Initiating Coverage

February 1, 2012
Rating Matrix
Rating Target Target Period Potential Upside : : : : Buy | 190 12-15 months 21%

February 14, 2012

Talwalkars Better Value Fitness (TALWAL) Betting On Young India

FY14E 23.5 22.2 31.2

YoY Growth (%)

FY11 Net sales EBITDA Net Profit 54.7 56.5 102.0 FY12E 35.1 35.1 41.7 FY13E 34.1 33.7 33.9

Current & target multiple

FY11 P/E Target P/E EV/EBITDA P/BV RoNW RoCE 23.6 28.6 11.6 3.0 12.8 12.5 FY12E 16.7 20.2 8.7 2.6 15.3 15.1 FY13E 12.4 15.1 6.5 2.1 17.0 18.0 FY14E 9.5 11.5 5.1 1.7 18.2 20.3

Talwalkars Better Value Fitness (TBVF) is one of the largest fitness service chains in India owning more than 100 health clubs. TBVF is poised to benefit from a bulging young population and rising awareness of being fit among the young population. With visible evidence of increasing membership (32% YoY growth in FY11) on a pan-India basis, we believe TBVF is well placed to benefit from being an early mover in the health club market in India with a strong brand name and quality services. TBVF further plans to expand its gym count to ~253 by FY14 by adding new HiFi gyms (budget category) in Tier-III and Tier-IV cities. We expect its net sales to grow at a CAGR of ~31% to | 229 crore and net profit to grow ~36% to ~ | 40 crore over FY11-14E backed by new gym additions and favourable demography. We initiate coverage on TBVF with a BUY rating. Lower penetration + Young population = Ample opportunity The fitness industry is highly under penetrated in India with mere 0.4% (taken for top 7 cities) membership as compared to Asia Pacific average of 3.7%. The industry, as a whole, is expected to benefit from rising proportion of age group between 20 and 44 in India, which is expected to be ~40% of Indias total population by the end of 2016. In addition, we believe growing disposable incomes and rising lifestyle related diseases would pent up demand for quality health and fitness services. Healthy expansions plans to reap maximum benefits The company has added overall ~32 new health clubs across India (owned and franchisees), taking its total gym count to 101 (73 own gyms, nine subsidiaries, eight franchises and 11 under licence agreement) with nearly one lakh members. It has further plans to increase its count of fitness clubs to ~253 by the end of FY14E. This includes addition of ~60 owned clubs and ~90 clubs through the franchise route with a total investment of nearly | 120 crore through a mix of internal accruals and debt. With favourable demographics and volume expansion, we expect FY11-14E sales and PAT CAGR of ~31% and ~36% respectively.

| 157

Stock Data
Bloomberg/Reuters code Sensex Average Volume (Year) Market capitalisation (| crore) 52 week H/L (|) Equity Captial (| crore) Promoter's stake (%) FII Holding (%) DII Holdings (%) TALW IN/TALW.BO 17806 128756 378.6 267/108 24 59.49 9.47 10.61

Comparative return matrix (%)

Return Talwalkars Titan Ind Bata Ind 1M 16.3 14.2 21.0 3M 4.7 1.3 7.3 6M -18.6 0.0 0.4 12M -12.9 31.3 106.0

Valuations

Price movement
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Feb-11 May-11 Aug-11 Nov-11 Talwal (R.H.S) Nifty (L.H.S) 300 250 200 150 100 50 0 Feb-12

At the CMP of | 157, the stock is trading at a P/E multiple of 12.4x and 9.5x its FY13E and FY14E, respectively (i.e. 6.5x and 5.1x FY13E and FY14E EV/EBITDA, respectively). We believe the industry is still in the nascent stage of growth. Also, considering the strong fundamentals of the company, we have valued the stock at 11.5x FY14 EPS and arrived at a target price of | 190 (2.1x FY14 book value and 6.0x FY14E EV/EBITDA). We are initiating coverage on the stock with a BUY rating.
Exhibit 1: Valuation Metrics
|. Crore Net sales (| crore) EBITDA (| crore) Net Profit (| crore) EPS (|) PE (x) PBV (x) EV/EBITDA (x) ROCE (%) RONW (%)
Source: Company, ICICIdirect.com Research

FY10 66.1 25.6 7.9 4.4 35.7 6.8 18.1 14.0 18.9

FY11 102.3 40.1 16.0 6.6 23.6 3.0 11.6 12.5 12.8

FY12E 138.1 54.1 22.7 9.4 16.7 2.6 8.7 15.1 15.3

FY13E 185.3 72.4 30.4 12.6 12.4 2.1 6.5 18.0 17.0

FY14E 228.9 88.4 39.9 16.6 9.5 1.7 5.1 20.3 18.2

Analysts name
Rashesh Shah rashes.shah@icicisecurities.com Hitesh Taunk hitesh.taunk@icicisecurities.com Vijay Goel Vijay.goel@icicisecurities.com

ICICI Securities Ltd | Retail Equity Research

Page 1

Company background
Shareholding pattern (Q2FY11)
Shareholder Promoters Institutional Investors Others Holding (%) 59.4 20.1 20.5

Talwalkars Better Value Fitness (TBVF) is one of the largest fitness chains in India and has a presence in over 60 cities across India. From 63 health clubs in FY10, the company now owns over 100 health clubs with a total membership of over one lakh. TBVF offers a diverse range of services including gyms, spas, aerobics and health counselling under the brand Talwalkar. The journey started way back in 1932 when the late Vishnu Talwalkar laid down the foundation stone of Talwalkars. Madhukar Talwalkar, the elder son of Vishnu Talwalkar, carried the legacy forward by opening his first gym in Bandra (Mumbai) in 1962 by the name Talwalkars Gymnasium. Later in 2003, TBVF was co-promoted by the Talwalkar Group and the Gawande group with the objective of developing Talwalkars brand as a leader in health clubs.

FII & DII holding trend (%)

12.0 10.0 8.0 6.0 4.0 2.0 0.0

9.3 11.08

11.1

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

There are 11 gyms operating under the registered brand Talwalkars under a trademark license agreement with TBVF. Out of 11 gyms, seven gyms (four in Mumbai, three in Thane) are managed by promoter group entities while the other four gyms (all in Pune) are owned by Life Fitness India Pvt Ltd (a promoter group company). In the past five years, the company has added over 80 gyms across India. The companys overall gym count has increased to ~101 in FY11 from a mere 20 gyms in FY07. To fire up its expansion plan and reduce the debt burden, the company raised | 77.4 crore through an IPO in FY11. Its net sales have grown at a CAGR of 46% since FY07 to reach | 102 crore in FY11. Its profits have grown at a CAGR of 96% since FY07 to hit | 16 crore at the end of FY11. The company has maintained an operating profit margin at an average of 34% for the past five years.

7.2 10.3

5.7

FII

DII

Exhibit 2: Ownership structure

9.5 10.6

9.6 9.9

Talwalkar Better Value Fitness

Owned Gyms (73)

Subsidiary (9)

Trademark Licensed (11)

Franchisees (8)

50.1%

Denovo Enterprise (4)

66.7%

Equinox Wellness Pvt Ltd (1)

50%

Aspire Fitness Pvt Ltd (4)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 2

Exhibit 3: Services offered by Talwalkars

February 14, 2012

Talwalkars Health Club

Fitness Training: -Personal Exercise Programme -Body Sculpting -Body Shaping

Nutrition Centre: -Weight Loss Programme Weight Maintenance Programme -Weight gain Programme

Value Add-ons: -Spa/Massage -Aerobics -Spinning -Steam/Sauna Bath

Source: DRHP, ICICIdirect.com Research

Being a professional health club service provider, TBVF caters to various needs of customers starting from personal exercise programmes to prescriptions for healthy nutrition programmes under the same roof. In addition to this, value added services such as spa/massage, aerobics and steamy/sauna bath programmes provide an edge to TBVF over other health clubs. Under its personal training programme, a team of experts analyses and exactly formulates the required programmes for members. The companys services include: Personal exercise programme: Under this service, TBVF provides individual attention to those members who require special attention for fitness related issues. The special attention paid by a personal trainer provides motivation and encouragement to its clients and helps to enhance the result. Body sculpting/shaping: TBVF provides world class services under its body building and body shaping services to tone up ones body muscles. TBVFs world class training, carefully planned mix of resistance training and cardio exercise makes this programme highly effective. Moreover, TBVF offers fitness programmes for women, for people suffering from back problems, cardiovascular problems and diabetic problems based on individual requirements. Nutrition centre: TBVF offers specialised programmes like weight loss, weight maintenance and weight gain programmes. The weight loss programme ranges from the 5 kg -one month plan to the 30 kg -eight month plan. Under its weight gain programmes, it helps to develop a good figure or physique with prescribe diets to customers suffering from diseases like diabetes, heart diseases, hypertension, etc. In addition to the aforesaid services, TBVF also offers value added services to its integrated gyms, which include spa/massage, aerobics and spinning.

ICICI Securities Ltd | Retail Equity Research

Page 3

Investment Rationale
Betting on rising young population
The Indian fitness industry is a hugely under penetrated market compared to several developed and developing countries in the world. According to International Health, Racquet and Sportsclub Association (IHRSA) 2011, the total number of health clubs in India is 1175 while the total number of members is nearly 0.41 million. According to the study, the penetration level of fitness club membership is a mere 0.4% (taken for top 7 cities) in India. According to a PricewaterhouseCoopers-Ficci report, the penetration is below 5% of the urban population in India. Although the industry is highly fragmented and dominated by mom and pop gyms, the large players have an edge in terms of product differentiation. We believe a significant rise in lifestyle related diseases and growing awareness of being fit and attractive at an age between 20 and 44 will be the main growth driver for this industry.
Exhibit 4: Talwalkars key investment thesis
...at nascent stage! Rising disposable income -Disposable income has grown at a CAGR of ~11% in last 10 years Bet on young population - Age group between 20 & 44 to be ~40% of total population by end of 2016E Rising obesity of population in India - As per OECD report, almost one in five men and over one in six women are overweight

Industry drivers

Lack of excerise route to abnormal disease!

No of cases (mn) 8.3 5.2 2.9 1.2 3.4 3.1 2 4.2

2.3

'Obesity'- lack of excerise and poor diet

Cardiac 2008 2013E 2018E 2008

Diabetes 2013E 2018E 2008

Oncology 2013E 2018E

Leading organized player with the highest numgber of Gym across India Leading organiaed player -100 health clubs over 50 cities across India - 1 lakh + membership - Proven track record of services 'Fit' Business model - Organised player with trained personnel -Focus on asset light model with addition of new gym concept ' HiFi' Road to sustainable long term growth -Targeting mass market by adding high qualtiy gym 'Hi-Fi' at reasonable price -Increasing obese population in India. Accroding to OECD, India's overweight or obese citizens increased by 20% between 1998 and 2005 -an estimated 5 mn people in India had annual income more than | 6l akh in FY06. This is expected to go up to 20 mn households by FY14E as per NCAER Strong growth in earnings - six year CAGR of 57% in total income - six year CAGR of 94% in PAT

Talwalkar's- spreading fitness by providing expertise

Where is the opportunity?

Source: Company, ICICIdirect.com Research, Apollo Hospital Investor Presentation June11

ICICI Securities Ltd | Retail Equity Research

Page 4

TBVF is poised to benefit from a bulging young population base and rising awareness on being fit among young Indian population. With visible evidence of increasing membership (reported 32% YoY growth in FY11) on a pan-India basis, we believe the company is well placed to reap the benefits of being an early mover in the health club market in India with a strong brand name and quality services.
Exhibit 5: Sustained growth of age group between 25 and 44
120 100 80 (%) 60 40 20 0 2006 0-19
Source: Company, ICICIdirect.com Research, National commission of Population 2006
43 36 34 20 37 24 40 26

Exhibit 6: Growth in membership

250 200 ('000) 150 100 50 CAGR 32%

40

2016P 20-44 44+

2021P

FY11

FY12E

FY13E

FY14E

No of Members
Source: Company, ICICIdirect.com Research

Increasing preference for brand Talwalkars due to wide service range offered
Despite a growing competition, rising number of gyms along with membership over the years is an evidence of the acceptance of the brand Talwalkars by the people. Over the years, the company has redefined its services by launching services across different verticals in fitness. To retain existing customers along with maximising revenues by making one stop solutions, the fitness centres have started offering various wellness services such as nutrition programmes along with the facility of spa and sauna bath. Addition of theses services results in higher footfalls (includes retention of existing customers) and maximises revenues.
Exhibit 7: Diversification from mainstream business to improve revenue
Beauty Players Nutrition Fitness & Slimming Alternate Therapies Rejuvenation Cosmetics Talwalkars VLCC Kerala Ayurveda Med Spa Himalaya Beauty Treatments

Salons

Source: PWC- FICCI 2011, ICICIdirect.com Research

The company has also maintained high quality standards by procuring latest equipment from reputed international manufacturers from the US and China. In order to provide standard services across all locations to its customers, TBVF has established a training academy (25,000 sq ft) at Thane (Mumbai) to train its staff. The companys vast experience in the business (since it has existed in the industry for the last 48 years) and its strategy of maintaining uniformity across every service point it offers differentiates it from various mom and pop gyms.

ICICI Securities Ltd | Retail Equity Research

Page 5

 competitive pricing provides an edge over other players

February 14, 2012

Talwalkars operates in a highly competitive market and faces stiff competition from other organised and unorganised players in the domestic market. The company has direct competition with many global and regional players in the organised segment such as Gold Gym, Fitness First and Fitness One. We believe TBVF is well placed to face competition due to its long presence in the industry, driven by qualified and experienced professionals, launch of personalised services, diversification and competitive pricing as depicted in Exhibit 8.
Exhibit 8: Peer group analysis
Name Talwalkars Gold Gym Fitness First Fitness one Area in Sq ft/per gym 4000-5000 6000-8000 14000/22000 15000/18000 Avg Fees (|) 12000-15000 16000-18000 24000-35000 16000-18000 No of gyms 101 65 6 34 Capex per gym (in | cr) 1.8-2 Franchised 8-10 NA

Source: Company, ICICIdirect.com Research

Rapid expansion to reap maximum benefits

The company has added ~32 new health clubs (including own and franchise) to reach a total count of 101 during FY11 in 50 cities as against addition of a mere 10 gyms in FY10. Besides, TBVF has converted three of its JV partners namely Denovo Enterprises (50.1% holding), Equinox Wellness (33.4% holding) and Aspire Fitness (50.001% holding) into subsidiary companies during FY11. Converting JV partners into subsidiaries will give the company the right to take a decision on various expansion plans and control over quality of the services. The company plans to increase its count of fitness club to ~253 by the end of FY14E, which includes addition of ~60 owned clubs and ~90 clubs through the franchisee route. This envisages a capital outlay of ~ | 120 crore, which would be mainly funded through internal accrual and debt. With a favourable demography and volume expansion, we expect members to grow at a CAGR of 32% during FY11-14E.
Exhibit 9: No of health clubs (including trademark ) for FY11 Exhibit 10: New health clubs with coverage of new cities
300 250 Franchised, 8 (Nos) 200 150 100 50 0 3 6 24 FY08 3 10 35 FY09 5 9 44 FY10 Owned
Source: Company, ICICIdirect.com, Research

99 8 9 73 FY11 JV/Sub 19 9 94 FY12 59 9 114 9 134

Trademark Licensed, 11

Owned, 73

Subsdiary, 9

FY13E

FY14E

Franchise

Source: Company, ICICIdirect.com, Research Note: Total gym count is excluding Gyms under Trade mark and license agreement

ICICI Securities Ltd | Retail Equity Research

Page 6

Tapping smaller towns with new Hi-Fi concept

TBVF launched new brand Hi-Fi Gyms (Healthy India Fit India) under the franchise route, which is mainly focusing on the Tier-III and IV cities. The capital expenditure to roll out a Hi-Fi gym is ~50% lower than a full fledged TBVF gym

February 14, 2012

The company is also exploring opportunities in Tier-III and IV cities through various formats of its health clubs. After considerable expansion in metros, TBVF plans to launch its new brand Hi-Fi, which is targeted towards the middle income population in smaller towns and cities (population of ~5 lakh) across India to offer high quality gyms at reasonable prices. The company is planning to have nearly 75 Hi-Fi gyms in FY13, 150 in FY14 (I direct estimate: 51 gyms in FY13E and 91 gyms in FY14E). This will mainly be franchised and enable the company to create brand awareness and consolidate its position firmly across India and generate additional revenues through royalty and franchisee fees. Since the model is mainly focused on the Tier-III and IV cities, the capital expenditure to roll out a Hi-Fi gym is ~50% lower than a full fledged TBVF gym. This enables the company to grow at a faster rate, by conserving its capital. However, this franchisee will get full support from TBVF with regard to the setting up of a gym, equipment, trainers etc. The company offers a turnkey solution to its franchise partners for setting up the health club.
Exhibit 11: A new concept Hi-Fi gyms for Tier-II and III cities
Particulars Size (Sq ft) Capex (| Lakhs) Fees (|) Facilities cities Target Customers Upfront Royalty (| Lakhs) Ongoing Royalty Model (Largely) Talwalkar Health Club 4500-5000 185-200 13000-15000 Gym+ Metros, Tier I, II Consumption-Class NA NA Ownership Hi Fi 2500-2800 75-95 8000-9000 Gym Tier III & IV Mass Market 4-6 6-8% of the topline Franchised

Source: Company, ICICIdirect.com Research

Exhibit 12: Hi-Fi revenue projection and gym additions

100
The company is planning to have nearly 75 Hi-Fi gyms in FY13, 150 in FY14 (I-direct estimate: 51 gyms in FY13E and

80 (Nos) 60 40 20 0

91

51

11
FY12E No of Gyms FY13E Franchise fee FY14E

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 7

(| crore)

91 gyms in FY14E)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

February 14, 2012

Exhibit 13: All-India presence of TBVF

Source: Company, ICICIdirect.com Research

Exhibit 14: Presence across all major states

35 30 25 20 15 10 5 0
Punjab Maharshatra* Tamilnadu Delhi NCR WB Karnataka Gujarat Rajsthan Kerala AP MP UP

(Nos)

Total no. of Gyms

Source: Company, ICICIdirect.com Research, *includes gyms under trademark licensed

ICICI Securities Ltd | Retail Equity Research

Page 8

Presence in all major cities minimises dependency on one February 14, 2012 location
Talwalkars has established a presence in over 60 cities and ~17 states across India and has maximum number of gyms (under the organised category) in Mumbai and Pune in Maharashtra. In order to get first mover advantage in the new location, the company enters either directly or adopts a joint venture or franchisee mode with strong local players in cities where it does not have a presence. Further, TBVF follows certain parameters to roll out new gyms in new location such as income distribution, population density and demographic profile of the area. Also, the management takes a final decision after looking at revenue and cost projections and breakeven time for a particular gym. We believe this panIndian presence strategy would not only enable the company to withstand the competition but also enable the company to optimally utilise its existing resources in this high competitive environment.
Exhibit 15: Organised gyms across Mumbai (inc Thane) region
Fitness First, 1 TBVF, 3

Exhibit 16: Organised gyms across Delhi (NCR) region

Gold Gym, 11 TBVF, 15 Fitness First, 3

Gold Gym, 13

Source: Company, ICICIdirect.com, Research

Source: Company, ICICIdirect.com, Research

Exhibit 17: Organised gyms across Chennai and Bangalore region

TBVF, 10

Exhibit 18: Organised gyms across Pune region

Gold Gym, 4

Fitness one, 20 Fitness First, 2 TBVF, 7

Fitness one, 1 Gold Gym, 8

Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research

ICICI Securities Ltd | Retail Equity Research

Page 9

Industry outlook
Indian fitness industry pegged at | 4,000 crore
According to PwC-Ficci 2011, the current size of the overall Indian wellness industry is estimated at ~ | 49,000 crore, and is expected to grow at a CAGR of 20% for the next three years to reach around | 87,500 crore

February 14, 2012

The Indian wellness industry encompasses a large number of service segments including beauty services (salon, treatment based beauty products), personal health counselling, fitness and rejuvenation segments. According to PwC-Ficci 2011, the current size of the overall Indian wellness industry is estimated at ~ | 49,000 crore. The industry comprises beauty services and cosmetics products, which is estimated at ~| 20,000 crore. The fitness and slimming market is estimated at ~| 4,000 crore, nutrition market (includes health and wellness food and beverages) at ~ | 13,000 crore, rejuvenation at ~ | 500 crore and alternate therapy market in India at ~| 11,500 crore, respectively. Further, according to the Ficci-PwC knowledge report, the Indian wellness industry is expected to grow at a CAGR of 20% for the next three years to reach around | 87,500 crore on the back of rising disposable incomes and increasing need to look good among the youth population in India.
Exhibit 19: Indian wellness industry (segment wise market share)
Alternate Therapy 23% Rejuvenation 1%

Beauty care market 41%

Nutrition Market 27%

Source: PWC-FICCI, Company, ICICIdirect.com Research

Fitness & Slimming industry 8%

Exhibit 20: India- One of the lowest membership penetration rates

Lower membership penetration rate in India compared to other Asian nations shows huge potential of growth, going forward 80 65 50 35 0 5 10 15 20 5 -10 20 25 30 35 40

Global market size

Continent Total industry Rev (US$ bn) Total nos of Total nos of Clubs members (mn) 48005 38332 18149 3210 24086 1776 133558 44 58 14 3 7 2 129

Europe 31.4 North America 24.0 Asia 10.7 Australia 2.3 South America 2.4 Africa 0.1 Total 70.9 Source: IHRSA Mediakit 2012

No of members (in mn)

Size of the bubble represents revenue (in bn $) of healthclub industry in respective region

No of Healh clubs ('000) US

Source: IHRSA,ICICIdirect.com Research

Japan

China

India

South Korea

ICICI Securities Ltd | Retail Equity Research

Page 10

February 14, 2012 According to IHRSA, the global health club industry generated an estimated ~US$71 billion in total revenues during 2011 from ~US$67.2 billion in 2010 while global health club memberships have gone up to ~129 mn in 2011 from~119 mn in 2010 (up ~8% YoY). Currently, the Indian fitness industry is in nascent stages of growth. The fitness and slimming industry has ~8% of market share (~| 40 billion as on September 2011), of which slimming and fitness services account for ~65% of market share. The fitness industry in India is highly under penetrated compared to several developed and developing countries in the world. For instance, 16% of the US population has fitness club membership compared to a mere 0.4% for the Indian markets (selected top 7 cities).

Industry to benefit from growing young population

Growing concerns on maintaining body fitness among the young population in India has provided more room for growth in the fitness products and service providers segment. Significant changes in lifestyle related to lack of physical activity and increased consumption of fast food among both affluent and working class population has led to greater need for healthy lifestyles. In India, the age group of 20-44 can be mainly identified as the prime market for fitness clubs. According to a report published by NCP in 2006, the proportion of people in the age group of 20-44 is projected to go up from 37% in 2006 to 39% in 2011 and 40% in 2016. This is an addition of approximately another ~4.3 crore people in terms of population between 2011 and 2016. According to IHRSA, the current membership in the fitness industry has grown ~78% YoY to 0.41 million against 0.23 million in 2010.
Exhibit 21: Young population growth rate in India
60.0 50.0 Population (crore) 40.0 30.0 20.0 10.0 0.0 1995 2001 2006 2011P 2016P 2021P 2026P 41 40 39 38 36 35 34 33 32 (%) 37

Population age between 20-44 (in crore)

Source: National commission on population 2006, ICICIdirect.com Research

% of total population

ICICI Securities Ltd | Retail Equity Research

Page 11

February 14, 2012 Growing disposable income to translate to higher discretionary expenditure
TBVF will benefit from growing urbanisation coupled with rising disposable income in India. The number of households earning between | 3.1 lakh and | 15.6 lakh in each segmen grew at ~12% CAGR (from 11 million to 28 million) betwee 2001-02 and 2009-10

We expect the major growth driver for the fitness service industry to be the growing population in urban India. According to census 2011 provisional data, the urban population constituted 31.2% of the total population in 2011. Going forward, continuous growth in disposable income from 2001-02 to 2009-10 can be clearly figured out through the PwC-Ficci report. It suggests that the number of households earning below | 1.4 lakh per annum declined from 135 million to 114 million in 2009-2010. However, the number of households earning between | 3.1 lakh and | 15.6 lakh in each segment grew at ~12% CAGR (from 11 million to 28 million) between 2001-02 and 2009-10. With rising income levels, we expect spending to also increase significantly. During the last few years, a sharp rise in wealth can be seen in several posh residential complexes that have emerged in the top few Indian cities like Mumbai, NCR, Chennai, Kolkata, Hyderabad, Bangalore and Pune. This segment of the population provides an upscale market for fitness centres to offer not just the basic gym facility but also advanced value added activities like spas, steam/sauna bath, nutrition centres, aerobics, spinning studios and personal training programmes.
Exhibit 22: Growth in middle class income to drive wellness industry
CAGR 21% 1 2 9 41 CAGR 17% CAGR 12% CAGR 12% CAGR (2%) 135 50 4 6 22 75

200

million households

150

100

114

0 2001-02 Deprived (AI< INR 140,000) Seekers (AI INR 310,000-780,000) Globals (AI>1560,000) 2009-10 Aspirers (AI INR 140,000-310,000) Strivers (AI INR 780,000-1560,000)

Source: Ficci-PwC, ICICIdirect.com Research

Exhibit 23: Shift from the rural to urban category

100 Proportion of All India Population (%)

Over the last three decades, the urbanisation rate grew at a CAGR of ~11%

4 14 12

5 15 14

6 16 16

7 18 17

80

60 67 62

40

57

52

20 1981 <10000 1991 >10000 and < 1Lac 2001 >1 Lac and <10 Lac 2011 Above 50 Lac

Source: IIHS ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 12

According to a McKinsey Global Institute (MGI) 2010 report, Indias fast February 14, 2012 growing cities will drive a near fourfold increase in the countrys per capita income between 2008 and 2030. As per the report, the number of middle class households (earning between | 200,000 and | 1 million a year) will increase more than fourfold nationwide from 32 million to 147 million in 2030. As per the report, the per capita disposable income of the urban segment grew at a CAGR of 5.4% between 1990 and 2008 while it is expected to grow at a CAGR of 6.4% between 2008 and 2030. With the rising disposable income, consumers discretionary expenditure is also likely to increase significantly. As per the PwC-Ficci report, the discretionary spend (Exhibit 25) has increased by 1000 bps from 2000-01 to 40% of the total spend in 2009-10. This is further expected to go up by 1000 bps by 2019-20.
Exhibit 24: Household income growth to be an important driver
Per capita disposable income, | '000 2008 prices Projection 239 Urban 6.4 136 All India

240 220 200 180 160 140 120 100 80 60 40 20 0

6.1 67 Rural 5.4 4.2 4.3 3.2 1990 1995 2000 2005 2010 2015 2020 2025 2030

Source: MGI 2010 ICICIdirect.com Research,, Figures in circle represents CAGR growth

Exhibit 25: Rising discretionary expenditure

2019-20

50%

50%

2009-10

60%

40%

Non discretionary spend Discretionary spend

2000-01

70%

30%

0%

20%

40%

60%

80%

100%

120%

Source: FICCI-PWC, ICICIdirect.com Research

The affordability of products and services shifts beyond the basic need for food and clothing to discretionary items as deprived households shift to the aspirers and seekers category. We believe significant changes in lifestyle related to lack of physical activity and increased consumption of fast foods among both the affluent and working class population has led to the greater need for healthy lifestyles through sports, fitness centres and counselling on dietary habits. This opens the door for fitness services providers.

ICICI Securities Ltd | Retail Equity Research

Page 13

Rising lifestyle diseases

February 14, 2012

Significant changes in lifestyle related to lack of physical activities and increased consumption of junk foods among the young population has created a greater need for a healthy lifestyle through exercise and counselling on dietary habits. According to the International Diabetic Federation, India alone has 61.3 million people living with diabetes. This places India second only to China. Due to its large child population, India accounts for most of the 1,12,000 children with type 1 diabetes. Rising number of diabetic patients in India in the adult age group is creating room for established gyms players to expand gyms with trained employees. How regular exercise helps to reduce chances of chronic disease Regular exercise is extremely effective in decreasing the risk of developing diabetes. According to a Harvard study, physical activities such as jogging and lifting weights (rigorous exercise) takes two-third of the time compared to moderate activities (such as walking) in order to reduce the chances of being diabetic. Regular exercise controls blood pressure and cholesterol levels, encourages weight loss and helps the body to handle insulin better. High blood pressure, high cholesterol levels, excess weight and poor insulin usage are each major risk factors for diabetes.
Exhibit 26: Diabetic population across age groups between 20 and 79 years
~12% of adult* population suffering from diabetes Diabetes related deaths among adults*

800 (in mn) 600 400 200 0 Undiagnosed Cases Diabetes Cases 61 31

735

India, 0.98 mn RoW, 2.3 mn China, 1.13 mn USA, 0.18 mn

Total adult population

Gender wise adults* affected by diabetes

Location wise population distribution among adults*

34 32 30 28 26

32.5 28.8 (in mn)

40 30 20 10 0

33.7

27.6

(in mn)

Men

Women

Rural

Urban

Source: International Diabetes Forum,, The Economic Times, ICICIdirect.com Research * adult consists age group between (20-79 yrs)

ICICI Securities Ltd | Retail Equity Research

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Rising awareness of healthy lifestyle among Indians

There is a growing demand for wellness services in urban markets beyond Tier 1 cities mainly due to rising awareness in the country on diseases like diabetes. A study of AC Nielsens Global Online Consumer Survey 2009 reveals that going to gym is the second most preferred option for exercise after walking. Among total respondents, ~35% preferred exercise through walking while only 18% preferred gyms for the exercise. We expect penetration of gyms to increase in the near future with rising income level and awareness about lifestyle diseases among the adult age group.
Exhibit 27: Exercises preferred by Indians
Others 14% Walking 35%

Exhibit 28: Frequency of exercise

Daily 22% Never 20%

Running/ Jogging 16%

1-2 days a week 22%

Yoga/Pilates 17% Source: DRHP, ICICIdirect.com, Research

Gym 18%

3-6 days a week 36%

Source: DRHP, ICICIdirect.com, Research

Least affected by slowdown in economy

The gym, health and fitness clubs industry is in the growth stage of its life cycle due to an increased awareness and interest in fitness & health and the need for exercise. Even in the midst of the economic downturn, the industry has maintained steady growth, with membership rates growing consistently and profits remaining solid. Demand for gyms and health and fitness clubs will continue to rise over the next five years as the general public becomes more health conscious and the aging population places a greater emphasis on staying fit. Additionally, the amount of leisure time and growth in household incomes will positively affect businesses, leading operators to expand into larger facilities
Exhibit 29: Growth in fitness clubs and respective membership in India
1400 1200 1000 800 600 400 200 Fitness club 2008
Source: DRHP, IHRSA, ICICIdirect.com Research, *in thousand

CAGR 15%

1175

765 CAGR 21% 411 230 Membership* 2011

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Understanding the business model of a February 14, 2012 health club

According to the company, it takes nearly 14-16 weeks to set up a health club with an area of ~4000-5000 sq ft after finalisation of the site location. The gym layout consists of sections like the gym hall comprising the cardio facility, free weights, physical training, massage, steam/sauna, nutrition counselling, changing room with locker and juice bar. Setting up a health club is a two phase process, which includes 1) planning phase and 2) execution phase (for details please refer Exhibit 28). Further, under the cost break-up of an integrated health club, interior cost contributes a major portion of the total cost (~42-45%), which involves civil work, carpentry, electrical, structural, painting and other infrastructure related costs including architects professional fees. The second major cost contributor is cost of gym equipment (~29%), which includes gymnasium equipment such as cardio, strength and free weights (cardio equipment imported from the US and China).
Exhibit 30: Flow chart and cost distribution for gym facility with operating area of 5000 sq ft

Planning Phase

Execution Phase

1. City and region/area identification for proposed gym 2. Feasibility study based on critical parameters (like income distribution, population density and demographic profile) 3. Site identification in the chosen city region 4. Preparation of business plan-revenue projections, costing (lease rent , physical infrastructure, etc.) 5. In principle management consent

1. Typically a 14-16 weeks execution cycle includes designing for the club layout, civil work, sourcing of equipment 2. Recruitment and training 3. Promotional activities

Estimated cost brea- up of a health club Talwalkar Health Club Size (Sq ft) Capex (| Lakhs) Fees (|) Facilities Cities Target customers Upfront royalty (| lakh) Ongoing royalty Model (largely) 4500-5000 185-200 13000-15000 Gym+ Metros, Tier I, II Consumption-Class NA NA Ownership Hi Fi 2500-2800 75-95 8000-9000 Gym Tier III & IV Mass Market 4-6 6-8% of the topline Franchised Cost of Gym Equipment 29% Other infrastructure related cost 19% Pre operative costs Deposits 5% 5%

Interior costs* 42%

Source: Company, ICICIdirect.com Research * for an average area of 5000 sq feet

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Exhibit 31 explains the replica of a fitness club revenue model wherein we February 14, 2012 have taken a very conservative approach to build a standalone income statement and simple balance sheet. Under our assumption, we have taken one gym with an area of 5,000 sq ft, which consists of a service of gyms, spas, aerobics and health counselling. We have estimated ~ | 18 million cost (cost considered by Talwalkars Better Value Fitness) to develop the gym (excluding land cost), which includes interior cost (~42% of total cost), cost of gymnasium equipment (~29%), other infrastructure cost (~19%) and pre operative cost (~5%) for a floor space of 5,000 sq ft. We have assumed average fees of | 15,000 at the starting stage with a revision of fees only every third year till 10th year and have taken ~5% increment in membership fees every year (to offset the rising inflation). We have assumed footfalls of nearly 800 in Tier I and Tier II cities. However, we have kept the total gym membership at 1,000 which can be achieved in the second year after opening a gym. Under the major cost component, we have assumed admin and other expenses at ~27% of total operating income, which includes general expenses such as consumables, food supplements, water charges, audit fees, etc. Another major component includes employee cost at ~20% of net sales and a gym will have ~18-25 employees per gym, which is the maximum of what a fully integrated gym operates with. Further, we have assumed other income at a steady 5% of gym revenue, which mainly includes income from juice centre and food and supplements, interest income, etc. We believe achieving stable operations for a new centre (in terms of new membership) depends on location and the competition. Hence, we have assumed a new centre will take one or two years to be fully operational. Ideally, on a steady state, the health club would make ~40% of margin and reach the break even level at the EBITDA level in the first year of its operation. The high EBITDA margin for an organised player could be due to a rise in average fee as major cost components are fixed. Our study suggests that having achieved stable operations an organised gym would have a payback of five years.

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Exhibit 31: Fitness club Revenue Model

Income Statement Gym Fees No of Customer Gym Revenue Other Revenue Total Revenue Employee cost Admin & Other exp Selling & Marketing Service tax Total Operating Expenses EBITDA EBITDA Margin Dep Dep Charge EBIT Interest Effective interest rate PBT Tax Effective Tax Rate PAT Capital Employed Debt Equity RoCE RoE Dividend Adj Equity RoE

0 Nos |/per Nos | mn | mn | mn | mn | mn | mn | mn | mn | mn | mn | mn | mn | mn | mn 18 11 7

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Yr 16 Yr 17 Yr 18 Yr 19 Yr 20 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 15000 15000 15000 16500 16500 16500 18150 18150 18150 19965 19965 20963 22011 23112 24268 25481 26755 28093 29497 30972 800 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 12.0 15.0 15.0 16.5 16.5 16.5 18.2 18.2 18.2 20.0 20.0 21.0 22.0 23.1 24.3 25.5 26.8 28.1 29.5 31.0 0.6 0.8 0.8 0.8 0.8 0.8 0.9 0.9 0.9 1.0 1.0 1.0 1.1 1.2 1.2 1.3 1.3 1.4 1.5 1.5 12.6 15.8 15.8 17.3 17.3 17.3 19.1 19.1 19.1 21.0 21.0 22.0 23.1 24.3 25.5 26.8 28.1 29.5 31.0 32.5 2.4 3.0 3.0 3.3 3.3 3.3 3.6 3.6 3.6 4.0 4.0 4.2 4.4 4.6 4.9 5.1 5.4 5.6 5.9 6.2 3.2 4.1 4.1 4.5 4.5 4.5 4.9 4.9 4.9 5.4 5.4 5.7 5.9 6.2 6.6 6.9 7.2 7.6 8.0 8.4 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.7 1 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 7.2 9.0 9.0 9.9 9.9 9.9 10.9 10.9 10.9 12.0 12.0 12.6 13.2 13.9 14.6 15.3 16.1 16.9 17.7 18.6 4.8 6.0 6.0 6.6 6.6 6.6 7.2 7.2 7.2 8.0 8.0 8.4 8.8 9.2 9.7 10.2 10.7 11.2 11.8 12.4 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 0.6 0.6 0.6 0.5 0.5 0.5 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.8 0.7 0.7 0.7 0.7 0.7 4% 4% 4% 3% 3% 3% 4% 4% 4% 4% 4% 4% 4% 4% 5% 4% 4% 4% 4% 4% 4.2 5.4 5.4 6.0 6.0 6.0 6.4 6.5 6.5 7.2 7.2 7.6 8.1 8.5 8.9 9.4 9.9 10.5 11.0 11.6 1.21 1.21 1.21 1.21 1.14 1.06 0.98 0.88 0.77 0.65 0.51 0.36 0.19 0.00 0.00 0.00 0.00 0.00 0.00 0.00 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 2.9 4.1 4.1 4.8 4.9 5.0 5.5 5.6 5.7 6.6 6.7 7.3 7.9 8.5 8.9 9.4 9.9 10.5 11.0 11.6 0.97 1.37 1.37 1.59 1.62 1.64 1.80 1.86 1.90 2.17 2.22 2.40 2.60 2.80 2.93 3.12 3.28 3.46 3.64 3.84 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 2.0 20 11 9 21% 22% 1.0 8.0 25% 2.8 23 11 12 24% 24% 1.4 10.4 27% 2.77 26 11 15 21% 19% 1.4 11.7 24% 3.24 29 11 18 21% 18% 1.6 13.4 24% 3.3 31 10 21 19% 16% 1.6 15.0 22% 3.3 34 10 24 18% 14% 1.7 16.7 20% 3.7 37 9 28 17% 13% 1.8 18.5 20% 3.8 40 8 32 16% 12% 1.9 20.4 19% 3.8 43 7 36 15% 11% 1.9 22.3 17% 4.4 46 6 40 16% 11% 2.2 24.5 18% 4.5 49 5 45 15% 10% 2.3 26.8 17% 4.9 53 3 49 14% 10% 2.4 29.2 17% 5.3 56 2 55 14% 10% 2.6 31.9 17% 5.7 60 0 60 14% 9% 5.7 31.9 18% 5.9 66 0 66 13% 9% 5.9 31.9 19% 6.3 73 0 73 13% 9% 6.3 31.9 20% 6.7 79 0 79 13% 8% 6.7 31.9 21% 7.0 86 0 86 12% 8% 7.0 31.9 22% 7.4 94 0 94 12% 8% 7.4 31.9 23% 7.8 102 0 102 11% 8% 7.8 31.9 24%

Source: Company, ICICIdirect.com Research

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Page 18

Key financials
Topline to grow at handsome ~31% CAGR between FY11 and FY14E
We expect the topline to grow on the back of ~31% CAGR in membership. This can be mainly be attributed to growth in gym addition at 36% CAGR between FY11 and FY14E, keeping the average member per gym at ~1000 during the period

We expect net sales to grow at ~31% CAGR between F11 and FY14E on a consolidated basis from | 102 crore to ~| 229 crore on the back of its aggressive expansion plans (addition of ~152 new gyms during the period) and rising customer base. We have assumed ~32% CAGR in membership between FY11 and FY14E while we have assumed growth at 3% CAGR in membership fees. Our assumption of ~31% CAGR in membership can mainly be attributed to growth in gym addition at 36% CAGR between FY11 and FY14E, keeping the average member per gym at ~1000 during the period.
Exhibit 32: Net sales growth trend
250 200 (| crore) 150 102 100 50 0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 22 38 60 66 138 185 229

Net sales
Source: Company, ICICIdirect.com Research

Sustained EBITDA margin on higher topline growth

We expect the company to maintain its EBITDA margin ~39% between FY11 and FY14E supported by revenue CAGR of ~31% during the same period. Major cost components such as employee cost (which contributes ~30% of total cost) is expected to grow at a CAGR of ~34% mainly due to new gym additions during the period. We have assumed 20 employees per gym and addition of 1170 employee across India between FY11 and FY14E. We expect an increase in membership in future to help reduce the fixed cost component significantly, thus improving margin.
The EBITDA margin will remain intact at ~39% between FY11 and FY14E supported by revenue CAGR of ~31% during the same period

Exhibit 33: EBITDA & EBITDA margin (%) trend

100 90 80 70 60 50 40 30 20 10 0 88 72 54 40 13 17 26 30 25 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E (%) 35 45 40

(| crore)

EBITDA
Source: Company, ICICIdirect.com Research

EBITDA Margin

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Net profit to grow at ~36% CAGR between FY11 and FY14E

Net profit is expected to grow at ~36% CAGR between FY11 and FY14E on the back of sustained growth in topline and EBITDA during the period. However, interest cost during FY12E is expected to jump sharply by ~17% YoY due to higher interest charges as the company has issued non convertible debentures worth | 30 crore in FY11. The company plans to add nearly 120 gyms (20 TBVF gyms annually and 80 Hi-Fi gyms annually) between FY12E and FY14E. Going forward, the depreciation charges are expected to grow by ~17% YoY in FY12E and ~15% YoY in FY13E on account of addition of new gyms in the period.
Exhibit 34: Higher topline and EBITDA translate into notable profit growth
45 40 35 30 25 20 15 10 5 0 40 30 CAGR 94% 16 5 7 8 23

CAGR 36%

(| crore)

1 FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

Net Profit
Source: Company, ICICIdirect.com Research

Return ratio: a replica of higher earnings

The companys return ratios remained firm during FY07 to FY10 mainly on the back of notable revenue growth (CAGR 44%), strong EBITDA margin (average EBITDA margin over 30%) and earnings growth (CAGR ~94%). However, RoCE and RoE showed signs of consolidation from FY10 onwards on the back of a rise in debt and equity (IPO offer came on April 2010). We expect TBVF to maintain its return ratios to the tune of 1620% for RoCE and RoE on the back of strong revenue growth (due to new gym addition) and robust margins.
Exhibit 35: Higher profitability to drive return ratios
23 21 19 17 15 13 11 9 7 5

20 19 14 13 12 18 15 15 17 18

(%)

FY10

FY11 RoCE

FY12E ROE

FY13E

FY14E

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Risk & concerns

Rising competition from global players
As discussed earlier, the wellness industry is still in the nascent stages of growth and has large potential to grow in the coming future. Hence, to grab the opportunity, organised and unorganised players are continuously trying to enhance the pie in the business. TBVF faces stiff competition from organised and unorganised players. In addition, the price is also playing an important role in the customers selection of the companys services.
Exhibit 36: Major organised players in India
Name Area in Sq ft/per gym Avg Fees (|) No of gyms

Talwalkar Gold Gym Fitness First Fitness One

Source: Company, ICICIdirect.com Research

4000-5000 6000-8000 14000/22000 15000/18000

12000-15000 16000-18000 24000-35000 16000-18000

101 65 6 34

Growth potential and low entry barrier invites new entrants

With a thriving consumer population along with rising discretionary income level, the industry has witnessed robust demand for fitness services. In addition, rising awareness of lifestyle diseases and exposure to media and advertisement on personal fitness continues to support the demand for fitness services in India. Considering that, an improvement in membership penetration level (India has lowest membership penetration among other developing countries in Asia) and low entry barriers in the business in the worlds second biggest populated nation creates an opportunity for new players to enjoy the benefit of early entrants.

Human resource
Being in the service industry, it is very important to have a trained work force (gym trainer) to handle the client. People are still hesitant to disclose that they are working in a gym though a bulk of the fitness trainers come from a less affluent class of society. In addition, in India fitness is still not a priority for women. Hence, finding women trainers is also difficult.

Macroeconomic risk
Factors such as recession, inflation and unemployment influence income levels and eventually shape the consumers purchasing patterns, thereby influencing consumer demand for the companys products. There is a direct link between consumer confidences and spending that is determined by general economic conditions and discretionary income levels.

Corporate governance
There are 11 gyms operating under TBVF registered brand Talwalkars, which are owned and operated by group companies/entities. Of these, seven gyms are held by three TBVF Promoter-Directors Madhukar Vishnu Talwalkar, Girish Madhukar Talwalkar and Prashant Sudhakar Talwalkar through their proprietary undertakings and partnership firms. The other four gyms are owned by Life Fitness India Pvt Ltd, in which Madhukar Vishnu Talwalkar jointly with his wife holds 50% of its outstanding equity share capital. Any deficiency in the quality of services, equipment, training, etc. provided by these gyms may adversely affect TBVFs brand image and, thereby, business and results of operations/financial condition.

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Maximum property on lease

Total ~70% of owned gyms are on a lease/license agreement and agreements for some of the premises are not registered. In the event the company faces litigation pertaining to these properties, these lease/leave and licence agreements may be challenged in a court of law. Besides, the lease agreements for all these premises are renewable on mutual consent upon payment of such rates as stated in these agreements. If any of the owners of these premises do not renew the agreements under which TBVF occupy the premises or renew such agreements on terms and conditions that are unfavourable to the company, TBVF may suffer a disruption in operations, which could have an adverse effect on its business, financial conditions and results of operations.
Exhibit 37: Key management personnel
Name Designation Credentials Holds Bachelors degree in Textile Engineering from Mumbai Madhukar Vishnu Talwalkar Executive Chairman 51 yrs of experience in the Fitness Industry Founder President- Greater Bombay Body Builders Assocation President- Maharashtra State Body Builders Federation Holds Bachelors degree in Science from Mumbai Over 25 yrs of experience in promoting the Fitness Industry Holds Bachelors degree in commerce from Mumbai Vinayak Ratnakar Gawande Executive Director 31 Yrs of experience in taxation, law and finance industry Key responsibility of taxation and legal matters of the company Anant Ratnakar Gawande
Source: Company, ICICIdirect.com Research

Prashant Sudhakar Talwalkar

Managing Director & CEO

Fellow member of ICAI, over 20 yrs of experience in finance, leasing & related services Executive Director & CFO In-Charge of the entire finance operations including budgets and controls

ICICI Securities Ltd | Retail Equity Research

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Valuation
TBVF is one of the largest fitness chains in the country with over 100 health clubs across 60 regions. The company is the only listed player in the country, which is operating in the fitness services segment. The company was relatively immune to the economic slowdown as it reported net sales CAGR of ~64% during the period FY07-09. India has experienced significant changes in lifestyle related to lack of physical activities and increased consumption of junk food among the young population. This has created a greater need for a healthy lifestyle through exercise and counselling on dietary habits. In addition, growing concerns on maintaining body fitness among young population along with rising discretionary incomes in India provide substantial space for growth for the fitness service providers. We expect revenue CAGR of ~31% between F11 and FY14E on a consolidated basis from | 102 crore to | 229 crore on the back of its aggressive expansion plans (Hi-Fi gym in Tier II and III cities) and a rising customer base. The return ratios of the company saw a decline from FY08 to FY11 as the company went on an expansion spree and added ~70 gyms (including all types) during the same period. However, we expect the ratio to improve from FY12E onwards as TBVF plans to add more gyms on the franchise route (Hi-Fi gyms), going forward. Since the company is the only listed player in the category of fitness service providers. The average consensus P/E multiple of its peer group are at 20x of CY11E and 15x CY12E, respectively, while TBVF trades at 16.7x FY12E and 12.4x of FY13E, respectively. We believe the industry is still in a nascent stage of growth. Considering the strong fundamentals of the company, we have valued the stock at 15x and 11.5x FY13E EPS and FY14E EPS respectively and arrived at a target price of | 190. At this price the stock would trade at 2.1x FY14 book value and 5.3x FY14E EV/EBITDA. We initiate a coverage on the stock with a BUY rating.
Exhibit 38: International Peer comparative matrix
Mcap (in mn Country USD) US US US India 5167 1984 200 379 2010 1452 913 462 102.3

International Peers Weight Watchers* Life Time Fitness* Town Sports Int Ltd* Talwalkars^

Sales 2011 1828 1008 467 138.1

2012 1955 1113 483 185.3

2010 424 253 74 40.1

EBITDA 2011 578 279 87 54.1

2012 633 315 96 72.4

Net Profit 2010 2011 2012 194 304 350 81 96 111 (0) 5 16 16.0 22.7 30.4

2010 24 24 NA 23.6

PE EV/EBITDA ROE 2011 2012 2010 2011 2012 2010 2011 2012 17 15 15 11 10 NA NA NA 20 17 9 9 8 10 11 11 22 14 5 5 5 NA NA NA 16.7 12.4 11.6 8.7 6.5 12.8 15.3 17.0

Source: Bloomberg, Company, ICICIdirect.com Research ^| crore, Talwalkars financials denotes year ending March (i.e.FY11-13E) * year ending December and financials are in USD mn

Exhibit 39: Unlisted player comparative matrix

Domestic unlisted Peers VLCC Healhtcare
Source: Accord fintech, ICICIdirect.com Research

Country Mcap India NA

FY08 182.2

Sales FY09 203.7

FY10 213.8

FY08 34.3

EBITDA FY09 27.5

FY10 28.8

Net Profit FY08 FY09 FY10 10.0 7.0 11.9

FY08 18.0

ROE RoCE FY09 FY10 FY08 FY09 12.0 14.0 13.0 11.0

FY10 16.0

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Exhibit 40: Profit and Loss

(| Crore) (Year-end March) Gross Fees inc service tax Franchisee Fees inc service tax Input credit service tax Total Operating Income Expenditure Employee Expenses Marketing Expenses Administrative Expenses Rent Electricity Service tax Total Operating Expenditure EBITDA Other Income Interest Depreciation PBT before Exceptional Items PBT Total Tax PAT before MI Minority Interest PAT after MI EPS EPS (Adjusted)
Source: Company, ICICIdirect.com Research * Result are consolidated FY11 onwards

FY10 63.6 1.3 1.3 66.1

FY11 93.5 6.4 2.3 102.3

FY12E 128.1 7.4 2.5 138.1

FY13E 171.7 10.7 2.9 185.3

FY14E 212.3 13.2 3.4 228.9

15.7 1.5 4.9 7.8 4.6 6.1 40.5 25.6 0.4 8.1 6.1 11.8 11.6 3.7 7.9 7.9 4.4 4.5

20.2 3.5 10.7 11.9 6.4 9.4 62.2 40.1 2.1 8.6 9.0 24.6 24.2 7.4 16.8 0.8 16.0 6.6 6.8

26.1 4.0 16.6 14.7 9.7 12.8 84.0 54.1 1.9 10.1 12.0 34.0 34.0 10.2 23.8 1.1 22.7 9.4 9.4

35.1 4.8 22.2 20.7 13.0 17.1 112.9 72.4 1.7 12.5 14.1 47.4 47.4 15.7 31.8 1.4 30.4 12.6 12.6

42.7 6.0 27.5 27.3 16.0 21.0 140.5 88.4 1.8 11.7 16.2 62.3 62.3 20.5 41.7 1.8 39.9 16.6 16.6

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Exhibit 41: Balance Sheet

(| Crore) (Year-end March) Equity Capital Reserve and Surplus Total Shareholders funds Secured Loan Unsecured Loan Total Debt Deferred Tax Liability Minority Interest Liability side total Assets Total Gross Block Less Accumulated Depreciation on T Net Block Capital Work in Progress in Tangible Total Fixed Assets Liquid Investments Debtors Cash Loans and Advances Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written Assets side total
Source: Company, ICICIdirect.com Research * Result are consolidated FY11 onwards

FY10 18.1 23.9 42.0 62.9 34.3 97.2 4.8 144.0 126.5 15.3 111.2 13.0 124.3 3.3 12.5 10.9 26.6 11.8 5.6 17.4 9.2 0.8 144.1

FY11 24.1 101.6 125.7 107.4 13.7 121.1 10.9 2.2 260.0 199.1 25.2 173.9 27.4 201.3 3.7 20.3 29.4 24.3 74.0 17.3 11.3 28.6 45.4 260.0

FY12E 24.1 124.3 148.4 117.8 8.7 126.5 10.9 3.3 289.1 238.5 36.9 201.6 27.4 229.0 3.7 26.5 31.4 31.0 88.9 24.6 17.2 41.8 47.1 289.2

FY13E 24.1 154.7 178.9 131.6 8.7 140.3 10.9 4.6 334.7 277.3 50.7 226.6 27.4 254.0 3.7 38.1 42.8 43.1 124.0 33.0 23.1 56.1 67.9 334.8

FY14E 24.1 194.7 218.8 122.1 8.7 130.8 10.9 6.4 367.0 318.1 66.7 251.5 27.4 278.9 3.7 43.9 52.6 48.4 144.9 40.8 28.5 69.3 75.6 367.0

Exhibit 42: Cash Flow Statement

(| Crore) (Year-end March) Profit after Tax Depreciation Cash Flow before working capital changes Net Increase in Current Assets Net Increase in Current Liabilities Net cash flow from operating activities (Purchase)/Sale of Fixed Assets Net Cash flow from Investing Activities Inc / (Dec) in Equity Capital Inc / (Dec) in Sec Loan Funds Inc / (Dec) in Unsec Loan Funds Net Cash flow from Financing Activities Net Cash flow Cash and Cash Equivalent at the beginning Closing Cash/ Cash Equivalent
Source: Company, ICICIdirect.com Research * Result are consolidated FY11 onwards

FY10 7.9 6.1 14.0 (4.7) 2.4 11.7 (32.7) (29.5) 16.1 11.9 4.0 29.4 11.6 0.8 12.5

FY11 16.0 9.0 25.0 (30.4) 11.2 5.8 (85.8) (80.4) 6.1 44.6 (20.6) 91.6 17.0 12.5 29.4

FY12E 22.7 12.0 34.7 (12.9) 13.2 35.0 (39.4) (38.4) 10.4 (5.0) 5.4 2.0 29.4 31.4

FY13E 30.4 14.1 44.5 (23.8) 14.3 35.1 (38.9) (37.5) 13.8 13.8 11.4 31.4 42.8

FY14E 39.9 16.2 56.2 (11.1) 13.2 58.3 (40.8) (39.0) (9.5) (9.5) 9.8 42.8 52.6

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Page 25

Exhibit 43: Ratio Analysis

(Year-end March) Per Share Data EPS Cash EPS BV Operating profit per share Operating Ratios EBITDA / Total Operating Income PAT / Total Operating Income Return Ratios RoE RoCE RoIC Valuation Ratios EV / EBITDA P/E EV / Net Sales Sales / Equity Market Cap / Sales Price to Book Value Turnover Ratios Asset turnover Debtors Turnover Ratio Creditors Turnover Ratio Solvency Ratios Debt / Equity Current Ratio Quick Ratio
Source: Company, ICICIdirect.com Research

FY10 4.4 7.8 23.2 14.2

FY11 6.6 10.4 52.1 16.6

FY12E 9.4 14.4 61.6 22.4

FY13E 12.6 18.5 74.2 30.0

FY14E 16.6 23.3 90.7 36.7

38.7 12.0

39.2 15.7

39.2 16.4

39.1 16.4

38.6 17.4

18.9 14.0 14.8

12.8 12.5 13.5

15.3 15.1 16.3

17.0 18.0 20.0

18.2 20.3 23.0

18.1 35.7 7.0 1.6 5.7 6.8

11.6 23.6 4.6 0.8 3.7 3.0

8.7 16.7 3.4 0.9 2.7 2.6

6.5 12.4 2.5 1.0 2.0 2.1

5.1 9.5 2.0 1.0 1.7 1.7

0.5 20.1 5.6

0.5 5.0 5.9

0.5 5.2 5.6

0.6 4.9 5.6

0.7 5.2 5.6

2.3 1.5 0.8

1.0 2.6 1.6

0.9 2.1 1.4

0.8 2.2 1.4

0.6 2.1 1.3

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February 14, 2012 RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target 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.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I Rashesh Shah CA, Hitesh Taunk MBA (Finance), Vijay goel MBA (Finance) authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal 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) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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