One company which is least affected in economic downturn is the Talwalkars Better Value Fitness, which operates 130 gyms across 68 cities in India, having active member base of over 1.25 lakh. Since the financial year 2008, the company's turnover has grown over six times and profits have grown many fold. Even in the last two quarters, the revenue growth has been decent at about 25-30% on the year-on-year basis. This was possible largely possible with the help of expansion or adding new gyms. However, here on the trigger is not only expansion--as the company wants to achieve over 250 gyms by the end of FY15--but to increase the same store sale. More importantly, the capex of the last several years has started to generate cash, which now entitles the company to turn cash flow positive.
Value creation
The company is now planning to leverage the existing business. Steps such as HiFi Gym in rural areas, NuForm studios at premium locations for weight loss and Zumba fitness programme, Personal Trainer and Reduce (weight loss solution) at existing gym are estimated to result in increase the revenues from the same store sale.
The analysts expect these initiatives to form about 15% of the revenues in the financial year 2014 and the increase thereon. Importantly, the company is looking to expand through the subsidiary model as well as the franchisee model which will lead to lower capex at a time when the existing gyms have started (specially the new ones) to contribute to the overall cash flows of the company.
Shaping for the future
The cash flow from the operation is expected to jump from about Rs 40 crore to over Rs 80 crore in FY14. This should take care of future capex turn the company into the positive cash flow after the capex. The company's business model is such that it needs money to expand, but if the existing cash flow can take care of the future capex that is good news for the shareholders because that will allow the company not to rely on dilution or borrow funds.
Also, there is good chance of the remaining cash being paid back to the shareholders in the form of dividends. Besides it has recently formed strategic alliance with Europe’s leading premium sports, health and leisure group David Lloyd Leisure.
"David Lloyd is the second-largest in the world and this alliance is the best thing that could happen with the company because there are huge opportunities in India in terms of operating, managing and the advising for the club business. This may not contribute in FY14 but beyond next two years one can see that contributing significantly to the company's growth and earnings," says Ankit Kedia, who tracks the company at Centrum Broking.
For this purpose to infuse the funds which will be required for the formation of the wholly-owned subsidiary and other purposes like expansion and creating clubs the company has recently closed the QIP issue of Rs 42.37 crore issuing shares at Rs 205.18 as against the current share price of Rs 187.5 per share. This has led to about 8% dilution. However, even factoring the dilution the stock is trading at 11 times its FY14 earnings.
