Talwalkars Better Value Fitness

 

 

Though Talwalkars' issue appears to be fairly priced, there is likely to be limited upside for investors as the next few years' growth is already factored into its offer price

 

IPO details:
Price Band: Rs 123 - 128
issue size: Rs 74.4 - 77.4 crore
Date: May 21 - 23


Mumbai-based Talwalkars Better Value Fitness (TBVF), the company owning the chain of Talwalkars gyms and health clubs, is proposing an initial public offer. The offer consists of a fresh issue of 60.5 lakh shares of face value Rs 10 each to raise around Rs 75 crore. Out of the issue proceeds, around Rs 50 crore are to be used for setting up of additional health clubs, Rs 20 crore for repaying certain unsecured loans and remaining for meeting the issue related expenses.

   The total issue represents around 25% of the post-issue capital of the company. While there are no listed peers of this service company, an analysis of the company's business and valuations indicate that though the issue appears to be fairly priced, there is likely to be limited upside for the IPO investors as the next few years' growth is already factored into the offer price.

BUSINESS:

The company owns one of the largest and oldest fitness chains in India. The company (as of December '09) owned 37 health clubs and operated 14 more through franchisee route across 24 cities in 11 states across the country. The company's health clubs offer a P suite of standardised services like gym, spa, aerobics and health counselling under the brand name 'Talwalkars'.

   Trained personnel, imported fitness equipment and airconditioning are some of the basic features of the clubs run by the company. Over the years, the company has built a strong brand equity and market leadership in the fitness industry.

GROWTH STRATEGY:

The company, being present in the health, fitness and wellness industry has tremendous growth potential in an under-penetrated market like India. As economic prosperity improves coupled with increased awareness about fitness and healthy lifestyle, the patronage of health clubs is bound to increase.

   Moreover, with changing demographic profile, health clubs are increasingly being accepted as a means of achieving good health.

   The nascent industry is quite fragmented as small and standalone players dominate the field. This presents a strong case for the growth of an organised professional player like TBVF.

   The company has been aggressive in opening new clubs in various tier I and tier II cities in the country. It plans to open 38 clubs in FY11. Of these, work is already in progress in seven clubs. Besides this, the company, under its franchisee agreement, has the option to buy out the franchisees in the case of 13 of its clubs at attractive valuations.

FINANCIALS:

The company's revenues have grown at a compounded annual growth rate (CAGR) of 63% since fiscal year '05 to reach Rs 59.2 crore in FY09. Its profits have grown at a CAGR of 118% since FY05 to hit Rs 5.7 crore at the end of FY09. The company's operating and net profit margins presently stand
at 29% and 10% respectively. Postissue, the company is likely to reduce its debt-equity ratio to around 0.4, improving its borrowing capability. The company has a good track record of robust growth, strong cash flows and consistent dividend. Moreover, the company's business has good growth prospects.

VALUATIONS:

The company is valued at 46 to 48 times its estimated full-year earnings of FY10. This may appear to be a high price to earnings multiple by any industry standards. However, considering the growth to be generated by the company through a capital infusion of around Rs 50 crore, the current valuations look fairly priced. However, the current valuations are discounting the growth of the company over the fiscal years FY11 and FY12. Long-term investors ready to bet on the company's growth story and management's execution ability can go ahead and subscribe to the issue.