Healthy “SSS” drives margin expansion… • Talwalkars Better Value Fitness (TBVF) :: ICICI Securities, pdf link

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Healthy “SSS” drives margin expansion…
• Talwalkars Better Value Fitness (TBVF) performed better than our
expectations during Q2FY15. Operating revenues grew 20.4% YoY to
| 83.8 crore (I-direct estimate: | 84.8 crore), which was mainly on
account of healthy same store sales (SSS) growth (up 8.9% YoY)
• Launch of annual discount schemes during August and higher share
of value added services contributed to SSS growth in the quarter
• Further, moderation in advertising expenses coupled with healthy
SSS growth led to 331 bps YoY expansion in margins. Due to this,
net profit of | 19.7 crore (up 33.1% YoY) remained ahead of our
estimates (I-direct estimate: | 17.2 crore). Going ahead, with launch
of 20-25 new gyms and increasing awareness towards healthy life
among young population is going to remain a major growth driver
Favourable industry dynamics provides strong growth opportunity
The fitness industry in India is highly under penetrated compared to
several developed and developing countries globally. For instance, 16%
of the US population has fitness club membership compared to a mere
0.4% for the Indian market (selected top seven cities). Given this
opportunity, Talwalkars (TBVF) is well poised to benefit from a bulging
young population base and rising awareness on ‘being fit’ among young
Indian population. With visible evidence of increasing number of health
clubs (reported 16.5% YoY CAGR in FY11-14) and being an early mover in
the health club market in India with a strong brand name and quality
services, we expect growth momentum to continue, going forward.
Focus on expansion, value added services to keep growth healthy
The company has added overall 14 new health clubs across India (owned
and franchisees) during FY14, taking its total gym count to 149 (103 own
gyms, 16 subsidiaries, 13 franchise & licensed gyms and 17 HiFi gyms)
with ~1.4 lakh members. Going forward, the company will continue its
new health club expansion by carefully choosing locations, which will
yield incremental RoCE of 25% on an ongoing basis. The company will
also focus on driving profitability across the system through active
marketing of value-added services and improving same-store sales from
current 4-5% to 8-10%. Taking this into account, we expect number of
gyms to grow at a CAGR of 9.6% during FY14-16E.
Competitive pricing provides edge over other players
Talwalkars operates in competitive market and has direct competition
with many global and regional players such as Gold Gym, Fitness First
and Fitness One. However, we believe TBVF is well placed to face
competition due to its long presence in the industry driven by qualified
and experienced professionals, diversification and competitive pricing.
Growth visibility intact; maintain BUY rating
Backed by a strong operating performance, we expect revenue and PAT
CAGR of 20.5% and 31.1%, respectively, during FY14-16E. Also, we
believe the industry still has good potential to absorb new capacity.
Hence, we remain positive on the company and revise our target price
upward to | 289/share (i.e. valuing at 12.0x FY16E EPS, 6.5x FY16E
EV/EBITDA) with a BUY recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_Talwalkar_Q2FY15.pdf