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Talwalkars: Spreading fitness, in the wrong direction - Outside View by Luke Verghese
 
 
Talwalkars: Spreading fitness, in the wrong direction

A 'dekho' at the first available annual report of Talwalkars, post its initial public issue of capital in April 2010 does not give rise to many pleasant feelings. For sure brand Talwalkar is shining brighter than ever before, but the management has several other irons in the fire. The emphasis of the management is not just limited to creating more value to the Talwalkar brand per se. They are also creating other side attractions, and, from the looks of it, merely for the enjoyment of the promoter families. But more of this mirch masala further on.

The company raised a lot of equity capital (relative to its scale of operations) between October 2009 and April 2010. Starting with a private issue of shares which raised Rs 185 m, it was followed by a public issue of equity in April 2010. In between the private placement, and the public offering of shares, the management very sensibly capitalized accumulated reserves and issued bonus shares in the ratio of 7:1. (As on March 31, 2010, the holding of the promoters in the paid up equity of Rs 181 m was 80%.) Looks like the private placement of shares prior to the public issue led to the reduction in the holding of the promoter family in the expanded equity.

The public offering of shares

Together, the two issues of capital raised a cool Rs 960 m in cold cash for the company, before netting off the issue expenses that is. The paid up equity capital as on March 2010 stood at Rs 181 m and after the public float, the equity base would have expanded to Rs 241 m. Reserves and surplus post public offer would have got a substantial boost too. This issue also marked the management's first full blooded thrust at expansion through the risk capital route, since it commenced operations in 1932. The company's unique selling point appears to be 'Spreading fitness since 1932'. Coming to think of it what type of exotic fitness recipes was the company selling in 1932, during the times of the late Vishnu Talwalkar, father of the current chairman Madhukar Talwalkar? Currently the company's march to better times appears to be firmly in the hands of the Talwalkar and the Gawande families.

Capex intensive business

Talwalkars operates today in a high capex intensive business for sure. Selling fitness dreams does not come cheap. And the company can do with all the capital that it can lay its hands on. Consider the following. On a rough basis, taking the average of the gross block for the two years of Rs 1.2 bn (and after excluding the goodwill that is has on its books), the company could rustle up a turnover, excluding other income, of only Rs 661 m. That is to say the revenue generated was a mere 57% of the gross block. What's more, the turnover barely inched up 11% in FY10.

At the financial year end the company operated 58 health clubs, out of which 44 health clubs belonged to the company, and 14 belonged to joint venture companies, associate companies, and franchisee. It also makes do with one training centre located at Thane. In the last two years the company has invested a solid Rs 687 m in capex.

Flush with funds

In the current financial year, the company, now flush with its new fund resources is upping the stakes. The chairman in his letter to the shareholders states that the number of health clubs will increase to 79 by September 2010 and a further expansion of 27 health clubs will be undertaken thereafter. More specifically, on a consolidated basis, the company hopes to achieve its short term objective of reaching the magic figure of 100 clubs in about 50 cities by March 2011. (The company has earmarked a sum of Rs 502 m for new gyms.) That works out to an addition of 47 clubs this financial year, or an increase of 89%. A variety of the gyms also have additional offerings such as Yoga sessions, Aerobic classes, Pilates, Spinning studios, Weight loss regimen and such like, in addition to the basic fitness equipment, which is obtained from abroad. In other words future income streams will include increasing receipts from the non-traditional category. (Currently the company also derives some minor income from Juice Centre and Food and Supplements.) What is not specifically stated here is the composition of these clubs in terms of number of owned clubs, JV clubs, and franchisee clubs.

Side shows

The point is that the company has gone in for a sideways thrust by incorporating a 50:50 JV by the name of Aspire Fitness, along with Life Fitness India Pvt Ltd. The two promoter families are the directors of Aspire. The company has invested Rs 0.5 m into Aspire Fitness, and presumably an equal share of Rs 0.5 m would obviously have come from the promoters. This is small change for a fitness centre as yet, and presumably the parent will have to invest a lot more into this venture in the future. The investment schedule has no mention of Life Fitness (which presumably is also a 50:50 JV), so it is difficult to hazard a guess on where Life Fitness fits in, in the overall scheme of things, barring the information contained in the directors' report. But the company also has a 50% stake each in two other JVs- Talwalkars Pantaloon Fitness and Denovo Enterprises as is apparent from the investment schedule. Its equity stake in the former is Rs 39 m, and in Denovo Rs 5 m. Both Pantaloon Fitness and Denovo like Aspire are franchisee operations, in which the management has a direct stake, though the counter parties in these three companies are not known.

So on paper and going by their nameplates, there are three affiliate 'fitness' companies. The point is that such lateral investments do not in any way add to the direct wellbeing of the parent, other than fattening up the promoters for one, and besides, the funds of the listed company will be used to seed finance the development of these JVs. (The parent has given corporate guarantees on behalf of Talwalkar Pantaloons and Denovo Enterprises amounting to Rs 121 m to banks which have advanced loans to them). In any case there is very little that minority shareholders can do about such diversionary tactics. There is yet another JV sporting the name of Equinox Wellness, which too does not find a place in the investment schedule. This company is apparently a 66.6% subsidiary of Denovo Enterprises, by virtue of which the parent has an indirect holding of 33.3% in Denovo. (What is the need to resort to such complications please?) In any event the parent has given a bank guarantee of Rs 38 m on its behalf too, for loans availed of by it.

The cash flow scenario

The company states that a part of the public issue proceeds amounting to Rs 206 m has been used to retire debt. The composition of its debt portfolio at the end of the financial year prior to the loan repayment is interesting. The company had secured loans of Rs 629 m and unsecured loans of Rs 343 m. The unsecured loans in its entirety were obtained from 8 companies and 5 related parties belonging to the management. (That is a 'helluva' lot of money to borrow from other group companies. And, if these companies have so much of idle cash sloshing around, what was the need for a public issue of capital? Furthermore, why do these affiliates have to raise loans in the first place, and for the parent to give guarantees for loans availed of by them?) Besides, the auditor's note on these outstanding loans is simply hilarious. The note states that the maximum amount involved during the year in respect of these loans was Rs 276 m, and at year end the balance of such loans outstanding was Rs 343 m. How can the balance outstanding be more than the maximum loans taken during the year? Or am I missing out on something here. The management says that it has repaid the unsecured loans.

The company has given a breakup of the secured loans that it contracted, in a detailed schedule, but there is no separate schedule mentioning the unsecured loans, barring the figure mentioned in the 'T Form' balance sheet. It will be good to know the names of these associate companies and key management personnel from whom the company has obtained the moolah, clearly stated upfront.

Complexity of its operations

The company's operations are a lot more complex than is immediately apparent. There is a welter of 25 enterprises over which key management personnel and their relatives exercise significant influence. In this list are 8 companies which bear the Talwalkar name, and 3 HUFs. (Barring one Talwalkar company that it holds shares in, it does not have any holding in the other 7 branded companies). It has had during the last accounting year, financial dealings on revenue and capital account with 24 of them, on several counts. They range from franchisee fee income, to loans taken, to loans repaid, to interest paid on loans, to loans and advances, to share investments, membership fees, to transfer of fees, to deposits, to rent, to dealings on capital account with HUFs, et all. One must admit however that several of these transactions are too miniscule to even find a mention.

Future perfect?

The current year and the year after should see the down the line effect of the capex spending, both on the top line and on the bottom-line. The profits that it should be able to generate, post tax, would be able to more than service the needs of the expanded equity base. What is more important here is the need for a renewed focus on developing the goodwill of Talwalkar Better Value Fitness now that it is a listed company, as also the need to put in place a more substantive financial management. That will be the crux of the success of the company in the years to come.

PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THIS COMPANY

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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