Company Analysis – Talwalkars Better Value Fitness



  1. General intro and background info:
  • Headquartered in Mumbai, founded in 1932
  • India’s largest and only listed fitness chain
  • 150 centers across 78 cities and towns
  • +1,50,000 members
  1. Business model:
  • It is the largest fitness chain in the country, with ~150 fitness centers
  • It has 2 formats 1) Talwalkars & 2) HI-FI ( low cost ) fitness centers
  • ~20% of centers are of the franchisee model
  • In addition to standard gym and fitness services, there are various value added services such as, zumba, reduce, transform, nu-form etc ( ~23% of revenues )
  • For franchisee business, upfront royalty – INR 2mn & ~6% of turnover for first 3 years and ~8% thereafter
  • 16 centers are subsidiaries which are co-owned by the company and a local partner
  • Average renewal rate of memberships has been ~75%
  1. Is the business scalable? Can the products / services find a large number of customers?
  • Yes the business is scalable and It can find a large number of customers
  1. Where do majority of the revenues come from?
  • All fitness centers are located in India across 78 cities and towns
  • Clientele is well diversified and company is trying to cater to all segments of the society through its premium and low cost fitness center formats
  • There is no risk of client concentration
  1. Market share?
  • It has a market share of ~45% in the organized fitness industry and 13% share in the total Indian fitness industry
  • Market share is increasing
  1. Is the business capital intensive?
  • Yes business is very capital intensive
  • Average size of a full fledged fitness centre is ~4000-5000 sqft, it takes around 16 weeks to set up and can cost between 1-2 cr
  1. Is the industry heavily regulated?
  • No
  1. Dynamics of industry?
  • The fitness industry is growing at a decent pace
  • Less than 1% of the urban population owns a gym membership
  • 40% of Indian population will be between age group 18-44 in 2016
  • Rising health concerns will ensure growth in this industry
  • In US there are 90,000 health clubs with 73 mn memberships, India has ~1300 clubs with only 440,000 members ( In no way can you extrapolate future growth using these numbers, but they can serve as tool to assess the opportunity size of the industry )
  • Industry is very competitive and the un-organized market in India is huge, however organized players are gradually taking away market share
  • The service offering is commoditized to an extent, people are price sensitive
  • Real estate is a major operational cost and is quite expensive, especially in urban areas



  1. Growth?
  • Sales, profits & centers have grown at a fast clip over the past 5 years ( all over ~20% CAGR )
  • Realizations have by and large been stagnant ( industry is very competitive ) ( ~10% CAGR, past 5 years )
  • Same store sales (SSS) growth has been modest ( again competitive intensity is pretty high ) ( ~7.5% CAGR 5 years )
  • Networth & Net block have grown in line with sales and profits and is impressive ( +35% CAGR )
  • The good thing is that Cash flows have grown consistently over the same period ( ~17% CAGR )
  1. Operating efficiency?
  • Margins have been good and increasing over the past 5 years (hence, same store profits have increased at a faster pace) ( net margin up from ~12% to ~21% in the past 5 years )
  • Company benefits from some economies of scale, purchasing furniture, equipments, hiring trainers for which they have developed a training center ( 25,000 sq ft)
  • Company has been maintaining decent working capital cycles, however can improve, competitive intensity can be seen here too as customers are spoilt for choice, various payment options need to be provided to attract clients, as a result of which receivable days have gone up significantly ( Receivable days up from 4 to 55 days )
  1. Investing efficiency?
  • Company has very poor fixed asset turnover ratio (built in operating leverage, competition is intense) ( Average ~0.5 )
  • ROE is decent but has reduced over a period of time, again due to poor turnover ratios ( average 5 years ~18% )
  • Company has focused on expanding the number of centres. SSS & realizations are stagnant . The entire revenue growth is largely coming from growth in no. of centres ( Centre growth ~19% )
  • Company is taking steps for the same and has added various VAS (value added services) which are margin accretive with low operating costs, this is responsible partly for margin expansion in the last few years
  1. Capital structure? Debt? Equity dilution?
  • Company came up with public issue in 2010, post that it has raised capital again in 2013 via QIP(40 cr) to set up a health club at Pune
  • Company is in an expansionary mode and focused on expanding number of centres which is very capital intensive, hence it will keep needing debt for growth (may change in future with renewed focus on setting up HI-FI centres which are franchisee based)
  • Over the past 6 years cumulative capex has been ~569 cr and cash flows ( post tax ) have been ~210 cr
  • Current debt/equity is greater than 1
  1. Cash flows?
  • Cash flows are good & have grown consistently
  • Cumulative PAT is ~177cr and the CFO post taxes is ~210 cr over the past 6 years
  • Interest cover is ~3 which should improve in future ( Interest expense/ CFO-pre tax)
  1. Funding for growth?
  • Internal accruals may not be sufficient for future plans
  • Company may continue raising debt and equity for expansion plans
  1. Other important observations:
  • Tax rate is along the lines of corporate tax rate which is a good thing
  • Expenditure on sales & promotion have been reducing over the past 5 years
  • Dividends wont possibly increase for some time to come
  • On average company spends ~80L on gym equipments / centre
  • Lease rentals on average ~8-10L / year
  • Institutions own ~30% of the total equity
  • Receivable days have consistently increased in the past 5 years



  1. Key people in the management? Promoter holding?
  • The company is managed by the Talwalkar & Gawande families, CEO- Prashant Talwalkar & CFO – Anant Gawande, Harsha Bhatkal ( marketing ), Girish Talwalkar are other key promoters who hold significant equity and are whole time directors
  • Combined promoter holding is ~43%
  1. Project execution & expansion plans?
  • When the company listed on the bourses in 2010 it had a footprint of ~60 centers, today within 4 years it has expanded to ~150 centers across the country, this is quite impressive considering the competition and the overall global slowdown
  • The company plans to focus on multiple areas in the coming future, in the next 3-4 years it wants to add another 100 centers across platforms ( Talwalkars, HI-fi, Health clubs etc )
  1. Adverse action against shareholders? Related party transactions?
  • The promoters have various other companies in which they hold significant influence and there are few related party transactions there, not sure why?
  • No material deliberate action against shareholders
  1. Compensation?
  • Top management and directors receive a total compensation of ~2.5 cr p.a which is ~6.5% of net profits ( FY 2014 )
  1. Ambitious? Pursuing profitable growth? Any diworsefications in the past? Bad acquisitions?
  • Management is certainly quite ambitious, from 60 centers in 2010 it has grown to 150 centers in 2014 and has taken significant debt to fund this capex
  • It is quite aggressive in adding centers while SSS & realizations are not growing satisfactorily, entire growth in profits is through addition of centers which is not sustainable, to change this management has added variety of VAS and the contribution of the same has grown from ~18% of sales to ~22% of sales in 2-3 years
  • No bad acquisitions or expansion in unrelated areas till now
  1. Promoters buying / selling shares, buybacks, splits, bonus?
  • On an average promoters have been selling shares which is not really good, one hand they are expanding aggressively and on the other they are selling shares almost consistently, since IPO promoter holding has reduced from ~60% to ~43% in the latest quarter



  1. What kind of upside is possible in future? Time frame?
  • Company is growing well, in 3-4 years company plans to add ~100 centers across platforms, we could look at revenues ~450 cr and PAT ~80 cr, at a multiple of 20x, value 3-4 years out could be between ~1600 cr, this is assuming SSS and realizations don’t increase and remain stagnant, value could be much larger considering the built in operating leverage and if you factor in this increase in SSS & realizations
  1. Things which have to go right in future?
  • Management has to keep up the momentum of expansion of fitness centers
  • Eventually debt has to reduce, SSS & realizations have to increase
  1. Major risks?
  • Frequent dilution of equity and increasing debt levels are not good signs, company constantly needs funds to expand and grow
  • SSS & realizations are very poor, however management plans to focus on increasing the same in future
  • Increasing competition
  • In the next 3-4 years company has to pay back NCD principal amount, not sure of how that will be arranged, additional debt? Dilution of equity?
  1. When would you sell?
  • Frankly I don’t know, I would consider selling if growth slows or SSS & realizations decrease and if debt balloons out of proportions



The good

  1. Business is growing at a fast clip
  2. Cash flows are consistent and growing, margins and returns are decent
  3. Opportunity size is huge
  4. Organized players are gradually taking market share from un-organized players
  5. Good brand recall
  6. Built in operating leverage
  7. Shivanand Mankekar & family own 6% of equity ( It is possibly a relatively small part of their portfolio )

The bad

  1. Growth is there but its not too efficient, management plans to focus on increasing SSS & realizations, this is the real test for the company, want some indication of them increasing in future
  2. Increasing debt
  3. Not comfortable with some aspects of corporate governance & promoters, will monitor periodically
  4. Receivable days have gone up significantly

With due respect to all the bad, I feel there is substantial scope for growth and value creation in this idea

I am still contemplating whether to buy or not, I may start with a 2-3% allocation and increase as my conviction in the business and promoters increase.

Feedback is most welcome!



P.S: Some data has been missing due to unavailability of AR 2015, some numbers have been calculated, may differ when actual AR is out

P.S: Data sources – Internet, wikipedia, Company reports, HDFC research report 2014

P.S: All figures are consolidated except 2009, 2010




The views and opinions expressed or implied herein are my own and this is not a buy / sell recommendation, it is for educational and discussion purposes only, my views could change depending on new information.

As of now I am not invested in this company.

Registration with SEBI:

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”.








The reading dose – 2

Here’s another set of articles and material which I have found very insightful and interesting.

1. The 400% man: This one is a very inspiring read, it’s about this guy called Allen Mecham, who, without any college education, no wall street contacts, operating from a small town in Utah ( USA ) beat most of mutual funds on wall street over the past 12 years, it teaches the importance of hard work, discipline, patience and simplicity.

2. Investing framework: Having a good framework to scrutinize ideas and companies is a must for any investor, this article has provided me with great insights and guidelines in order to deepen my understanding of ideas I am working with, I have used many of aspects of this in my own framework of analyzing ideas.

3. Finding Value: Whenever I get tempted and need to find my shoes on the ground, I visit Base hit investing, it really helps me stay disciplined.

4. Rejecting a stock: This remains one of my most favorite blogs to visit for deep insights into investing, this article deals with developing a framework to reject ideas, it’s a brilliant read, don’t miss it

Reading such material provides the foundation to building a good investing career.

Idea generation

I have come to realise, there are 4 pillars to the investment process:

1. Idea generation

2. Analysis

3. Buying & allocation

4. Selling
Today’s post is about the first!

There are over 4000 listed companies in India alone, picking investments which can give you decent returns can by itself be a challenge, I have listed some ways you can pick quality companies from the available universe.

1. Quantitative screens : This can be a great starting tool to find interesting companies, you are very likely to tumble on great small / mid-cap ideas which are otherwise ignored and not followed widely by mainstream financial press the best screener for Indian markets is you can also use the screener on the edelweiss website

2. Blogs : These are like gold mines, you will chance upon some of the best companies to invest in. The best part is that most of the initial research is already done for you, it’s an excellent starting point to dig deeper. I follow a multitude of blogs and really depend on them for generating new ideas.

3. Paid subscriptions : There are many paid online portals and blogs offering subscription based recommendations, this is money well spent. Some of the ones which are really good are,,, etc. In addition to this there are also magazines one can subscribe to, I subscribe to capital mind, often it has decent ideas to offer.

4. News & exchange filings : Often mainstream news and exchange filings, can throw up interesting ideas. One can get a good idea of future plans of the company, buybacks, splits etc.

5. Industry sources : Sometimes you may have industry network which could lead you to discovering interesting ideas often these can give you very good insights to the business model of the company and its management

6. Observation : This is the most underrated source to generate ideas, there are so many products we use on a daily basis whose companies are listed, Peter Lynch, the legendary fund manager made some of his best investments this way

By no means is the above list an end, ideas can come from all kinds of sources, however this can serve as a decent starting point.

Happy Investing!

Stock Idea – IPCA Laboratories

This one is a long post, I apologize in advance if you doze off while reading it, if you do manage to reach the end, feedback would be highly appreciated: p


  1. Incorporated in 1949 and currently employees ~11,000 employees
  2. Integrated pharmaceutical company; currently having around 80 APIs and 350 formulations ( branded and generics )in its product portfolio
  3. Market leader in anti-malarial and Rheumatoid Arthritis with over 30% market share
  4. Formulations business is 76% of revenue and the remaining is API
  5. Share of exports is over 60%
  6. Has more than 12 manufacturing locations

Key Market Indicators:

Key Financials & Analysis:


  1. Net worth ( Book Value ) measures the intrinsic and inherent value of stockholder’s equity, for IPCA labs, it has grown at an amazing 25% CAGR over the past 5 years, not only that, it has maintained an Return on equity (ROE) at an average of 24% over that period, this clearly states the superior fundamentals of the business and the efficient capital allocation skills of its management, maintaining a decent return on incremental capital employed by owners is one of the most challenging tasks for any company, IPCA labs seems to be doing a good job
  2. Company has delivered excellent growth over the past 5 years with Sales and PAT growing at 20.05% and 38.15% respectively
  3. Very less leverage which is a very good sign, when you look at that in conjunction with very little equity dilution, high growth and very good ROE, you realize the fantastic cash flow generating ability of the business and the superior capital allocation skills of the management
  4. The management is paying out only around 17% ( Avg 5 yrs ) of PAT as dividend and yet maintaining excellent ROE indicating that management is aggressively pursuing growth but not at the cost of profitability
  5. Fixed asset turns are impressive at an average of 1.97, the interesting thing is that over the past 5 years, this ratio has grown, indicating efficient use of assets by the company
  6. The business is consistently Free cash flow positive over the past 10 years
  7. Debtor receivable days have consistently come down and payable days have gone up indicating that the company is collecting cash faster and making payments later, further shows management efficiency
  8. Company is aggressively incurring capex aggressively to expand capacities, ~60% of PBT and ~10% of sales is incurred as capex

Reasons to buy:

  1. On fundamental grounds this is a company with superior fundamentals
  2. Company growing at +20% with little dilution or debt, this shows how large and deep the market potential is
  3. Management is decent and an efficient allocator of capital as evident from above analysis
  4. Aggressively investing in building capacities
  5. Recently one of its plants was inspected by US-FDA and it was shut down voluntarily by the company as a result of which the stock fell down by 13% ( this is where things get most interesting )
  6. The contribution of revenues from the US markets is ~10%, FY 2014 revenue was 3,296 cr ( Net ), let’s assume that 330 cr revenue from the USA is wiped off indefinitely
  7. PAT margin of 12% should mean an impact of ~40 cr on the bottom line
  8. So for FY 2015 let’s consider PAT to be 430 cr and assume there is no growth in any other segments either ( which by the way is unlikely as management has given guidance of 12% )
  9. So under these assumptions at 12% cost of capital, the current market price is assuming growth of ~12% for the next 10 years and 3% for the distant future
  10. The question is can the company do better? In our opinion it can and this is a very lucrative opportunity to buy this company
  11. The US-FDA issue is short term in nature as the management is committed to resolving it within 6-8 months time
  12. The company hopes to quickly regain lost market share as it would be difficult for competition to match its scale so quickly
  13. There is no penalty clauses with customers in case of discontinuation of supplies
  14. IPCA has been automating most of its production processes and management is confident that once it is complete, most of the issues raised by FDA will be resolved

Risks and Concerns:

  1. If the US-FDA issue isn’t resolved in time, it could further impact profitability and delay new launches
  2. Post resolving this issue the company could find it difficult to regain market share
  3. If there is a general slowdown in the industry
  4. Increased competition could impact margins


  1. In our opinion this is an opportunity to buy a company with superior fundamentals at a discount
  2. It is a long term idea and would require patience for the returns to unfold, we think CAGR of 15-18% is comfortably possible over the next 3-5 years

Disclaimer : This is not a buy/sell recommendation, it is purely meant for discussion and knowledge purposes, please do your own homework

Sources: Company AR, presentation, Ace equity and third party research

Stock Idea – South Indian Bank


  • Incorporated in 1929, South Indian Bank (SIB) is a mid-sized bank in the private sector space
  • It operates a network of ~800 branches and ~1000 ATMs
  • Predominantly present in Southern India ( Kerala )
  • It has scaled to a business of 83,894 cr in FY 2014 at a CAGR of 25% over a 5 years period

Loan Portfolio:

  • 22% of the loans are RETAIL LOANS out of which majority are against gold
  • Around 50% of loans are in the CORPORATE segment
  • 28% of the loans are in the SME & AGRICULTURE space
  • It has quite a conservative approach, if you observe they have negligible exposure directly to sensitive sectors like real estate and almost all of them are in the housing mortgage space

Key Financials: 


Reasons to buy:

  1. Management is managing risk quite well, Net NPAs<1% are really good, especially considering the recent slowdown and a very difficult macroeconomic scenario, bank is not sacrificing quality for growth
  2. In spite of that the bank seems to be growing and expanding quite well at a healthy CAGR of ~20% and expanding rapidly by adding new branches to have a pan India presence
  3. Profitability of the bank is very good, ROE is averaging at 18% over a 5 year period and NIM average is healthy too at ~2.5%
  4. It is well capitalized and its CAR stands at a comfortable 12.5%
  5. Another thing I like about SIB is that it hasn’t diluted too much equity in the past, this is one very critical element which we often overlook
  6. Management is quite transparent and clean, in addition to that the remuneration for the top brass is reasonable
  7. Its a professionally run bank, with no promoter holding
  8. It has decided to focus more towards the Retail, SME and Agriculture segments which has a high growth potential
  9. Other Income growing at ~18% CAGR will add a healthy fee based stable income to the bank’s bottom line and reduce earnings volatility
  10. Valuations are very attractive, for a bank growing @20% CAGR and having ROE @18% is quoting at a P/BV of 1.19
  11. Dividend yield of around 2.5% is quite good
  12. Mohnish Pabrai who is an investor I really admire for his style and Investment philosophy has recently invested in this idea

Risks and Concerns:

  1. The nature of the banking business is by itself quite risky, SIB however through its conservative approach is managing that risk quite well
  2. CASA ratio of the bank is quite low in comparison to some of its peers, this is very crucial to reduce its cost of funding, the bank is aware of this and taking adequate steps to increase the same
  3. Its Cost/Income is also on the higher side which the company should take steps to reduce
  4. If the macroeconomic scenario should not improve and remain sluggish it could impact its growth and profitability
  5. SIB has a high exposure to gold loans, which the company is taking steps to reduce


  • Overall I think this idea should do pretty well over 3-5 years and compound at a decent 15% CAGR
  • True there are some risks and concerns, which is why we always look for margin of safety which is adequate in this case

DISCLAIMER: I am not in any way making any recommendation to buy/sell through this post, please do your own analysis and homework


Sources: Company AR, presentations, ACE EQUITY, third party reports