Club biz to see 25-30% profit by March 2015: Talwalkars

In an interview to CNBC-TV18, Anant Gawande, chief financial officer, Talwalkars Better Value Fitness gives the details of their institutional placement (QIP) and their joint venture with David Lloyd Leisure Clubs. He says, "The company plans to start leisure and recreation clubs in Talwalkars with a joint venture (JV) with David Lloyd Leisure Clubs, the biggest club chain in the world which has 91 clubs with a turnover of approximately Rs 5,000 crore spread in Europe, UK and all over the world."

Gawande says the club business should fetch them profits by March 2015. "For March 2014 the club business will not contribute a substantial amount of revenue. March 2015 will be the first year in which you will see a substantial part of the revenue coming from clubbing system. We believe it will enhance profitability by about 25-30 percent when the first couple of clubs open across India." Below is the edited transcript of Gawande's interview to CNBC-TV18. Q: What is the use of these funds and by when do you expect to scale up on your expansions?
A: The technical process of the qualified institutional placement (QIP) should get over in the next couple of days. The QIP has been closed by us and we expect to use the funds essentially for driving a new idea. This is to start leisure and recreation clubs in Talwalkars with a joint venture (JV) with David Lloyd Leisure Clubs, the biggest club chain in the world which has 91 clubs with a turnover of approximately Rs 5,000 crore spread in Europe, UK and all over the world. It is a great privilege to be able to tie up in this JV with David Lloyd. We expect the funds to be utilised within this club system or club business for the next six to 12 months. Q: What revenues and margins will this give in FY14?
A: After the last quarter results, we believe we are ahead of schedule in terms of opening Zumba and Reduce outlet within our gyms. The first club will open in the next 15-18 months. For March 2014 the club business will not contribute a substantial amount of revenue. March 2015 will be the first year in which you will see a substantial part of the revenue coming from clubbing system. We believe it will enhance profitability by about 25-30 percent when the first couple of clubs open across India. Q: Will this entail high investments in the near-term because operating these clubs is a slightly high cost affair. So in the near term margins might dip a bit and after you have set up the clubs over the longer-term margins will improve because it will also get you premium in terms of what you are giving to your clients. So is that a genuine fear or do you think margins are unlikely to dip in the near term?
A: We believe that the current momentum of business in Talwalkars gyms, Reduce and Zumba, are enough to off set any small reduction of margin. We have only diluted 8 percent of our equity or less than 8 percent in the current round of QIP. We have been very careful in not trying to dilute a substantial amount of our equity, because we believe that we should give shareholders value as we acquire. I don’t think at a general level or  specific level we will be having a substantial dent on our ratios or profitability. Actually going ahead we believe value activity in the gym will contribute much more than what we are expecting. Once the club comes in, we believe it could be the icing on the cake in terms of increased profitability and thus, a better valuation. Q: What are you looking at in terms of revenue growth? Give us some ballpark numbers for FY14 and FY15?
A: We have generally been growing at about 30-35 percent in the last three years at bottom-line level. We believe that is a level which we should be able to sustain for 2014. For 2015, we will also be getting contribution from the clubs for which we have raised funds. Hence, the profitability pattern and increase in profitability will also take into account the club business. And instead of venturing into that, we would rather open the clubs and show the performance of the club. I don’t see any reason for us not to grow at historical rates for March 2014, unless the macro picture in India changes dramatically. Q: Would you have to pick up some leverage in order to expand in this fashion? Your current debt is very low. Do you think that increases and so does your interest cost?
A: Actually, we have a substantial amount of bank limits which were not utilised in the current year. The first half was good and the cash flow was much better than expected. We also believe that by March 2014, our capex in gym business would have capped out. We would start tapering around that time.
Our inflow from cash profit will be sufficient in 2014 to not only take care of capex, but probably leave us with a small net cash flow after that. This is our thinking based on our initial estimates. We will obviously be revising these as we come closer to the next year.

Q: On an average, you pay Rs seven crore as interest. How much would it increase to?
A: Our interest for the full year according to my estimate is about Rs nine crore. We borrow money for letter of credit in foreign exchange and we borrow money in India at pretty good rates. We are rated as AA minus. So we have a very good rating. One can expect the interest rate to remain within this target area. For 2014, we would expect it to be very flat because the net cash flow could be slightly positive or neutral. Q: This equity should suffice for a year? When will you be looking for equity next?
A: The way the business is panning out right now, if we turn net cash flow positive, we do not need business for gymming. We do not need funds for the core business of gymming.
As far as the business of clubbing goes, it is obvious that we will have to figure out whether that business has done far better than expected. If it has, we will still be able to drive it through the funds which we get from membership, which we sell to those members who become a part of our club. The company does not intent to dilute equity on ongoing business.
The other activities like Zumba or Reduce are picking up well, but those are smaller activities and we can always look at those activities in a different perspective.