Talwalkars Better Value Fitness Limited (Talwalkar) is tapping the capital markets with its IPO which has opened on Wednesday the 21st of April and closes on Friday the 23rd of April. The issue is for 60.50 lakh shares in a price band of Rs 123-128.

Business

Talwalkar’s is one of the largest fitness chains in India. It offers a diverse suite of services including gyms, spas, aerobics and health counselling under the brand “Talwalkars”. The first gym was setup in the year 1932 by the late Mr Vishnu Talwalkar. The company M/s Talwalkars Better Value Fitness Limited was born in 2003 and as on date of this prospectus operates 58 health clubs in 28 cities and having roughly 55000 members. The company offers quality service and more importantly its services are ‘standardized’ across its various clubs. This ensures a consistency in the offerings and gives an edge to the company in an unorganised and competitive market.

The broad offerings at the club consist of fitness training, nutrition centre and Value additions. In fitness training there is personal exercise program which helps an individual engage the services of a personal trainer in assisting one to achieve desired results. Body sculpting or body shaping is a technique used by body builders which consists of cardio exercise and proper food supplement. In the nutrition centre, specialised programs like weight loss and weight gain programs are offered under the guidance of dieticians. This is very helpful in modern days because of the various health conditions like stress, heart, diabetes and other lifestyle diseases which need to be monitored and regulated with proper diet as well. The third activity is value additions such as Spa/massage, aerobics and spinning. Spinning is a recent development and is a group exercise done on exercise bikes.

The requirement of skilled and trained people is a key requirement for a fitness or club. Talwalkars has established an in-house training academy in Thane on the outskirts of Mumbai for training their people. This institute trains the people required for new clubs and also the periodic updating and refresher training required for existing staff.

A typical club consists of about 5000 square feet and is standardised across centres. Once location is finalised and clearances obtained, it takes roughly four months to start the gym/club. Talwalkars is currently operating 58 clubs of which 44 are owned by the company, 6 are through a joint venture, 3 are through associates and 5 are operated through franchisees.

The company had done a private placement of shares in October 2009 where it raised Rs 18.50 crs at an effective price of Rs 79.38.

Objects of the issue

The company proposes to add 27 new clubs during the next 18 months and this would take the number of clubs owned/operated directly or indirectly, through franchise, through JV etc to cross the 100 mark. This is the first landmark or milestone that the company wants to achieve and this should happen sometime in the year 2011-2012.

Financials

The company has provided results for the nine month period ended December 2009 and also for the year ended March 2009 and March 2008. These results show that total revenue for year ended March 2008 was Rs 38.50 crs, while for the year ended March 2009 was Rs 59.42 crs. The revenue for nine months ended December 2009 was Rs 48.82 crs. The net profit for the same period was Rs 4.52 crs, Rs 5.69 crs and Rs 4.29 crs for the nine month period December 2009 respectively. The company has provided financials for a large number of group companies as well but most of them have insignificant numbers and also are not directly relevant to the activities of the company.

The equity of the company post the dilution through the IPO would be 241.156 lakh shares. The EPS on a fully diluted basis for the year ended March 2008 is Rs 1.87, for the year ended March 2009 is Rs 2.36 and for the nine months basis is Rs 1.78. If one were to annualise the nine months numbers the net profit would rise from Rs 4.29 crs to Rs 5.72 crs and the EPS would be Rs 2.37 against Rs 1.78.

Comparison

This is the easiest and most difficult part of the business depending on how you look at it. Amongst clubs you do not have any such player in the local space. However just for comparison the closest would be a Gold Gym which is present in many of the metros. This is an international chain and is not listed. There is actually no listed player in the club business.

The other way to look at the business is that of fast food chains and the recent example of Jubilant Foodworks, the master franchisee of Dominoes in India comes to mind. Though not strictly comparable, the scalability and the repetitive type of business make it somewhat comparable. They have a much larger presence and recently they have opened their 300th store in India and their 9000th store in the world. Talwalkar hopes to cross their 100th store in the next four six quarters. No matter what, this could be one way of comparison!

Valuations

If one were to look at EPS and value the company it does not make much sense as the annualised number for December 2009 would be an EPS of Rs 2.37. Based on this EPS the price earning multiple would be 51.89 at the lower price band of Rs 123 and 54 times at the upper price band. Certainly this would not be any way to look at a company. A club of 5000 square feet is capable of handling about 1200-1500 people. The ways to earn revenue do not end at subscription or membership but actually start from there. Personal trainers, aerobics, spa, massage are all ways to attract higher revenue using the same base and without expecting the membership strength to go up.

The September 2009 pre-IPO was done at a valuation of Rs 180 crs and the current issue is being done at a valuation of Rs 296-308 crs.

Key factors and Risks

The biggest risk in the business of clubs or service oriented offerings is the people risk. Talwalkar encourages its people to learn better skill sets and move up the value chain. It has been noticed that earlier people did not like working in gyms but now the environment, pay scales and recognition are all helping in changing the way people look at this business.

Yet another area of concern is the scalability and the opening of new clubs to keep pace with the requirement. The penetration level in the country is extremely low and the requirement of new clubs is there.

The promoter and promoter groups have certain clubs which are owned by them in their personal capacity and in companies other than the company going public. This is always a bone of contention between the promoters and minority shareholders and this case is no exception. The promoters in the road show have indicated their willingness to expedite the amalgamation/bringing under one roof of all these entities as early as possible, but till then this would remain an area of concern.

The object of issue includes a loan repayment of Rs 20.59 crs. A large part of this loan or almost 75% would go to promoters to repaying their loans. This becomes an area of concern.

Conclusion

The issue is from a sector which has no listed player. The unprecedented success of Jubilant Foodworks post listing is acting as a trigger for this company and there are some reports from broking houses indicating that this could happen. I believe this company would attain its true potential once it uses the money from the IPO and opens the clubs which are slated over the next eighteen months. The issue based on current numbers is extremely expensive and one cannot justify the same. On the other hand money would only be deployed over 18 months. Looking at the two sides of the coin, I believe investors with an appetite for risk should apply currently while those who have the patience should wait for opportunities on dips post listing.