Talwalkars Better Value Fitness IPO Analysis

Talwalkars Better Value Fitness is one of the largest fitness chains in India offering a diverse suite of services including gyms, spas, aerobics and health counseling under the brand "Talwalkars". It is promoted by Mr. Madhukar Talwalkar, Mr. Prashant Talwalkar, Mr. Vinayak Gawande, Mr.Girish Talwalkar, Mr. Harsha Bhatkal and Mr. Anant Gawande. "Talwalkars" has pioneered the concept of gyms in India and today is a recognized name in the health and fitness industry.

Currently the company operates 58 health clubs out of which 44 health clubs are owned by the company, 9 health clubs are Joint Ventures (JV)/Associates and the rest 5 health clubs are run through franchisees. It is present in 24 cities belonging to 11 states of the country and serving over 55,000 members. The company has added 15 health clubs in FY09. In FY10, the company has added 9 health clubs. In the near term the company is going to start 7 health clubs, for which premises have been taken on lease and gym equipments have been ordered. Moreover for 4 clubs, the company has completed the planning phase and will commence execution very soon.

The company has also entered into arrangements with established local fitness operators to accelerate gym ramp-up in specific locations. For instance, it has formed JV with Pantaloons Retail (India) to promote mall-based gymnasiums in India. The strategy is to leverage the large number of daily footfalls in Pantaloon Malls as potential clientele. The health clubs under this format are bigger in size and have more number of equipment. Currently it owns 6 gyms named ‘Fit & Active' through this JV viz, one each at Mumbai, NCR, Nagpur, Siliguri (WB) and two at Bangalore.

Moreover, the company through Denovo Enterprises owns health clubs at Indore and Jaipur while the company has also entered into an agreement with Equinox Wellness to own a health club at Kolkata. The company has five clubs under franchisee model with two each in Delhi and Nagpur and one in Mumbai.

The company has signed a Memorandum of Understanding (MoU) for a JV with Life Fitness India to set up 4 gyms in Pune. This gives the former a compulsory right to buy out these 4 gyms on March 31, 2013 and also an option to buy the existing 4 gyms currently operated by them.

The company offers three product/services: A) Fitness Training which includes personal exercise program, body sculpting and body shaping. B) Nutrition Centre which includes weight loss program, weight maintenance program and weight gain program. C) Value Add-ons which includes spa & massage, aerobics, spinning and steam & sauna bath.

In 2009, the company established a 7500 sq. ft. training academy at Thane, to impart training to fitness trainers both newly recruited as well as the existing staff. The course duration typically ranges from 30-45 days. A significant part of the training is focused on the nuances of fitness, incorporating both practical and theoretical aspects covering weight training, cardio vascular fitness, and nutrition.

The company intends to enter capital market to raise money in the range of Rs 74.42 crore to Rs 77.44 crore by issuing around 60.5 lakh equity share of face value of Rs 10 each at the price range of Rs 123 to Rs 128 per share. The company is raising this money to add another 27 health clubs in FY11. Each health club has capital expenditure of approximately around Rs 1.86 crore which turn into Rs 50.22 crore for 27 clubs. The company also plans to repay its unsecured loan amounting to Rs 20.6 crore (out of which Rs 15.7 crore will be paid to group entities).

Strengths

The growing awareness about fitness and a healthy lifestyle is providing a huge opportunity for health and fitness industry. Significant changes in lifestyle due to lack of physical activity and increased consumption of fast foods among both affluent and working class population has led to the greater need for healthy lifestyles through sports, fitness centres and counselling on dietary habits.

The rising income levels and growing young population also favour consistent growth for the industry

The fitness market in India is severely under penetrated even when compared to other Asian countries. India has a penetration rate of just 0.4% compared to the Asia Pacific average of 3.7%. This leaves ample space for the company to grow.

The company has pan India presence that operates 58 health clubs spread across 28 cities.

Weaknesses

The company operates in a highly competitive market and face stiff competition from other players operating both in organized and un-organized sectors. Also big foreign players have also entered the Indian market, which can give tough competition to the company.

A group, controlled by Mr. Rahul Talwalkar, Mr. Rohit Talwalkar and Mr. Amber Talwalkar all being nephews of Mr. Madhukar Talwalkar, operates gymnasiums under the company ‘Talwalkars Fitness Solutions Pvt Ltd' (TFSPL). They are operating their 13 gymnasiums at various locations namely Mumbai, Baroda, Ahmedabad, Raigad, Thane and Nasik. This group owns and operates gyms under the same or similar name and can claim the history of the brand.

There are other group companies operated by promoter directors, which offer similar services:

* There are 11 gyms operating under the company's registered brand ‘Talwalkars' which are owned and operated by the Group Companies / entities. Of these 7 gyms are held by three of Promoter-Directors Mr. Madhukar Talwalkar, Mr. Girish Talwalkar and Mr. Prashant Talwalkar through their proprietary undertakings and partnership firms. The other 4 gyms are held by Life Fitness India Private Limited, in which Mr. Madhukar Talwalkar jointly with his wife holds 50% of its outstanding equity share capital.

* The company remits 80% of the franchise fee of Equinox Wellness (67% owned by Denovo Enterprises) to Talwalkars Omnifitness, which is 100% owned by Mr. Madhukar Talwalkar and Mr. Girish Talwalkar.

* The company also remits 100% of the franchisee fee of the franchised health club operating in Vashi and 80% of the franchisee fee of two of the franchised health clubs operating in Nagpur to Talwalkars Omnifitness. Mr. Madhukar Talwalkar also holds 17.5% stake in Pinnacle Fitness, a franchisee that operates two health clubs in NCR, through the shareholding of Life Fitness India. Mr. Madhukar Talwalkar is one of the directors in the Board of Pinnacle Fitness and Life Fitness India.

* There are entities namely a proprietary concern, Talwalkars Nutrition Centre and a partnership firm Fitness India Investments, owned by the promoters, which may have business conflicting with that of the company. Further, Talwalkars Omnifitness and partnership concerns Club Business Systems and Talwalkars Health Commune, which pursuant to acquisition of their business still exist with an object conflicting with that of the company.

Valuation

The company has set a price band of Rs 123 to Rs 128 per equity share of Rs 10 face value. At the lower band of Rs 123 per share, the P/E would be 51.6 times the annualized EPS of Rs 2.4 for the nine months ended December 2009 (on post-IPO equity) and 82 times the EPS of Rs 1.5 (on post-IPO equity) for FY09. At the upper price band of Rs 128 per share, the P/E would be 54 times the annualized EPS for the nine months ended December 2009 and 85 times the EPS for FY09. There is no comparable listed company. The very high valuation already factors in very high growth rates in future.