Talwalkars: BUY

Bhavana Acharya
BL Research Bureau
Strong brand name, rising share of high-margin value-added services work in its favour
April 27, 2014:
At 168, the Talwalkars stock is attractively valued at10.4 times its estimated earnings for 2014-15, implying a 50 per
cent discount to its three-year average.
A player in the promising fitness and slimming services industry, Talwalkars has no listed peers. It has a wide, balanced
network of 149 fitness centres across major cities and Tier II and Tier III centres. The company commands a strong
brand name for quality service at a reasonable price.
A rising share of high-margin value-added services and steady expansion plans, backed by the financial wherewithal to
fund them, are the other factors in the companys favour.
Investors with a two/three-year perspective can buy the stock. But note that with a tiny market capitalisation of 440
crore, the stock is a high-risk bet.
Steady growth
Despite the slowing discretionary spending by consumers, the company has maintained a healthy pace of growth. Sales
and net profits were up 27 per cent and 21 per cent, respectively, for the nine months ended December 2013 over the
year-ago period. Membership has grown steadily and retention is good at around 70 per cent.
Theres been a swift expansion in Talwalkars fitness centres, with the number jumping from 94 at end-March 2012 to
149 now. Plans are for opening around 100 more centres over the next three years. With a strategy of having a mix of
franchise and self-owned gyms, the company has reduced the capital needed for expansion. With a reasonable
debt-equity ratio at 0.62 times as of end-September 2013 and an interest cover of over six times, financing expansion is
unlikely to pose a hurdle.
Talwalkars has added yoga, zumba and special weight-loss programmes, such as Reduce, which offer higher margins.
This raises the revenue per centre while keeping costs in check as investments in equipment and floor-space are
eliminated. Zumba, for instance, was offered in 46 centres at end-December last year, up from the 29 at the start of the
fiscal.
This plus rationalisation in staff costs, a key cost head, improved the operating profit margin in the April-December
period by two percentage points to 41 per cent compared to the year-ago period.
With the March quarter a busy one, accounting for about 40 per cent of net profits, full-year margins are expected to be
higher. In the past three years, the operating margin has been upwards of 45 per cent. A targeted 40 per cent share of
value-added services can give an impetus to margin improvement.
Interest costs on debt taken to fund expansion, while high, are also moderating, dropping 4 per cent in the April-
December 2013 period. But with heavy use of equipment, depreciation costs are high and likely to remain so.
(This article was published on April 27, 2014)
Printable version | Apr 28, 2014 2:35:49 PM | http://www.thehindubusinessline.com/markets/stock-markets/talwalkars-buy/article5953763.ece The Hindu
Business Line
Talwalkars: BUY | Business Line http://www.thehindubusinessline.com/markets/stock-markets/talwalkars...
1 of 2 4/28/2014 2:36 PM
Talwalkars: BUY | Business Line http://www.thehindubusinessline.com/markets/stock-markets/talwalkars...
2 of 2 4/28/2014 2:36 PM