Talwalkars Better Value Fitness (TALWAL) - ICICI Direct

Result UpdateRating matrixRating : BuyTarget : | 214Target Period : 12-15 monthsPotential Upside : 35%Key Financials| crore FY12 FY13 FY14E FY15ENet sales 130.5 168.8 210.5 265.2EBITDA 54.3 72.6 92.9 118.3EBITDA Margin (%) 41.6 43.0 44.1 44.6Net Profit 22.0 30.1 41.5 56.1EPS (|) 9.1 11.5 15.8 21.4Valuation summaryFY12 FY13 FY14E FY15EPE (x) 17.3 13.8 10.0 7.4Target PE (x) 23.4 18.6 13.5 10.0EV to EBITDA (x) 9.8 7.5 5.9 4.6Price to book (x) 2.6 2.0 1.7 1.4RoNW (%) 15.3 14.4 16.6 18.4RoCE (%) 14.6 15.5 17.6 20.1Stock dataMcap| 413 croreDebt (FY13)| 157 croreCash & Invest(FY13)| 23 croreEV| 547 crore52 week H/L | 223 /141Equity cap| 26.2 croreFace value | 10MF Holding(%) 9.6FII Holding(%) 11.3Price movement6,5006,0005,5005,0004,5004,000May-12Analyst’s nameAug-12Price (R.H.S)Nov-12Rashesh Shahrashes.shah@icicisecurities.comSneha Agarwalsneha.agarwal@icicisecurities.comFeb-13Nifty (L.H.S)May-13250200150100WHAT’S CHANGED…May 9, 2013Talwalkars Better Value Fitness (TALWAL)PRICE TARGET ....................................................................................................UnchangedEPS (FY14E)......................................................................... Changed from | 14.7 to | 15.8EPS (FY15E)............................................................................................................... | 21.4RATING...............................................................................................................UnchangedIncremental growth led by new initiatives…Talwalkars Better Value Fitness (TBVF) performed better than ourexpectations on the topline and PAT front in Q4FY13. Operating revenuesgrew 35.6% YoY to | 55.8 crore (I-direct estimate: | 51.7 crore). Toplinegrowth is mainly attributable to a rise in same store sales supported byimpact of new initiatives such as NuForm, Zumba® and Reduce across allgyms apart from new addition of gyms. However, operating marginsremained marginally lower than our estimates (reported OPM of 49.9%vs. I-direct estimate of 50.9%) due to higher employee costs & marketingcosts related to Zumba and Reduce, respectively. Finance costs remainedlower by 24.6% YoY to | 2.1 crore due to deployment of QIP funds fordebt repayment. With better topline growth and lower interest costs, netprofit grew 27.2% to | 12.1 crore.New initiatives by company to augur well in longer runIn the current quarter, the company has widened its presence in differentsegments of fitness like weight loss (Reduce), alternate form of fitness(massage & Zumba). TBVF has increased the number of Zumba centres to29 from15 since the last quarter. The company has also increased thenumber of Reduce centres to 17 from five in the last quarter with amember base of over 500 members. The company currently has over 150certified Zumba trainers. This, in turn, has led to higher employee cost forthis quarter. This new initiative has helped the company to leverage on itscurrent asset and enhance member base without incurring any majorcapex. Pricing for new initiatives is at a significant premium that webelieve would help the company in improving its margins, going forward.Growth momentum to continue, going forward; maintain BUY ratingWe expect revenue and PAT CAGR of 25.3% and 36.6%, respectively,during FY13-15E on the back of its aggressive expansion plans aided bynew high-end service offerings. Also, we believe the industry is still in anascent stage of growth especially in semi-urban areas. Hence, weremain positive on the stock and maintain our target price of | 214 with aBUY rating (i.e. at 10.0x FY15E EPS, 6.0x FY15E EV/EBITDA).Exhibit 1: Financial Summary(| Crore) Q4FY13 Q4FY13E Q4FY12 Q3FY13 QoQ (Chg %) YoY (Chg %)Total Operating Income 55.8 51.7 41.2 28.4 96.9 35.6EBITDA 27.9 26.3 20.8 10.3 170.4 33.7EBITDA Margin (%) 49.9 50.9 50.6 36.3 1357 bps -72 bpsDepreciation 4.1 3.6 2.9 3.6 14.3 42.2Interest 2.1 2.8 2.8 3.0 -28.2 -24.6Other Income 0.5 0.7 0.5 0.4 26.3 3.7Reported PAT 12.1 11.2 9.5 3.0 310.2 27.2EPS (|) 4.6 5.6 3.6 1.1 310.2 27.2Source: Company, ICICIdirect.com Research| 158ICICI Securities Ltd | Retail Equity Research

Exhibit 2: Consolidated revenue and QoQ growth trend6056.155.8120Net sales for Q4FY13 grew 35.6% YoY driven by 7-8% risein fees, increase in number of gyms and launch of newservices(| crore)5040302041.228.528.4100806040200(%)10-20-400-60Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13RevenueQoQ GrowthSource: Company, ICICIdirect.com ResearchExhibit 3: EBITDA & PAT margin trend60The EBITDA margin declined 70 bps YoY due to a sharprise in employee and marketing cost owing to newservice offerings(%)50403050.632.345.036.349.92023.221.721.7109.210.40Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13EBITDA MarginPAT MarginSource: Company, ICICIdirect.com ResearchExhibit 4: Number of health clubsExhibit 5: Number of health clubs by ownership250200150175205Licensed/Franchised9%HiFi10%Nos1005094128130130137144Subsidiaries10%Owned71%0FY11FY12Q1FY13Q2FY13Q3FY13Q4FY13FY14EFY15ESource: Company, ICICIdirect.com ResearchSource: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 2

Exhibit 6: Members growth trendTotal gyms for the quarter increased marginally QoQ.However, on a YoY basis, it grew over 10% to 1,33,000members(In '000)200180160140120100806040200185162125 126 130 132 1338359.0FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 FY14E FY15ESource: Company, ICICIdirect.com ResearchRecent initiatives taken by companyIn the current quarter, the company has widened its presence in differentsegments of fitness like weight loss (Reduce), alternate form of fitness(massage & Zumba). These initiatives are earnings accretive for thebusiness due to its low dependence on capex. Some of these activitiescan also be developed as standalone services outside the fitness centre.TBVF has increased the Zumba centres to 29 from 15 since the lastquarter result. The company currently has over 150 certified Zumbatrainers. Currently, large corporates, including MNCs, are availing Zumbaprogramme and NuForm. The company is actively looking at otheravenues like schools, colleges, home based services, etc.TBVF has also increased the number of Reduce centres to 17 from five inthe last quarter. The member base has widened to over 500 members.Reduce is also offered as “Home based Reduce”, primarily catering to HNIand corporates at their door step. This requires minimal capex. Hence, ithas an incremental positive impact on the fitness centre’s profitability.These new initiatives have helped the company to leverage on its currentasset and enhance the member base without incurring any major capex.Pricing for new initiatives is at a significant premium that we believewould help the company in improve its margins, going forward.ICICI Securities Ltd | Retail Equity Research Page 3

Financial summaryProfit and loss statement(| Crore)(Year-end March) FY12 FY13 FY14E FY15ETotal operating Income 130.5 168.8 210.5 265.2Growth (%) 27.6 29.3 24.7 26.0Employee Expenses 24.8 31.2 38.9 49.0Marketing Expenses 4.1 47.0 53.5 66.1Administrative Expenses 36.2 0.0 0.0 0.0Rent 0.0 0.0 0.0 0.0Other Exp 11 18 25 32Total Operating Expenditure 76.2 96.1 117.6 146.9EBITDA 54.3 72.7 92.9 118.3Growth (%) 35.5 33.9 27.7 27.4Depreciation 11.8 14.6 18.3 20.9Interest 9.1 10.8 11.4 11.7Other Income 1.6 1.3 1.6 1.8PBT 34.9 48.6 64.7 87.5Others 2.5 2.7 1.9 2.5Total Tax 10.4 15.8 21.3 28.9PAT 22.0 30.1 41.5 56.1Growth (%) 37.5 36.4 37.9 35.4EPS (|) 9.1 11.5 15.8 21.4Source: Company, ICICIdirect.com ResearchBalance sheet(| Crore)(Year-end March) FY12 FY13 FY14E FY15ELiabilitiesEquity Capital 24.12 26.2 26.2 26.2Reserve and Surplus 120.0 182.1 223.6 279.7Total Shareholders funds 144.1 208.3 249.7 305.9Total Debt 141.2 156.6 163.6 167.0Deferred Tax Liability 14.3 19.2 20.5 21.7Minority Interest / Others 5.0 8.1 9.9 12.4Total Liabilities 304.8 392.2 443.9 507.0AssetsGross Block 261.5 377.4 422.4 487.4Less: Acc Depreciation 37.0 51.6 70.0 90.8Net Block 224.5 325.8 352.5 396.6Capital WIP 27.4 27.4 32.4 32.4Total Fixed Assets 251.9 353.2 384.9 429.0Intangibles 4.6 4.6 4.6 4.6Investments 18.4 22.7 26.7 30.7Long term Loans and Adv 0.0 0.0 0.0 0.0Debtors 20.1 17.8 26.0 32.7Loans and Advances 22.6 29.3 35.4 44.1Cash 19.8 22.9 29.1 35.2Total Current Assets 62.5 69.9 90.5 112.0Creditors 22.6 42.8 46.1 50.9Provisions 10.1 15.5 16.7 18.4Other current liabilities 0.0 0.0 0.0 0.0Total Current Liabilities 32.7 58.3 62.8 69.3Net Current Assets 29.9 11.7 27.6 42.7Application of Funds 304.8 392.3 443.9 507.1Source: Company, ICICIdirect.com ResearchCash flow statement(| Crore)(Year-end March) FY12 FY13 FY14E FY15EProfit after Tax 22.0 30.1 41.5 56.1Add: Depreciation 11.8 14.6 18.3 20.9(Inc)/dec in Current Assets 1.9 -4.4 -14.3 -15.5Inc/(dec) in CL and Provisions 4.1 25.5 4.6 6.4CF from operating activities 39.8 65.9 50.1 68.0(Inc)/dec in Investments -9.8 -4.3 -4.0 -4.0(Inc)/dec in Fixed Assets -62.4 -116.0 -50.0 -65.0Others 6.2 8.0 3.2 3.7CF from investing activities -65.9 -112.3 -50.8 -65.3Issue/(Buy back) of Equity 0.0 2.1 0.0 0.0Inc/(dec) in loan funds 20.1 15.3 7.0 3.4Dividend paid & dividend tax 0.0 0.0 0.0 0.0Inc/(dec) in Sec. premium 0.0 27.2 0.0 0.0Others -4.8 4.8 0.0 0.0CF from financing activities 15.3 49.4 7.0 3.4Net Cash flow -10.8 3.0 6.2 6.1Opening Cash 30.6 19.8 22.9 29.1Closing Cash 19.8 22.9 29.1 35.2Source: Company, ICICIdirect.com ResearchKey ratios(Year-end March) FY12 FY13 FY14E FY15EPer share data (|)EPS 9.1 11.5 15.8 21.4Cash EPS 14.0 17.1 22.8 29.4BV 59.8 79.6 95.4 116.8DPS 0.5 0.0 0.0 0.0Cash Per Share 9.5 14.0 17.1 22.8Operating Ratios (%)EBITDA Margin 41.6 43.0 44.1 44.6PBT / Total Operating income 16.9 17.8 19.7 21.2Asset Turnover 0.5 0.5 0.5 0.6Debtor days 56.2 38.4 45.0 45.0Creditor days 63.2 92.5 80.0 70.0Return Ratios (%)RoE 15.3 14.4 16.6 18.4RoCE 14.6 15.5 17.6 20.1RoIC 10.5 10.6 12.0 13.8Valuation Ratios (x)P/E 17.3 13.8 10.0 7.4EV / EBITDA 9.8 7.5 5.9 4.6EV / Net Sales 4.1 3.2 2.6 2.1Market Cap / Sales 3.2 2.5 2.0 1.6Price to Book Value 2.6 2.0 1.7 1.4Solvency RatiosDebt/EBITDA 2.6 2.2 1.8 1.4Debt / Equity 1.0 0.8 0.7 0.5Current Ratio 1.9 1.2 1.4 1.6Quick Ratio 1.3 0.8 1.0 1.1Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 4

Company DescriptionTalwalkars Better Value Fitness (TBVF) is a fitness chain offering a suite ofsolutions, including gyms, spa therapy, nutrition counselling,physiotherapy guidance, aerobic activity classes and yoga sessions underthe brand Talwalkars. Its other products and services include spinningstudio, pilates and weight loss regimen. The company has an 8,000 sq ftresidential training academy at Thane. The training academy offers atraining programme of four to six weeks for its staff joining at the newcentres. As of December 2012, it operated 137 health dubs in 73 citiesand has more than 132,000 members. Its health clubs and training centresare located in Andhra Pradesh, Gujarat, Karnataka, Kerala, Maharashtra,Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and WestBengal. In April 2012, the company, through its subsidiary, opened ahealth club in Gandhinagar.Exhibit 7: Recommendation History250200150100500May-12Jun-12Aug-12Sep-12Nov-12Dec-12Feb-13Mar-13May-13PriceTarget PriceSource: ICICIdirect.com ResearchExhibit 8: Recent ReleasesDate Event CMP Target Price Rating13-Feb-12 Initiating coverage 157 190 BUY24-May-12 Q4F12 Result update 163 190 BUY14-Aug-12 Q1F13 Result update 156 190 BUY19-Oct-12 Q2F13 Result update 195 219 BUY11-Feb-13 Q3FY13 Result update 168 219 BUYSource: ICICIdirect.com ResearchExhibit 9: AssumptionsYear FY12 FY13 FY14E FY15ENew Gym additions 20 13 29 23Members per Gym 1011 1083 1080 1000Revenue per member (|) 13813 14227 14938 15835Average revenue per gym (| cr) 1.3 1.5 1.2 1.3Source: ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 5

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The performance horizon is two years unless specified and the notionaltarget price is defined as the analysts' valuation for a stock.Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;Buy: >10%/15% for large caps/midcaps, respectively;Hold: Up to +/-10%;Sell: -10% or more;Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.comICICIdirect.com Research Desk,ICICI Securities Limited,1 st Floor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)Mumbai – 400 093research@icicidirect.comANALYST CERTIFICATIONWe /I, Rashesh Shah CA, Sneha Agarwal MBA, research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect ourpersonal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) orview(s) in this report. 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