Talwalkars Better Value Fitness – BUY ‘Getting in shape’:: IIFL

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We spoke to Talwalkars’ CFO to gauge the near term outlook
for the company. TALW has rolled out 19 gyms in nine months
so far and expects to open another 16 gyms in the current
quarter. Management also stated that a plan for roll out of
clubs has been put on hold and it would retain focus on gym
expansion. Mgmt targets FCF +ve in FY14 as a large chunk of
gym base would then be operating in the mature state and
expansion through franchisees would gather pace. Roll out of
HiFi gyms through franchisee route will ensure deeper
penetration without concurrent capex needs. Company expects
benefits of operating leverage to kick in considering the large
share of fixed costs which would help improve margins. We
revise lower our estimates and now expect a 33% EPS cagr
over FY12-14; retain BUY with revised 9-mth tgt of Rs190.
Club roll out plan put on hold; to focus on gym expansion
Talwalkars Better Value Fitness (TBVF) mgmt stated that plans to roll
out clubs - a different format compared to gym requiring much larger
investments and longer gestation periods - has been put on hold. It
would continue to focus on gym expansion where it remains bullish on
the opportunity in the market given the low penetration rates for
organized players.
To end FY12 with total gym base of 126
TBVF has rolled out 19 gyms in 9M FY12 and it is slated to launch
another 16 gyms in Q4, a traditionally strong quarter for the fitness
business. This would take its total gym base to 126 of which about 90
would be owned and rest would be through a combination of
subsidiaries, franchisees/JVs and HiFi gyms. Company plans to add 8
HiFi gyms in the current year through franchisee route which would
not entail any capex for the company. We also revise lower our owned
gym addition count to 18 in each of next 2 years.
Cut earnings on reduced owned gym count but retain BUY
We cut earnings forecasts for FY12/13 as we reduce owned gym
additions and now expect ~18 gyms to be added in FY13/14.
Expansion in HiFi gyms through the franchisee route would gather
momentum over next 2 years which would lower overall capex
intensity and generate free cash flow in FY14. Retain BUY rating with
revised 9-mth tgt of Rs190.
Lower earnings on reduced gym count but retain BUY
We have lowered FY13 owned gym count estimates and now expect 18
gyms to be added in FY13/14 vs company guidance of about 20 each.
Overall, we model in about 166/222 gyms on consolidated basis by
end of FY13/14. On the pricing front, company intends to hike
membership fees by 8% for new gyms (<1 year of ops) from April’ 12
but we opt to keep rev/gym constant over 3 years and project FY12-14
revenue cagr of 31%.
Given the largely fixed nature of costs we expect operating leverage
benefits to kick in over FY13/14 and factor in OPM of 44.9%/45.2%.
Given that roll outs in next 2 years would be more through subsidiaries
and HiFi franchisees (~63% share of incremental gym adds), we
expect capex intensity to decline to 21% in FY14 from 45% in current
fiscal. This would help generate free cash flow in FY14.
On the back of lower gym count, we lower FY12/13 EPS estimates. We
continue to value TALW at 17x FY13 EPS and retain BUY with revised
9-mth tgt of Rs190 (earlier Rs274).
Key risk to our earnings and target multiple would emanate from lower
than expected gym adds and possible dilution in rev/gym.