BUSINESS MODEL & INDUSTRY ANALYSIS:
- 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
- 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%
- 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
- 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
- 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
- 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
- Is the industry heavily regulated?
- 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
- 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 )
- 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 )
- 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
- 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
- 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)
- Funding for growth?
- Internal accruals may not be sufficient for future plans
- Company may continue raising debt and equity for expansion plans
- 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
MANAGEMENT ANALYSIS :
- 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%
- 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 )
- 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
- Top management and directors receive a total compensation of ~2.5 cr p.a which is ~6.5% of net profits ( FY 2014 )
- 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
- 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
- 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
- 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
- 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?
- 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
- Business is growing at a fast clip
- Cash flows are consistent and growing, margins and returns are decent
- Opportunity size is huge
- Organized players are gradually taking market share from un-organized players
- Good brand recall
- Built in operating leverage
- Shivanand Mankekar & family own 6% of equity ( It is possibly a relatively small part of their portfolio )
- 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
- Increasing debt
- Not comfortable with some aspects of corporate governance & promoters, will monitor periodically
- 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”.