The Ace Investor's Latest Stock Pick

VALUE PICK – TALWALKARS BETTER VALUE FITNESS LTD - GTS 4 ANSWER
Whole thing is copied from https://theaceinvestor.in





The Ace Investor - Value Pick
Talwalkars Better Value Fitness Ltd
Listed on both BSE:533200 and NSE:TalwalkarsTalwalkars is currently trading around 310 with a market cap of under 900 crores.
Promoters hold 43.32% stake, 29.99% stake is with investors/institutions holding more than 1% stake. Individual shareholders hold only 17.63% stake out of which 6.01% is with noted investor Prof. Mankekar's family. Only 11.62% of total equity is with small retail investors.
Total Debt is around 150 crores, 52 week high is near 410 and 52 week low is near 170.
Established back in 1932 with its maiden gym in Mumbai. Talwalkars with its superb brand value has become the sector leader today with its wide branch network spread all over India.
Talwalkars as of 31st March 2015 is having a total of 150 fitness centers (Gyms) across 79 Indian cities and towns. Highest for any company in India.
Talwalkars and UK based sports and leisure club company The David Lloyd are in a JV to develop sports and leisure clubs across India in the future.
Talwalkars has been a trend-setter in the Indian fitness industry and it has also recently launched NuForm which is a unique training program based on EMS (Electrical muscle simulation) a training technique which is gaining momentum in the USA right now with sports scientists backing it and sportsperson and atheletes prefering it more over the normal strength training. Talwalkars plans to make NuForm available in majority of its fitness centres soon.

Talwalkars has recently launched the REDUCE plan which is a total diet plan where the food packets will be given to you at the Talwalkars outlet with time written on it, You must have it as per the diet plan. In this package you don't have to workout and they say it is a sureshot way to lose weight. This is quite similar to US based Nutrisystem's weight loss program. Nutrisystem is listed on NASDAQ and trades at a P/E of 33 with poor margins.
Talwalkars the brand is doing well but do they have a good marketing strategy? As a strong brand business let us take a look at Talwalkars branding against another brand-business company Page Industries.


The success of Page Industries's Jockey brand has been great mainly because they spent on targeted local advertising instead of spending money like water on celebrities which their peers were busy with. A good marketing lesson for a non FMCG but consumer oriented business such as that of Talwalkars.

Now here is the comparison with other GYM brands.
Almost all the companies are promoting their brand with the help of local marketing. John Abraham was maybe Gold's Gym India's face earlier but off late it has only been sponsoring bollywood events instead of entering contracts with celebs.
With its amazing network reach Talwalkars is right now in a position where massive growth is very much possible.
Coming to the Financials, Talwalkars has been growing steadily over the years. Take a look at its annual performance.

Above chart shows Talwalkars having great margins and steady growth. Now lets compare financials of Talwalkars with lone listed company in wellness sector which is Marico Kaya the company which runs the chain of Kaya Skin Clinic across the country.

Talwalkars OPM is around 53% against Marico Kaya's OPM of 9.88%. Talwalkars gross margin is at more than 80% and Marico Kaya's gross margins is around 50 or so. Gross margins and Operating Profit Margins indicate operational efficiency of a company and how successfully they are running the business. And of course coming to the Net Profit Margin it actually is the sum up of business performance and there too Marico Kaya is lagging well behind Talwalkars.​

Now lets take a look at membership fees comparison: Talwalkars v/s Golds.

Talwalkars membership is cheaper compared to Gold's Gym as its business strategy is to attract all from middle-class to the rich class while Gold's Gym is more of a luxury gymming experience. Zumba is another service offered by both Gold's and Talwalkars which was missed in the above chart and is usually not available in small standalone gyms. SnapFitness as reviewed by customers don't have an upto the mark service record to be compared with Talwalkars and Gold's.

The membership fees and facilities info was acquired by calling up the fitness centers in Mumbai,Delhi and Kolkata and might not be totally accurate for other cities. But is clear that Talwalkars and Gold's are the two giants operating in this field in terms of network spread, customer base, services and clients satisfaction and Talwalkars is the sector leader and actually the only listed player in its field.



The fitness industry in India is currently around Rs 6,000 crores and expected to grow at a CAGR of 20-25%>. Almost 95% of The Indian Fitness sector is unorganized while brand entities such as Talwalkars, Golds etc. form the remaining 5% of the total Rs 6,000 crores market.
Only 0.05% of urban indians have a gym membership as against 3.11% in rest of Asia pacific and 17.5% in USA. This data shows us the untapped opportunity in the fitness industry which Talwalkars should be able to exploit.

The Demographics of India almost forces growth in the Fitness Sector.

India has world's largest youth population according to a U.N. report with about 356 million 10-24 year olds despite having a smaller population compared to China.

By 2020 India is set to become the world's youngest country: In 2020 the median individual in India will be 29 years.

Warren Buffett had coined a new term "Economic Moat" which is what he looks for in the stocks he picks.

What are the common Economic Moats?
Patents, Brand identity, Technological advantage, Buying power, Higher switching costs and Operational efficiency.

If we try to find Economic Moat in Talwalkars we find it matching some or all principles:
+ Strong brand identity
+ Technological Advantage: EMS is not available in other GYMs however not sure about it
+ Buying Power: The massive expansion over the year hints at strong backing and buying power
+ Higher switching costs to other brands
+ Financials indicating strong operational efficiency.

A brand-business sector leader, only listed player in a hugely untapped sector with wonderful growth opportunities operating in a wide network and matching the Economic Moat criteria of the Great Warren Buffett is available at a P/E of around 17 and they think we will miss this opportunity? Talwalkars should hopefully be able to do well in the sector which will shape up The Young India.
Even with present financials: The current P/E of around 17 is dirt cheap for a lone listed player. Just take look at the astronomic valuations a lone listed company in a sector commands. Wellness chain Marico Kaya which traded at a peak p/e of 90 as the stock rallied from Rs 200 to Rs 2000 in just 9 months, Jubilant Foods the only listed Pizza chain (Dominos) trading at a p/e of almost 100 and MCX the only listed financial exchange is trading at a p/e of around 45 despite all the negative news flow related to group company Financial Technologies.​

 

Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.
Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per 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”
Disclosure: It is safe to assume that i might have Talwalkars Better Value Fitness Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

:Links:
Talwalkars Website
Talwalkars Screener
Talwalkars Results this FY
Talwalkars Latest Quarterly Presentation
Forbes article about Talwalkars
UN Report: Youth Population in India
Youngest Country INDIA by 2020.
Talwalkars latest BSE announcement regarding David Lloyd JV ​

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The Ace Investor 20 June 2015 at 12:45
News Update:
Talwalkars Better Value Fitness Ltd has raised Rs 107 crore through a Qualified Institutional Placement (QIP). The issue received bids from investors such as Capital International and Ascent Capital among others. The funds would be deployed for setting up new fitness centres, acquire existing gymnasia and gym chains, setting up leisure clubs, besides advertising and promotion. The company recently entered in the sports club segment in India and set up a 50:50 JV with David Lloyd Leisure Limited (UK). An investment of Rs 500 crore has been planned over the next five years for developing 7-10 clubs across India. Centrum Capital Ltd was the Book Running Lead Manager to the issue.

https://www.thehindubusinessline.com/companies/talwalkars-raises-107-cr-thru-qip/article7333848.ece

 

THIS IS ONE OF THE BEST REPORTS I HAVE EVER READ ON A BLOG BE IT VALUEPICK OR THEACEINVESTOR ^^^^ salutes to THE ACE INVESTOR SIR if he is reading.

 

May we have a perfornance report of the Ace investor for all his recos during, say, last two years.?

 

LOL .... Very Good Point. These are all JUMLA Stocks picks. It will fizzle out. BE VERY CAREFUL OF SUCH STOCKS

 

Don't get trapped !! Talwalkwer fitness raised money using QIP recently to do the expansion . The only way they can more money is store expansion or expanding their service options . Talwalkwer is doing expansion by raising capital ,so it does mean they are not making enough profit to start the store by profit without raising capital . This business model is highly riskly . let's say they raised money right now to expand 200 gyms . in order to expand more into different cities every year they are gonna keep on raising their money . when they can't raise money using equity at one stage they will start buying loans from banks . so this business model would trap the investors . just my view ! Take it or leave it !!

 

Do they have a franchisee model or do they open all their store themselves in which case the cost might be higher. Franchisee model can lower down their costs but they would get just a portion of profit while the rest would be kept with the franchisees. Also in the above description a very rosy picture is painted of the company. Are there any other risk factors regarding the company or underlying business ??

 

I am not happy with such stocks. Analysis is incomplete with risk factors. In Valuepickr Donald is very strict. Any analysis without risk factors and only bombastic statements means that there is DANGER.

 

They do have a franchise option . Franchise always works only if the business generates good return as well as it should be difficult industry to enter . Eg: franchise options like jubiliand foods will work coz the pizza has some unique taste , difficult to get food license etc . but industry which is unregulated like this ,it's difficult to sustain . In a long term this business would fail easily coz there would be more competitors . the better way for talwalkwer to survive in this industry is to rent places, join venture with fitness equipment companies so they don't have much expenses. They can do marketing and create a market for them . Again this is just my view !! If you are ready to take risk ,you can . no one can judge the market 100%.its my personal view on this company .

 

If they are going to raise capital and run the business, the stock can fly to double digit soon .because the more capital they insert into the business the returns on the business go lower . if they want to spend 50 crores to make 50 crores . then even if business people like ambani and godrej can enter investing 1000 crores which ll make this business to suffer . the only way you can say whether it's a good business or not is by investing their own profits . it would take time for growth but there would be stable growth . I love to invest in business which has stable growth not the crappy ones .

 

@Investor2008
I agree but then there are companies which are at a growing stage and usually when a company that is at growing stage it would need more capital for expansion than an already well settled market leader. I also agree with your point that more competitors can be much tough on company's growth but competition is such a thing that frankly you cannot avoid in today's day and age. You have competition frankly in every industry and sector. There are very few companies in India which are a total monopoly. Most of these are government sector companies. Coal India is a good example of that. I believe if you have a competition so the only way to survive is to build your own brand name with giving good quality to customers and having sufficient marketing budgets. FMCG companies are a classic example. They have competition from both regulated as well as unregulated competitors but they build on to their brand and hence command a premium for their products.

Another thing to note is that usually when you open any retail space be it gym or be it a store, it is very difficult to be profitable from day one onwards since a very high capital is invested early on hence I was asking about franchisee model as most of the initial costs are covered by franchisee and are not the burden to the company which can focus on building the brand of the company. The bigger companies when opening new store have a turn around time. It can vary from industry to industry and company to company. So lets say as an example suppose if their average turnaround time to make a gym profitable is 3 years then for that 3 years they would have to take into account the losses they make. We need to assess the average turnaround time to make a gym profitable

Regarding franchise viewpoint, my opinion is a bit different than yours. Making pizza is not a rocket science and even though you gave an example of Domino's but there are many small pizza places all over large urban cities that make far better pizza then the one's that you get at Dominos. I personally believe that you take a franchisee because of it's brand name. Brand carries a lot of weight in the industry. So even if I owned a small place where I make much better pizzas then Dominos, it would still be difficult for me to achieve sales similar to those of Dominos mainly because it is such a strong brand name. Brands like Dominos and McDonalds have achieved supergrowth mainly because of their strong franchisee model. The thing to note here is whether Talwarkar as a brand can be sufficient to attract franchisee's to invest and build new gyms and morever would people be attracted to it's brands.

 

@Srouta Mukherjee I agree totally with you. Risk factors should be carefully considered. while investing in a company. Usually if you study annual reports of the companies under Management Discussion and Analysis section each company do list what according to them might be risks to their businesses. These are the risks that company thinks that could affect their business hence it is useful to look these before investing. There can be other risks too which are not anticipated by the company and hence not mentioned in the annual report. I found last year's annual report of the company (2014) on the BSE website.

https://www.bseindia.com/stock-shar...ualreports.aspx?expandable=0&scripcode=533200

If you look at the 2014 annual report Page 25 & 26 are where the risk factors are detailed.
Once again these are just the risk factors that company think they have got There can be various other risks too which company might not have anticipated and can affect the company's performance. So proper due dilligence is thus required before investing.

 

Alright let me say my opinion .

You said start up companies need more investment . I completely agree with you on that point. When I researched about talwalkwer they are doing this frequently. Last time they went into QIP was at 2012 and they raised 42 crores approximately. Right now they are getting into another QIP which is going to be around 150 crores . Their total equity is around 200 crores and debt is around 150 crores . if they are a debt free company I would say its good to enter . but already they have debt of 150 crores and again raising 150 crores through QIP is completely risky . They raised QIP before two years for expansions too ,again they are doing the same thing. It's completely a risky investment for investors.

Regarding the competitors , yeah every industry has a competitor. But if u consider food industry it would be a difficult monopoly to enter since it need food approval ,same goes to fmcg . but what is the difficult thing in fitness industry ? Any one can start this business raise equity and develop their business on each city . there is no restrictions . again I don't say that this stock won't fly . it might , but the real stock growth grows with earnings. If company is raising capital for every dollar they earn then they are going to get screwed.

This is just my opinion !!!!

 

@Investor2008
Yes I know and I totally appreciate your view point. The more people write their views here the better it is. It is always good to know how others think about a particular thing. Personally while anyone is doing a research he/she may be blinded by his own opinion so that is why it is nice to know a different point of view.It is always nice to have a healthy discussion of pro/cons of a company. It makes the effort more worthwhile.

Secondly I am in no way endorsing this company. The information that was posted before got me interested in doing just a preliminary research but that is just limited to finding more information about the company and in no way going and buying a stock.

Regarding your QIP and fund raising of the company, I agree more debt is not favorable for any company. They are in an expansion phase and they might be building new gyms across the country. This can be good for company in longer run once these investments start being profitable. However if they are doing mindless expansion from borrowed money then this can really backfire and probably can cost company very dear. We have seen many mindless expansions before by many companies resulting in heavy debt on their books. Regarding QIP, I am not sure what is the nature of QIP. Are they issuing convertible shares to them if thats the case then that wouldn't add to the debt but it would raise total number of shares and dilute the earnings when the shares are converted.

Regarding competitors and approval, I agree that since the the industry is not regulated in any way it would be easy for anyone to start and open a gym. But if you closely consider there are other barriers to entering the space. The primary being financial one. Anyone can open a gym but any decent gym would require quite a huge space to function normally. Nobody would like to work out in a place too small and people crowded at each other. I guess this is one of the main barriers of the industry since rents are high in urban cities only the ones with deep pockets or who already have their own big space might think of opening a gym.

You are right about anyone can open a gym in different cities and I think that would happen sooner rather than later. If we don't see Indian gym companies expanding then we would certainly see foreign gym and fitness centers expanding in India. Gold's gym and Fitness First are prime examples of the same. India is a huge market for them and even if they capture a tiny portion of that market it would be worthwhile for them. Ultimately I agree with you that the real growth is with growth with earnings.

 

Well true ,lots of people simply assume whether the company is good or not just seeing the share price . People need to read annual report to know how each business works . even though they are in same industry their business model would be different for each and every company. Annual reports takes time to read but not much people reads it .

Regarding the competitors, I meant to say that if a company is raising capital and expanding stores ,any guy who is interested in this business can do. That's the reason I pointed out. It's all about investing via profit or having less debt and managing it properly without leveraging. Leveraging is a very good example in futures. People buy stocks it ll go up in futures by leveraging but if it goes in opposite direction they have to pay the big losses .

Third thing even if people are planning for high debt companies and they are damn sure about their future,they can add it in their portfolio and diversify it with many companies, that's one of the option to make the investment less risky .