Strong brand name, rising share of high-margin value-added services work in its favour

At ₹168, the Talwalkar’s 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 company’s 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.

There’s 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)
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