TBVF - Q4FY13 Result Update - Centrum

Talwalkars Better Value Fitness

Rating: Buy

Target Price: Rs266

CMP: Rs155

Upside: 72%

Performance above expectations

TBVF posted better than expected Q4FY13 results with net sales at Rs498mn on the back of increasing traction in ZUMBA and weight loss program ‘Reduce’ which helped the company increase its same store sales growth. Price hike in the annual August scheme coupled with new fitness studios further boosted sales. Margin expansion of 122bps on the back of cost control helped the company post 33.7% YoY increase in operating profit, 19.6% above our expectations. Adj PAT was up by 32% YoY to Rs121mn. We maintain a strong BUY on the stock.

m  Q4FY13 results beat estimates: TBVL posted net sales of Rs498mn (up 30.7% YoY), 4.3% above our estimates on the back of strong traction in new services, increasing same store sales growth and opening of fitness centers. Operating margins expanded by a healthy 122bps on a consolidated basis on the back of tightly controlled admin & other expenses which grew by mere 17.2% YoY. Operating profit was up by 33%YoY (19.6% above our estimates) to Rs279mn while PAT was high at Rs121mn, up 32% YoY. For FY13 the company posted revenues of Rs1509mn (up 26.4%YoY), operating profit of Rs726mn (up 34% YoY) with margin expansion of 263bps and Adj PAT of Rs301mn (up 38.5%YoY).

m  Focus on increasing same store sales growth: New initiatives such as Zumba®, Reduce and NuForm have helped the company leverage on its current assets and enhance member base. The higher pricing for new initiatives compared to existing services is helping the company yield higher margins and increase RoCE. By FY14 the company is confident of opening 100 Zumba® centers from 29 centers currently and introduce Reduce programs in 75 fitness centers from 17 centers now. The company currently has over 150 certified Zumba® trainers with large corporates including MNCs opting for Zumba® program and Nuform. For Reduce, the member base has widened to over 500 with the product being offered as “Home based Reduce”, primarily catering to HNIs and corporates at their door step.

m  Gym expansion plans on track: During the quarter the company started 7 new fitness centers of which 6 were owned, and one under Hi-fi. For FY14, the management expects to open 20-30 fitness centres with most of them owned taking the total gym count to 207 by 2015E. New gyms opened in tier II and III cities have received positive response from customers reflecting strong latent demand. 

m  Margins continue to expand: During the quarter operating margins expanded by 122bps to 55.9% as the company maintained tight control on expenses. Admin & other expenses grew by mere 17.2% while employee cost was up by 48.3% on the back of newly recruited Zumba trainers and marketing for Reduce. We expect the margins to expand by 137bps in FY14E to 49.5% on the back of high operating leverage from new services such as Zumba and Reduce which have high margins.

m  Other highlights: During the quarter the company launched online Shop site for Zumba merchandising, nutritional supplements, Talwalkars fitness accessories and gift vouchers. D/E for FY13 has been reduced to 0.75 from 1 in FY12 while the company has been able to reduce debtors’ days to 43 from 62. The management maintains it will become free cash flow positive by FY14 end.

m  Maintain BUY: We have increased our FY14/FY15 operating profit by 5.3%/9.5% on the back of higher margins from new services such as Reduce & Zumba while PAT has been increased by 5% for FY15E on the back of higher operating profit. TBVF is currently trading at 9.06x FY14E and 6.51x FY15E EPS of Rs17.1 and Rs23.8 respectively. We continue to value the stock at 13x Sept 2014 and increase our target price of Rs266.

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