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Talwalkars IPO: Too Expensive


So the gym chain Talwalkars is going to go public. Notes:

  • They’re raising 78 cr., with 60 lakh shares at an issue price of 123 to 128 rupees.
  • That’s for 25% of the company, so the valuation is 312 cr. post money, 234 cr. pre.
  • Revenue in FY09 – 60 cr., profits – 5.6 cr. FY10 looks like it will also see 60 cr. revenue and 5.8 cr. profit.
  • That’s a P/E of about 40 for the company. I refuse to be surprised, but let’s see if there’s value.
  • They have 55,000 members, and 58 clubs. That’s about 10K per user per year as revenue. Small scope for growth there, but there must be a number of dropouts. They charge about 15-20K per year.
  • The aim is to grow to 100K customers by adding another 27 clubs. They’ll retire some 20 cr. of debt too (on which they pay around 3 cr. of interest per year). So if all iz well, they will get a revenue of: 100K x 10,000 per customer = 100 cr. plus the 3 cr. they save in taxes. Let’s assume they can raise prices 15-20% and get 120 cr. (Btw, these aren’t conservative estimates. The total number of gym-goers in India is currently 230,000. )
  • Current margins are around 10%. Let’s up that a bit and say they will earn 15 cr. post tax. That will give us an EPS of about Rs. 6.25. At that EPS, the IPO price is a P/E of about 20. Not too bad; but remember, this is when they have achieved all their growth estimates and are at the edge – so the 20% growth from here will be tough.
  • The huge plus point in India is that with the exception of Bangalore where you have great weather, indoor gyms are going to be a preferred location for exercise for the office going crowd. Try walking in the Gurgaon heat and you will find yourself turning into a blazing inferno. (I exaggerate; it’s okay between midnight and 1 am)

Stuff I don’t like:

  • They don’t list prices on their site. I find that weird; the standard excuse is that prices change often. Dear Talwalkers, let me introduce you to the internet, where you can reflect changed prices as often as you want, that’s the point! But this is a common Indian malady so don’t expect concern from the guy who will load up on the stock anyway.
  • There are 11 gyms running under the Talwalkars brand that are owned by promoters and which compete with the company. Free ride! And some relatives of the promoters have 13 gyms under the name Talwalkars which is their name as well so there’s more brand confusion.
  • Competition: Their organized competition is Gold’s and Fitness First, which charge 3K-5K per month with annual discounts (price points are similar). Smaller local gyms are of the order of Rs. 500-1000 per month. Most apartment complexes have gyms for which fees are of the order of Rs. 300 to 500 per month. The market is very very tough, and organized players have huge real estate and operating costs in comparison with the competition.
  • Calculations: Plus, unlike the west where organized players have HUGE gyms, Talwalkars’ standard gym size is a piddly 5,000 square feet, has 8 treadmills and 3 cross-trainers. That’s 11 people for the most requested cardio equipment. At 30 minutes per person per machine, and 10 hours of usage, we see a max servicing capabiilty of 220 people per day. Assuming people go to the gym twice a week that’s a serviceability of 700 people per gym per month. Make it a 1000 because there are enough suckers who pay and don’t gym. 27 new gyms is going to add capacity for just 27,000 more people – with their current 55K, this will add up to 82K and stop. If they actually do 100K with just 27 more clubs they will end up with many pissed off customers who simply won’t renew.
  • Adding more clubs? Each club seems to cost 1.8 cr. to do. It’s not going to be easy to add a lot more clubs from free cash flow – consider that at the edge, net profits of Rs. 15 cr. a year, if fully reinvested in the business, may give you a max of 10 more clubs per year, or 10,000 members per year, which is only 10% growth.
  • Their DRHP says Indian fitnes industry is hugely under-penetrated, at 0.4% versus 16%. But the 0.4% is only for the top 7 cities. That’s like saying see Bangalore has 32,000 gym goers out of a population of 8 million. 32,000 is HUGE for Bangalore, at the Talwalkars price point. Also see comparisons – Indian gyms have only 29% average retention rates which means you gotta churn, baby, churn.
  • The debt – they have about 60 cr. of secured debt (other than what they borrowed from promoters). Every 1% increase in interest rates will hit their bottom line by 5-10%.

Tough industry but I think it’s a great space for a good organised player. I’m not sure if Talwalkars is that player, and if India is ready for it now versus say 5 years down the line (i.e. real estate will be more affordable, equipment costs will come down, more people will be interested etc.).

Note: I’m just putting in counter arguments. These may not be compelling, and by a stroke of luck we may have a HUGE increase in gym goers or a massive cost reduction due to exchange rate, and the business might boom. I’m known to have performed horribly as market sentiment has pushed stocks into much higher territory, so pinch of salt etc.

Overall I think the issue is too high a price. Something around the 60-80 levels would have been fair value, and I don’t even like fair value – it has to be a bargain. I haven’t experienced Talwalkars first hand, so I can’t comment on their service or quality. If you have and you think the deal is compelling enough to override the above arguments, you might want to buy. I’ll just skip and wait to see what the market says.


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