Talwalkars Better Value Fitness - Focus on new initiatives - Centrum

Despite lowering our estimates and target price, we are confident of margin expansion and higher RoCE on the back of gym expansion plans and new initiatives enhancing productivity with optimum utilisation of time slots. Lower capex expansion is expected to help the company become FCF positive by FY14. With Q1FY14 operating results in line with expectations and initial response to annual August scheme positive, we maintain BUY rating on the stock and find current valuations attractive as the stock has fallen 19% in the last 3 months in line with CNX Midcap index (16%).

Operationally, Q1FY14 results in line with estimates: Strong member count coupled with 10% incremental revenues from Zumba & Reduce helped the company post 31.2% YoY growth in revenues, in line with expectations. Despite one-time expenses incurred for the launch of Reduce, operating margins expanded by a healthy 109bps on a consolidated basis while operating profit was up by 35.1%YoY (1.9% above our estimates) to Rs124mn. PAT was high at Rs34mn, 11.9% below estimates on the back of higher deprecation & interest cost.

New initiatives to drive growth: During the quarter, the company launched Reduce in Mumbai and other cities with the total now at 44 while Zumba studios increased to 31. The company is to start aggressive marketing for Zumba & Reduce post its annual August scheme for gym membership. By FY14, management has guided for opening 100 Zumba® centres and introducing Reduce programs in 75 fitness centres. These have aided in gym membership, enhancing same store sales growth. Management expects non-membership revenues to increase to 35-40% over the next 3 years.

Margin expansion to continue: On the back of high operating leverage from new services such as Zumba and Reduce, which have high margins, we expect margin expansion to continue in coming quarters. Same store sales growth of 6-8% in the first 10 days of the annual August scheme, without cross selling new services, could further expand operating margin. We believe the company is set to become FCF positive by FY14.

Estimates lowered; Maintain BUY: We have reduced revenues by 3.4%/4.8% for FY14/FY15 on the back of lower gyms, Zumba and Reduce centres, in line with management guidance. Hence, PAT has been lowered 8.2%/6.4% for FY14/FY15. TBVF is currently trading at 8.1x FY14E and 5.7x FY15E EPS of Rs15.7 and Rs22.3 respectively. We maintain BUY rating on the stock with a reduced target price of Rs212 (9.5x FY15), SD-1 valuations of the last 3 years. Downside risks are lower customer intake in the August scheme with Zumba and Reduce not gaining traction.

Source : Equity Bulls

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