Sucheta Dalal :Talwalkars’ profits are too meagre; its IPO too expensive
Sucheta Dalal

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Talwalkars’ profits are too meagre; its IPO too expensive   

April 20, 2010

The Mumbai-based fitness chain Talwalkars Better Value Fitness Ltd (TBVF), which operates ‘Talwalkars’ gyms and health clubs, hits the market on 21 April 2010 with its initial public offering (IPO). TBVF operates 58 health clubs in 28 cities having a membership of 55,000. The company owns 44 clubs and six others are operated under a joint venture with Pantaloon and other franchises.

“We will double our headcount by 3,000 employees to manage the 38 new clubs. This will take our employee strength to 6,000,” Prashant Talwalkar, CEO, TBVF, told PTI.

The company’s operating revenue has grown from Rs10.20 crore in FY06 to Rs59.20 crore in FY09. Correspondingly, it recorded a net profit of Rs5.69 crore, Rs4.52 crore and Rs1.09 crore against a total income of Rs59.42 crore, Rs38.50 crore and Rs22.29 crore in FY09, FY08 and FY07 respectively.

TBVF’s cash and cash equivalents have been meagre for fiscal 2009 despite positive cash flows from both operating and financing activities. This was due to significant investments in fixed assets. Its earnings per share (EPS) were Rs3.61, Rs2.88 and Rs0.72 in the financial years 2009, 2008 and 2007 respectively. There is no comparable stock in the market. At a floor price of Rs123, the company’s diluted PE is an exorbitant 42.71.

TBVF operates in a highly competitive market and faces stiff competition from other players operating both in the organised and un-organised sectors. Some foreign players have also entered the Indian physical fitness market.

TBVF is marred by conflict of interests. According to the RHP, there are 11 gyms which operate under the trademark name ‘Talwalkars’ which are owned and operated by TBVF’s group companies. Of these, seven gyms are held by three of TBVF’s promoter-directors Madhukar Vishnu Talwalkar, Girish Madhukar Talwalkar and Prashant Sudhakar Talwalkar through their proprietary undertakings and partnership firms while the other four gyms are held by Life Fitness India Private Limited, in which Madhukar Vishnu Talwalkar jointly with his wife holds 50% of its outstanding equity share capital. TBVF has entered into trademark license agreements with these 11 gyms.

Talwalkars Fitness Solutions Private Limited (TFSPL), another company controlled by Rahul Talwalkar, Rohit Talwalkar and Amber Talwalkar, operates 13 gyms in Mumbai, Baroda, Ahmedabad, Raigad, Thane and Nasik. There is no separation or non-competing agreement between these two independent companies (The Talwalkars Group and TFSPL). This Group owns and operates gyms under the same name and can claim the history of the brand Talwalkars and can be a potential conflict of interest.

Moreover, TBVF’s business is not scalable as it cannot bring in economies of scale by adding more gyms. The company owns 58 health clubs across India and has generated a mere Rs5.69 crore net profit in FY09.

India Infoline Ltd is the lead running manager to the issue. The issue opens on 21 April 2010 and closes on 23 April 2010. The company plans to raise Rs74 crore to Rs77 crore at a price band of Rs123-Rs128 by issuing fresh equity of 60.50 lakh shares of Rs10 each.

Ratings agency CARE has assigned ‘IPO Grade 3’ to the issue. According to the red herring prospectus, the proceeds (Rs70.81 crore) will be utilised for setting up of additional health clubs and repayment of unsecured loans to the tune of Rs20 crore. It plans to add 27 health clubs by the end of fiscal 2011 with an estimated cost of Rs50.22 crore. 
— Moneylife Digital Team

-- Sucheta Dalal