Talwalkars - Q2FY13 Result Update - Centrum

Talwalkars Better Value Fitness

Buy

Target Price: Rs219

CMP: Rs191

Upside: 15%

Strong operating performance

TBVF posted strong operating results with net sales at Rs501mn on the back of robust August scheme where the company had a renewal rate of 76% after price hike of 6-8%. Increasing investments in ZUMBA and weight loss program ‘REDUCE’ too helped the company increase same store sales growth. Margin expansion of 438bps on the back of cost control and royalty income helped the company post 47% YoY increase in profitability. We maintain BUY rating on the stock.

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m  Strong results: TBVL posted strong results with net sales at Rs501mn on the back of robust August scheme while operating profit for the company grew at 43.7% to Rs252mn. PAT after MI was up by 47% on the back of significant margin expansion to Rs122mn.

m  Healthy operating performance: Due to the robust August scheme the company was able to garner 4000 more members during the quarter. The company hiked prices by 6%-8% across health clubs which had not raised their prices during the first half of the calendar year. Despite the price hike the company witnessed an increase in its annual renewal rates to 76%. During the quarter it did not open any new gyms but invested in ZUMBA and REDUCE to increase same store sales growth. We remain optimistic on the new gym launched in H2FY13.

m  Focus on increasing same store sales growth: TBVF is increasing its focus on optimizing its product offerings by introducing new services to leverage current asset base and the existing customer portfolio. During the quarter, the company launched ZUMBA in 15 centers at a price point of Rs2500/member/month and is targeting the age group of 16-40years. It has also launched a weight loss program under the brand ‘REDUCE’ priced at Rs28000/quarter. We believe these initiatives will help the company increase its same store sales growth.  

m  Margins continue to expand: Operating margins increased by 438bps YoY to Rs50.4% as the company maintained its tight control on expenses. Employee cost as a percentage to sales reduced by 30bps while that of admin  and other expenses reduced by 406bps on the back of operating leverage. The company used innovative advertising routes such as Facebook and Google ads, which gave better results with lesser cost. The company’s focus on going asset light also helped in margin expansion on the back of royalty income from HiFi and subsidiary gyms.     

m  Maintain BUY: Global fitness companies are trading at an average of 16x CY12E and 13.5x CY13E while Indian retail companies are trading at significant premiums. TBVF is currently trading at 14.9x FY13E and 10.5x FY14E EPS of Rs12.8 and Rs18.3 respectively. The stock has given 28% return since our initiation in September and we believe the rerating will continue. Hence we value the stock at 12x FY14E (10% discount to international peers) and maintain our target price of Rs219.

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