holistic fitness program), Reduce (diet-based, easy diet program, Nuform (time-efficient weight loss program, spa, massage, aerobics and yoga.

Evolved its personality from one providing core fitness centre infrastructure to one providing holistic fitness to one providing wellness.

Upcoming corporate event demerger could be win-win for both companies with respect to better profitability and return ratios going forward.

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Source: Company, HDFC sec)

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Talwalkars Premium Gym: Talwalkars owns 8 premium gyms; premium gyms have all facilities like personal training and other value added services. It contributes around 25 – 30% of the total revenue and Premium gyms comes under large format categories with typical area size of 6,000 – 12,000 Sq. ft. This premium gym has an average capacity of 1,800 to 2,000 members per gym. The capex required for setting up premium gyms is around ~Rs 6 cr. The basic membership fee for premium gym is Rs 22000 to 25000 per member p.a.

HiFi Gym: HiFi Gyms (Healthy India Fit India) comes under franchise format, which are compact and affordable in nature and it has target customers of tier II, III and IV cities. Talwalkars has 26 franchises of HiFicenters with typical area of 2,500 to 2,800 Sq. ft., it has an average capacity of 650 – 700 members and the capex required to set up HiFi gyms is ~Rs 1 -1.5Cr.

Power world Gym (PWG): Talwalkars has established strategic partnership (in 2015) with Power World Gym (PWG) to penetrate in Sri Lanka, spreading its first global presence. TBVF acquired 49.5% of the total share capital of PWG which is biggest and leading health and fitness chain in Colombo, Sri Lanka with an acquisition cost of Rs 4.8 cr. The total number of PWG gyms in Sri Lanka is 20, with around 3750-4000 sqft area each and member capacity of 800-1,000 members per gym. PWG in India covers the area of around 4,000 to 5,000 Sq. ft. with an average capacity of 800 to 1,000 members per gym.

Recently, Talwalkar has opened 30 PWG gyms (10 in Delhi and 20 in Bangalore) in India which are 100% run by Talwalkars itself. Lower income groups in Sri Lanka is target customers, while in India it placed between Talwalkars formats which caters to upper middle class and HiFi gym formats which caters to tier II, III and IV cities. Set up cost requires for per PWG gym is around Rs 1.5 to 1.75 cr. PWG is called tomorrow’s Talwalkars.

The Company aims to increase its health centres to 300 gyms in next 3 years through its various formats. Separately, PWG Sri Lanka plans to inaugurate about 100 gyms across the length and breadth of Sri Lanka in next 3 years. Value added Services:

Personal Training: Talwalkars provides personal trainers, each fitness centres has around 12 to 14 personal trainers, the average fees of PT is around Rs 28,000 to 45,000 p.a. This segment generates Rs 2-3 cr revenue p.a.

Nuform: Nuform is a German Technology and it was introduced in India in the year 2013, it helps to reduce fat and tone the body. This technology contains electrical muscle stimulation (EMS) training exercise that uses impulse current to increase fitness in just 20 minutes per week. The capex required to set up Nuform services isRs~0.5 cr and has a potential to generate revenue of Rs 0.30-0.40 crp.a. with an average ticket size of Rs 36,000 to 42,000 per member p.a.

Reduce: Reduce service is offered as weight loss solutions by providing clients with low calories hydrogenated ready-to-eat food packets. This program offers 3 meals daily which are high in fiber& low in fat yet nutritious (1 Snack, 1 Meal & 1 drink per

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day) to reduce the weight. Reduce is present in more than 100 centres with a ticket size of Rs.20,000 to 28,000 per member per quarter.

Transform Transform is a combination of weight loss program and toning exercises simultaneously to give the desired results. It is an effective platform for speedy transformation of the body combining the benefits of weight training and calorie burning. Transform is a basically a combination of Reduce and Nuform value added services.

Group-X: This program includes group exercises like Zumba, Yoga, Kette Bell, TRX, Aerobics, etc, average ticket size of Rs. 1500 to 2000 per member p.m. Zorba: Zorba offers a choice of comprehensive suite of six courses and eight alternative therapies – including a series of yoga. It also offers specialized courses in healing ailments for certain diseases like asthma, diabetes, tantric meditation, weight loss, stress management and personality development. Zorba is available in 31 centers as on FY17.Zorba is expected to open 50 centres in coming 15-18 months. Fitness Centers as on 31st March, 2017 No of Fitness Centers over the periods

Particulars Q3FY17 Q4FY17

Owned Talwalkars 103 103 Power World Gym 20 30

Subsidiaries/Associates Talwalkars 9 9 Zorba Studios 3 5 PWG SriLanka 20 20

Franchise Talwalkars 18 18 HiFi 25 26 Total 198 211 *Power World Gym

(Source: Company, HDFC sec)

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Distribution - Tier- Wise (Q4FY17) Distribution - Zone- Wise (Q4FY17)


Presence:


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Subsidiary Companies: Subsidiaries Year End Holding -% Country Talwalkars Club Pvt Ltd 201703 10 India Talwalkars Club Systems Pvt Ltd 201703 10 India Denovo Enterprises Pvt Ltd 201703 50.1 India Inshape Health &Fitnez Pvt Ltd 201703 40.8 India Aspire Fitness Pvt Ltd 201703 50 India Jyotsna Fitness Pvt Ltd 201703 10 India

(Source: Company, HDFC sec) Industry Overview: The Indian fitness industry is on the way of paradigm shift. Sedentary lifestyles, rising disposable incomes and rising awareness pertaining to ‘healthy’ lifestyles are major factors driving the fitness industry. These people are trying out various ways to stay fit such as Zumba, aerial yoga, Pilates, mixed martial arts and kickboxing, among others. Fitness Industry in India is worth Rs. 45,000 Mn and is growing at 16-18% annually.

•Analysts predict that the entire sector is set to grow by 20-30% (YoY). A new trend of holistic wellness is gaining ground within the age group of 20-44.As per the IHRSA (International Health, Racquet & Sports club Association) Global Report 2015, there are 3,800 fitness clubs in India with total membership of approximately 0.95 million. • Gym Penetration is only 0.13% of the country’s population. The fragmented industry is dominated by unorganized and independent gym outlets. Organized fitness market is concentrated in the top eight cities of India. • More than 60% of the top companies are located in these cities. While the market will continue to grow in these cities, high real estate costs will drive players to look at tier II and III cities for growth. Hence, a higher growth in the premium and mid-end of the market is anticipated. Growth Drivers:

Unhealthy Lifestyles: India ranks third globally when it comes to obesity. Cardiovascular diseases, hypertension and stress afflict vast swathes of the population. India also has the highest number of diabetics in the world.

Fitness Oriented Youth: More than 35% of Indian population falls within the age group of 20-30. They are far more focused on staying fit than their predecessors and we are witnessing rising levels of disposable incomes. The long-held fad that fitness means bulging muscles and food supplements are slowly giving way as more people are turning to alternative means such as kickboxing, mixed martial arts, yoga and dance, among others, to get in shape and stay fit.

Growing awareness:The rise in the number of lifestyle diseases has reaffirmed the necessity for staying fit. The media (Audio Visual and web) have also played a major role in raising awareness.

Promotion by Government:The Central Government’s efforts towards promoting yoga and various celebrity endorsements have also made people aware regarding the benefits of a healthy lifestyle and a fit body.

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Rising Urbanization:People are migrating to cities and adopting the culture of cities. Currently, the major cities of India are home to approximately 300 mn people and the number is expected to double over the next 20 years, making urban centres a thriving market for fitness in India.

Investment Rationale:

Demerger of its business into fitness and wellness to unlock potential of both businesses in near future: Talwalkars has proposed to split its business into gym co (pure gymming) and lifestyle company (wellness business). Gym company will focus on core gymming and will have an asset light business. Lifestyle co will include club business; value added business and other wellness related segments.

The Company had filed the Scheme of Arrangement (Demerger) with the Stock Exchanges on 8th December, 2016. The Company has received the approval from the stock exchanges, SEBI and its shareholders to the Scheme of Arrangement. The Company is awaiting approvals and guidelines from with National Company Law Tribunal (NCLT), which will provide directions for convening the further meetings/other procedure.

Both the companies will be listed on BSE and NSE, and Gym business will retain the name as Talwalkar Better Value Fitness Ltd (TBVFL), while the life style business will be named as Talwalkars Lifestyles Ltd. Shareholders of TBVFL will get equal number of shares in TLL i.e in the ratio of 1:1.

Post demerger, operating and financial parameters could improve significantly; debt in Gym Company could reduce due to debt in respect of property, club and other non Gym/fitness business (~Rs.100 cr). Post demerger the EBITDA margins of Gym business is expected by the management to be ~55% in next 3 years, while Lifestyle Company could report margins of ~65% in next 3 years. PAT margin of Gym business could touch ~20% and PAT margin of Lifestyle could improve to ~28-30% in next 3 years.

The Gym Company could expand both organically and inorganically through acquisitions or strategic tie-ups. Post Demerger, Talwalkar Lifestyle Company could focus to create a brand value and expand its market share going forward in the wellness sector in an organized and systematic approach. Wellness sector has features of fragmentation and there is more opportunity to report healthy growth with high market potential.

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The Company has given a definitive mandate to unlock the value of the properties (~Rs.120 cr) to reduce the debt in the lifestyle segment.

This demerger will result in higher overall valuations being granted to the company as the potential for each of these segments is different even though the businesses complement each other. It will also offer different businesses to investors who are interested in one and not the other business.

Focus on premium or large format Gym and concentrating in 10-12 main cities could improve margins: • Talwalkars is now focusing back on main large 10-12 cities/towns and spending more. Most of Tier II and Tier III cities

have limited scope to grow with huge price competition by unorganized players. It however will continue to be present in these areas but be very selective in opening new gyms in such areas. This will help it to have more management bandwidth for more lucrative areas resulting in better operating performance.

• The Company has set new standards with the introduction of Premium /Large format fitness centre in upscale localities of Tier 1 cities, giving a superior experience.

• It offers various value added services and additional services like Wi-fi, juice & snack bars, valet services etc. • Its gyms are fully equipped with imported equipment, separate cardio sections and a dedicated strength and weight

training zone. • Its gyms have internationally qualified fitness trainers and dedicated nutrition experts to customize programs to help

members achieve their fitness goals.

Straddling across age group and income group by different format creates value: With Pan India presence, Talwalkars offers basic fitness which is Gym business (75-80% of revenue) and Lifestyle business (20-25% of revenue). Its Gym business has different formats like Talwalkars Gym, Hifi Gym, Power world Gym, Premium Gym, etc. Company also offers lifestyle or value added service like Nuform, Reduce, Yoga, Group X, Transform, Zorba, etc in addition to its Gym business.

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Company’s gym business is categorized into various segments according to age and Income group. For higher income class People, Company provides Premium Gyms, personal training facilities and value added services. The basic membership fee for premium gym is around Rs 22,000 to 25,000 per member p.a. For middle income class people, company provides HiFi Gyms, the basic membership fee is around Rs 12,000 to 15,000 per member p.a.

Apart from this, India’s population is relatively young which creates a potential market for alternative sources of fitness like aerobics, yoga, zumba and diet programs. Unhealthy eating habits, growing disposable income, health conscious are key drivers of growth in India. Company considers all the factors and provides services according to income, and age, it helps to expand its market share and helps to generate revenue.

Further an existing young client at the basic gym would graduate to higher level gym once he grows in age and earnings.

Acquisition of PWG will help in expanding footprints beyond India: Talwalkars entered into the Sri Lankan market through acquisition of Power World Gyms (PWG) in 2015. Sri Lankan market could provide better opportunity to expand its business led by the fact that (a) Market penetration in Sri Lanka is as low as 0.5% vis-à-vis 16.6%in the US, opening up huge scope for rapid growth. (b) Per capita income of Sri Lanka is US$9,738, significantly more than India’s US$5,418 per capita income. And (c) 30% of the total population is aged between 18 and 39 years, which is the company’s target market.

PWG has a network of 10 gyms in Colombo, serving8,100 members. It has a distinctive operating model targeting the medium income group. Going forward, PWG aims to expand its footprint and plans to open another 35 gyms in Sri Lanka in next 18-24 months (of which 10 have already opened inFY17). We believe this will drive revenue growth in coming years. Recently,Talwalkar has opened 30 PWG gyms (10 in Delhi and 20 in Bangalore) in India which are 100% run by Talwalkars itself. Lower income groups in Sri Lanka is target customers, while in India it placed between Talwalkars formats which caters to upper middle class and HiFi gym formats which caters to tier II, III and IV cities. Set up cost requires for per PWG gym is around Rs 1.5 to 1.75 cr. PWG is called tomorrow’s Talwalkars. Acquisition of Force Fitness India Pvt Ltd could help to expand its presence: Company has also signed a MoU to acquire 50.0%equity shares in Force Fitness India Pvt Ltd (FFIPL) (subject to due diligence) in March 2017. FFIPL has 60 gyms across major cities of India. Force Fitness India Pvt Ltd is India’s third largest gym company and the exclusive master franchise in India of “Snap Fitness Inc. USA”. This acquisition could lead to addition of addition of 60 Snap gyms into an existing nationwide network and it could bring the access to a strong management team of Snap India with better experience of franchise management. Later Talwalkars and Snap Fitness Inc have entered into a binding letter of intent pursuant to which Snap Fitness has agreed to grant exclusive right to develop and operate fitness clubs (under the Snap Fitness brand) In Bangladesh, Malaysia, Singapore, Srilanka, Vietnam and Thailand.

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Club business could provide new business opportunity: Talwalkars had announced its JV (50:50) with David Lloyd Leisure (DLL) in the FY16. David Lloyd Leisure Limited is Europe’s leading premium sports, health and leisure club. It has envisaged development of 7-10 clubs across India starting with Pune, Maharashtra. It has already acquired a land parcel for their first club. This club will be able to accommodate 4,500 families. As soon as regulatory and statutory permissions are received by David Lloyd Leisure, they will become an equal partner. The Company is awaiting the final clearances from Municipal and other authorities in Pune for the revised plans submitted to them. Separately the Company is making efforts to open a field/marketing office in Pune at the earliest which will showcase and sell the club membership. We expect, company has vision to expand into multiple folds in next 3-5 years, and expect 2-3 yrs as a payback period. The management feels that this business will not require cash as the first club can raise Rs.100 cr by way of life membership from 1000 families, which can be used to set up new clubs.

The club at Pune will involve Rs.90-100 crcapex. Talwalkars has already spent Rs.48 cr being almost the full contribution by them in the JV. Preferential allotment brings confidence in the future of the company: The company approved the issuance of 13 lakh Equity Shares on preferential basis to promoter group. Currently promoters hold ~ 38% equity shares combined of Talwalkars and Gawande family, individually both family holds ~19% stake in the company. Post preferential allotment to the promoters, promoters holding could increase to 42-43%.

Preferential allotment to promoters brings confidence in the future prospects of the company. Fund raising through preferential allotment could be a source of short term and long term working capital for the company and to support future growth plans. With sound financials, company is on track to significantly improve return ratios: Talwalkars delivered a robust financial performance and reported an all-time high Revenue and highest ever Profit from operations, when viewed in the backdrop of highly competitive and challenging business environment prevailing in the industry and also impacted by demonetization during the year. Revenue from operations for FY17 grew by 11% to Rs. 286.5 crore, as compared to Rs.258.13 crore during the previous year. EBITDA grew by 14.2% to Rs 171.6 crore because of cost rationalization efforts. EBITDA margin was up by 170 bps (YoY) at 59.9%. PAT grew 19.2% to Rs 65.6 crore in FY17 from 55.1 crore in FY16 and PAT margin ramped up by 160bps (YoY) to 22.9%. Debt to Equity has increased from 0.7x in FY 16 to 0.8x in FY17.

We expect ~13% revenue growth in FY18E and 15.7% revenue growth FY19E led by better per client revenue collection and addition of gyms. We could witness margins expansion by value added services, lower interest burden and cost rationalization efforts. Return ratios are on the way of recovery and are likely to register decent growth going forward in FY18E and FY19E.

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Margins (%) RoNW&RoCE-%


Value added services for weight loss solution and cost rationalization efforts could help to expand margins: Talwalkar has restructured its business and widened it by offering a number of value-added services. These value added services provide technology and workout to reduce fat, reduce obesity and weight loss. Apart from this, company also provides diet management services and Yoga. Key value added services are:

Nuform Nuform is a proven German technology introduced in India for the first time in the year 2013 by Talwalkars aiming at reducing fat and toning the body. • This technology contains electrical muscle stimulation (EMS) training exercise that uses impulse current to increase fitness in just 20 minutes per week. • People who cannot commit to daily workouts and want to reduce their weight fast can opt for this value-added service. • It is offered within fitness centers and has convenience of servicing at the customers doorstep. • 45% of the Nuform members are non-gym members. • As per the management it has potential to grow to Rs.500-600 mn in 4-5 yrs

Reduce: Reduce is a value-added service offered for weight loss solutions by providing them with low calories hydrogenated ready-to-eat food packets. • This program offers 3 meals daily which are high in fiber& low in fat yet nutritious (1 Snack, 1 Meal & 1 drink per day) to reduce the weight. • More than 65 options of food packets are available that includes Upma, Dhokla, etc. • 70% of Reduce members are non-gym members. • Convenience of doorstep services and online access option. • Tied up with Nykaa and Snapdeal for marketing. As per the management it has potential to grow to Rs.1000 mn in 4-5 yrs

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Transform; Transform is a brilliant value-added service that works on one’s weight loss programme and toning exercises simultaneously to give the desired results. • Transform is a basically a combination of Reduce and Nuform value added services. • It is an effective platform for speedy transformation of the body combining the benefits of weight training and calorie burning. • Members who want to quickly reduce weight without much daily dedicated workout; this is deemed to be their ideal solution. • Convenience of doorstep services is available. • It is strategically marketed at a cost that can be used by higher number of customers. Cost rationalization Efforts: • Aiming to consolidate its gyms with the nearest fitness centres having a presence in the same area. This will result in a

reduction of operating cost by Rs 2 crore per annum on account of discontinuing rent, power cost, part salaries, and separate marketing expenses.

• Providing dedicated team for periodic training to each gym across its centres in South Asia via online and onsite training.

Talwalkars Cost rationalization efforts coupled with restructuring and reduction in rentals and routine expenses, utilizing time slots efficiently could help to boost margins going forward. Apart from this, expanding facilities of value-added services could also help to boost margins going forward. Risk and Concerns:

Seasonality in revenue and expenses: For revenue generation, second and fourth quarter is good for the company; ~65% revenue comes in these two quarters. Company offers more incentives to its employee in second quarter every year. Any uncertainty of demand in second quarter and fourth quarter could impact its revenue going forward.

High competitive intensity: Talwalkar has direct competition with many global and regional players such as Gold Gym, Fitness First and Fitness One. Most of players offer its services with flexible price range and lower than Talwalkar, price competition with these players is a major concern for Talwalkar.

Two group of promoters: Company has two promoters group, Talwalkar family and Gawande families holding combined 38% stake in the company. Commonality of thought process is required between the two so that no disagreements happen resulting in the company’s operations being impacted.

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Trainer’s high attrition rate: To meet customer expectations, the Company needs to constantly focus on quality service offerings and availability of skilled manpower is a key requirement. One of the keys to a successful healthcare industry is trainers where the attrition rate is high.

Club business diversification: Club is a new business entered into by Talwalkars whose triggers, and challenges could be different than that of its existing business.

Low dividend payout and promoters has pledge shares: Talwalkar’s dividend payout ratio has been very low over the periods. Company has paid average dividend payout of 12.7% over the past 7 years, despite having good cash balance. Further its promoters have pledged 28.5% of their share holding (excluding the latest pledge of 7 lac shares on July 26, 2017). Any failure to service the loan could result in volatility in stock prices of Talwalkar.

Regulatory Risk: The Indian fitness industry is at a nascent stage. Any adverse government policy and reforms like higher tax rate on fitness equipment; levy of fresh tax or increase in existing tax rates, etc could impact the industry and company financials.

View and Valuation: Talwalkars is focused on improving revenue per client by offering newer products/services. The company continues to grow through organic and inorganic expansion. Apart from this, Talwalkars is taking various measures to reduce operating cost and improve productivity like consolidation of gyms, reduction in rentals, utilizing time slots more efficiently and widening bouquet of value-added services, which could boost margins in the coming years. Upcoming corporate event demerger could be win-win for both companies by ensuring better profitability and return ratios going forward. Separating the two businesses could result in growing the total valuation enjoyed by the combined entity so far and also help in attracting investors who are interested in either of these two businesses. We feel investors could buy the stock at the CMP and add on dips to Rs. 273-277 band (8.0x FY19E EPS) for sequential targets of Rs 360.5 (10.5x FY19E EPS) and Rs 395 (11.5x FY19E EPS). At the CMP of Rs 325 the stock trades at 8.9x FY19E EPS. Post demerger, the combined valuation could inch up to 14.0-15.0xFY19EPS over time.

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Quarterly Financials –

Particulars, Rs in Cr Q4FY17 Q4FY16 YoY-% Q3FY17 QoQ-% FY17 FY16 YoY-% Total Income from Operation 90.0 80.0 12.5% 53.1 69.5% 286.5 258.1 11.0% Stock Adjustment 0.0 0.0 - -0.2 -78.9% -0.2 0.0 - Purchase of Finished Goods 0.1 0.0 - 0.4 -73.0% 0.5 0.0 - Employee Expenses 9.5 7.9 20.7% 8.8 8.1% 43.0 39.4 9.2% Other Expenses 17.7 17.2 2.7% 17.6 0.5% 72.0 68.6 5.0% Total Expenditure 27.2 25.1 8.6% 26.6 2.5% 115.3 107.9 6.8% EBITDA 62.7 54.9 14.2% 26.5 136.7% 171.2 150.2 14.0% Depreciation 14.6 13.1 11.6% 10.8 35.6% 48.6 47.0 3.3% EBITA 48.1 41.9 15.0% 15.8 205.7% 122.7 103.2 18.9% Interest 4.6 5.4 -14.5% 5.8 -19.4% 19.4 17.7 9.6% EBT 43.5 36.4 19.4% 10.0 335.4% 103.3 85.5 20.8% Tax 19.3 19.1 0.9% 2.5 672.0% 36.4 30.2 20.6% PAT 24.2 17.3 40.0% 7.5 223.1% 66.9 55.4 20.9% Minority Interest After NP 0.5 -2.9 -116.1% 1.5 -67.8% 2.7 0.4 660.0% Extra-ordinary Items 0.9 0.0 - 0.2 480.0% 1.4 0.0 - Adjusted Profit After Extra-ord-item 24.6 20.2 21.7% 6.2 298.1% 65.6 55.0 19.3% EPS (Adj) (Unit Curr.) 8.3 7.0 18.5% 2.1 298.1% 22.1 19.3 14.8%


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Financials – Consolidated

Income Statement Cash Flow Particulars, Rs in Cr FY15 FY16 FY17 FY18E FY19E

Particulars, Rs in Cr FY15 FY16 FY17E FY18E FY19E

Income from Operations 225.7 258.1 286.5 323.4 374.2

EBT 72.9 85.5 103.7 126.9 160.6 Changes in Inventories 0.0 0.0 -0.2 0.1 0.0

Depreciation and Amortization 39.7 47.0 48.6 48.0 48.5

Purchase of stock in trade 0.0 0.0 0.5 0.6 0.9

Interest /Dividend paid 12.8 17.8 19.4 20.0 16.5 Employee benefit expenses 36.9 39.4 43.0 48.5 56.5

Other Adjustment -5.2 -15.8 -17.4 -10.4 -19.0

Other Expenses 64.2 68.5 71.6 79.9 91.7

(Inc)/Dec in working Capital -34.0 -74.3 -31.0 -14.8 -11.4 Total Expenditure 101.1 107.9 114.9 129.1 149.1

Tax Paid -22.4 -28.1 -36.4 -43.5 -56.2

EBITDA 124.5 150.2 171.6 194.3 225.0

CF from Operating Activities 63.8 32.0 86.9 126.2 139.0 Depreciation 39.7 47.0 48.6 48.0 48.5

Capital expenditure -136.8 -121.9 -51.5 -62.0 -57.0

EBIT 84.8 103.2 123.1 146.3 176.5

Proceeds from sale of f.a 30.7 0.1 0.2 1.0 4.8 Other Income 0.9 0.0 0.0 0.6 0.6

(Purchase)/Sale of Investment 3.8 6.1 -51.4 12.3 7.4

Interest 12.8 17.7 19.4 20.0 16.5

Others 4.2 2.8 -87.4 -20.0 -10.1 PBT 72.9 85.5 103.7 126.9 160.6

CF from Investing Activities -98.2 -112.9 -190.0 -68.8 -54.9

Tax (including CT & DT) 24.5 30.2 36.4 43.5 56.2

Inc/(Dec) in Share capital 50.0 157.5 30.0 0.0 0.0 Reported Profit After Tax 48.4 55.4 67.3 83.4 104.4

Inc/(Dec) in Debt 54.4 48.7 94.4 -40.0 -40.0

Minority Interest 2.3 0.3 2.7 3.3 4.2

Dividend and Interest Paid -29.5 -33.8 -24.7 -27.1 -25.4 Profit/Loss of Associate Co 0.0 0.0 1.4 1.6 1.7

CF from Financing Activities 74.8 172.4 99.7 -67.1 -65.4

Extra-ordinary Items 0.0 0.0 -0.4 0.0 0.0

Net Cash Flow 40.5 91.5 -3.5 -9.6 18.7 Adjusted Profit After EOI 46.1 55.1 65.6 81.6 102.0

Opening Balance 5.1 45.6 137.2 133.7 124.0

EPS 17.6 18.5 22.1 27.5 34.3

Effect of exchange gain 0.0 0.0 0.0 0.0 0.0

Closing Balance 45.6 137.2 133.7 124.0 142.7


Balance Sheet Key Ratios Particulars, Rs in cr FY15 FY16 FY17 FY18E FY19E

Particulars FY15 FY16 FY17 FY18E FY19E

EQUITY & LIABILITIES

No of Equity Shares-cr 2.6 3.0 3.0 3.0 3.0 Share Capital 26.2 29.7 29.7 29.7 29.7

Enterprise Value-cr 536.5 472.2 573.7 544.6 485.8

Reserves and Surplus 250.7 397.3 462.7 537.2 630.3

Shareholders' funds 276.8 427.0 492.4 566.9 660.0

EPS 17.6 18.5 22.1 27.5 34.3

Minority interest 13.6 13.8 16.4 18.1 19.6

Cash EPS (PAT + Depr) 32.8 34.4 38.4 43.7 50.7 Long Term Borrowings 277.9 307.3 401.5 362.9 322.9

Book Value Per Share(Rs.) 105.7 143.7 165.8 190.9 222.2

Deferred Tax Liabilities (Net) 25.4 27.5 29.6 31.1 32.7

Other Long Term Liabilities 1.1 0.3 1.5 1.6 1.7

PE(x) 17.3 16.4 13.8 11.1 8.9

Non-current liabilities 304.3 335.1 432.6 395.6 357.2

P/BV (x) 2.9 2.1 1.8 1.6 1.4 Short Term Borrowing 0.7 1.2 1.4 1.3 1.2

Mcap/Sales(x) 3.5 3.5 3.2 2.8 2.4

Trade Payables 14.6 10.0 10.4 10.6 12.3

EV/EBITDA 4.3 3.1 3.3 2.8 2.2

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Other Current Liabilities 40.3 77.1 66.9 53.5 45.5

Short Term Provisions 16.0 16.5 12.1 12.7 13.3

EBITDAM (%) 55.2% 58.2% 59.9% 60.1% 60.1%

Current liabilities 71.6 104.8 90.8 78.1 72.3

EBITM (%) 37.6% 40.0% 43.0% 45.2% 47.2% Total 666.4 880.7 1032.3 1058.7 1109.1

PATM (%) 20.4% 21.3% 22.9% 25.2% 27.2%

ASSETS

Fixed Assets 521.3 564.5 616.0 630.0 638.4

ROCE (%) 15.1% 13.8% 13.5% 15.5% 17.6%

Non-Current Investments 5.1 9.9 61.3 49.0 41.7

RONW (%) 16.6% 12.9% 13.3% 14.4% 15.4% Long Term Loans and Adv 30.0 82.8 99.3 119.1 133.4

Other Non-Current Assets 0.2 0.2 15.2 13.6 13.0

Debt-Equity (x) 1.0 0.7 0.8 0.6 0.5 Non-current assets 556.4 657.4 791.7 811.8 826.5

Inventories 0.0 0.0 0.3 0.9 1.0 Trade Receivables 34.1 31.7 29.8 34.6 41.0 Cash and Cash Equivalents 46.6 140.8 133.7 124.0 142.8 Short Term Loans and Adv 29.2 43.3 61.2 73.4 84.4 Other Current Assets 0.0 7.5 15.6 14.0 13.3 Current assets 110.0 223.3 240.5 246.9 282.5 TOTAL 666.4 880.7 1032.3 1058.7 1109.1 (Source: Company, HDFC sec)

One Year forward P/E One and half year daily price chart


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Fundamental Research Analyst: Abdul Karim ([email protected]) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066Website: www.hdfcsec.com Email: [email protected]. Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 __________________________________________________________________________________________________________________________________________________________________________________________ Disclosure: I, (Abdul Karim, MBA), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. 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HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report.

This report is intended for non-Institutional Clients only. The views and opinions expressed in this report may at times be contrary to or not in consonance with those of Institutional Research or PCG Research teams of HDFC Securities Ltd. and/or may have different time horizons

HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193

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