Investment Focus - Talwalkars Better Value: Buy :: Business Line

Investors can buy the shares of Talwalkars Better Value Fitness, which owns and operates the Talwalkars chain of gymnasiums and health centres across the country. The fitness and wellness industry itself is vastly untapped and Talwalkars, with a strong presence in smaller cities too, is the only listed player in the space.

At Rs 163, the stock trades at 15.7 times the trailing 12-month earnings, at the lower end of the three-year valuation band. Given that most stocks tagged with a consumer theme trade at much higher levels, Talwalkars’ valuations appear reasonable. That said, being a small-cap (market capitalisation of Rs 440 crore), the stock is risky and investors are advised to take limited exposures to it.

SMALLER TOWNS

Besides the flagship Talwalkars chain, the company also has a chain called HiFi. Smaller in size and priced about 40 per cent lower than the Talwalkars, the HiFi model is being used to push into tier-II and -III towns. The margins are lower in this model, but it helps faster expansion, especially in small cities where the fitness wave is beginning to spread.

Rising aspirational spending on fitness in smaller cities may mean better business for Talwalkars, which has a good presence in Tier-II cities. Talwalkars also has the first mover advantage in these cities. As of December, almost 70 per cent of its health centres were in Tier-II and III cities.

Talwalkars’ new initiatives this year include high-margin Zumba fitness classes, weight-loss programmes centring on diet, and a new form of exercise regime involving electrical muscle stimulation. These offerings have got good response. Health centre expansion has been put through at a steady pace, and the company has used franchisees for faster expansion, especially in the smaller cities. So far this fiscal, the company has added 22 centres taking the total count to 137. Addition of members and renewal of membership have been steady.

MARGINS IMPROVE

Sales have grown 26 per cent in the nine months to December 2012. The once-wavering operating margins have steadied, holding above a healthy 35 per cent. But the company’s huge debt, taken on to fund expansion, and the asset-heavy model have led to high interest and depreciation costs. Net margins, thus, have hovered around 10 per cent. Net profits grew 43 per cent in the April-December 2012 period.

The company raised Rs 42 crore in equity in the December quarter and this will reduce the need for debt and also trim the debt-equity ratio from 1.01 times (March 2012). A possible dip in interest rates will also help reduce the interest outgo.

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