Talwalkars Better Value Fitness - From gym to fitness - Centrum

We recently met with the management to ascertain recent developments in the company. The management continued to remain unaffected by the economic slowdown and is on track to achieve its FY15E target of opening 250+ gyms. Its focus on going asset light is bearing fruits while migration from gym to fitness will significantly increase same store sales growth and help the company become FCF positive by FY14. The company is also looking at an opportunity to start its own recreation club and possible tie-up with a global leader. We maintain our BUY rating on the stock.

- On track to cross 250 gyms by FY15: The management maintained that they were on track to cross 250 gyms by FY15 of which more than 50% would be in its own format while the remaining under subsidiary and franchisee formats. We have estimated that the company would grow its gym count at a CAGR of 30% over FY12-15E from 128 clubs in FY12 to 281 by FY15E.

- Continues to focus on asset light model: The management believed that to grow and expand footprints pan India it would have to expand under the subsidiary model where it would own 51% but have the right to buy back the remaining stock at 3.5x EV/EBIDTA. Under this model we expect the company to have 38 gyms by FY15 from 13 in FY12. It also plans to expand under the franchisee route where the capex would be zero and the brand will be 'HiFi' typically made for tier-III, IV cities.

- Migration from gym to fitness: From a mere gym player the company has migrated to being a fitness player and started focussing on weight loss programmes and fitness. It recently launched NuForm which is an alternate fitness solution using Electric Muscle Stimulation based technology which improves BMR, aid muscle formation and lead to weight loss. The company has already started 6 studios and will start the 7th soon and currently has 500+ members. Under 'REDUCE' the company has targeted the weight loss category where food packets would be given to customers with a diet plan. The company has already launched it in Bangalore and offers 38 products and has 225 members.

- Targeting younger audience: With ZUMBA the company is targeting the age group of 16-30 years and plans to introduce the brand across all gyms in the next 3 years. Currently it has started them in 15 locations with more than 160 members within 1 month. The management believes that this will help it increase store sales growth and also help cross sell other products. It could also venture into merchandising for the same in the near future.

- Plans to start own recreation clubs: The management believes that cities like Mumbai (Thane), Pune, Hyderabad and Bangalore have strong potential for recreation clubs with growing earning middle class population and limited family recreation destinations within the city. They believe that the capex/club to be ~Rs400mn including land & buildings and would host all facilities including rooms, swimming pools, courts for badminton, tennis, squash, gym, spa, salon, card rooms, banquet halls, cafés, bars and residential rooms. The company is also looking to tie-up with a global leader in this space. It would initially start 2 clubs by FY15E and is targeting 1,500 members each in the first three years. Pay back will be within 2.5-3 years and the club will have more than 25% RoCE on a steady state basis.

- Maintain BUY: We continue to maintain our strong BUY rating on the stock with all growth drivers for the company still in place. The stock is currently trading at 15.6x FY13E and 10.9x FY14E EPS. We now value the stock at Rs256, 14x FY14E EPS.

Source : Equity Bulls

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