Talwalkars Better Value Fitness (TBVF) is amongst the largest fitness chains in the country operating 66 health clubs (including JVs/franchisees), ser-ving over 55,000 members. Though TBVF operates in a fragmented and competitive market, it has ample room for growth on account of under-penetrated membership rates, favourable structural factors and pan-India presence.
The wellness industry encompasses a large number of services, including beauty services (salon, treatment based beauty products), personal health counselling, rejuvenation (yogas, spas) and fitness. Within this, the fitness segment viz. gym is an estimated $113-million market in India and enjoys healthy growth rate.
Fitness industry is highly fragmented with the market dominated by ?mom-and-pop? gyms. Every club offers similar basic gym facilities, leading to a complete lack of product differentiation. Consequently, the current scenario involves a fragmented market with little pricing power, resulting in low margins.
Yet, awareness about fitness and a healthy lifestyle is growing, aided by higher disposable incomes and an increasingly young population. Despite a pent-up demand for quality health and fitness services at affordable price, market share of top five players by number of clubs is about 14%. The corresponding figure for developed markets like Japan and Singapore is over 40% and about 20% for Mainland China, Australia and New Zealand. This provides enough room for growth for organised domestic players.
Out of its total 66 health clubs, TBVF directly owns 49 while the rest are operated through JVs/franchisees. The company opened nine gyms in FY10; it plans to commission another 38 health clubs in the current fiscal, of which 27 would come on stream in H2, funded by IPO proceeds. We see another 30 health clubs being added in FY12, taking the total gym count to 112. Moreover, TBVF has entered in to a JV (namely Aspire Fitness) with Life Fitness India to set up four more gyms. This gives the former a compulsory right to buy out these four gyms on March 31, 2013 and also an option to buy the existing four gyms operated by Life Fitness.
TBVF had earlier formed a 50:50 JV with Pantaloons Retail named Talwalkars Pantaloon Fitness (TPF) to promote mall-based gymnasiums. However, in Q1FY11, TPF proposed to acquire ?Star and Sitara?, a pan-India beauty and hair salon chain, through infusion of additional equity. Post-the completion of transaction, TBVF stake in the JV would be reduced below 10% and it would largely be a passive investor.
We forecast two-year revenue/EPS CAGR (earnings per share, compound annual growth rate) of 71%-102%. IPO proceeds would help it reduce balance sheet leverage with D/E (debt-equity) projected to touch historic lows of 0.3x in March ?12 from about 2.3x in FY10. The stock trades at 15x FY12 PER (price-to-earnings ratio) and we believe it has sufficient valuation headroom to achieve our target price of Rs 241. Recommend Buy.