After 20% profit growth in FY16; Talwalkars hungry for more

Talwalkars Better Value Fitness reported a steady fourth quarter yesterday, topping off a year in which its revenues about 15 percent to Rs 258 crore while profit grew 20 percent to Rs 55 crore.In Q4, the company also reported lucrative 68.8 percent EBITDA margins, boosted by an additional Rs 6.5 crore franchise income and Rs 5.5 crore treasury income, as well as value-added income, CFO Anant Gawande told CNBC-TV18.Going forward, Gawande said Talwalkars is focusing on bolstering its value-added businesses in a big way, such as increasing the number of its Zorba brand of yoga fitness centres, as well as adding newer-format activities such as TRX and kettlebell exercises and introducing supplements.Below is the transcript of the interview on CNBC-TV18.Reema: 68-69 percent margins, is there more scope to improve your margins from current levels?A: If I spit them into two parts, the core margins at about 50-52 percent. This year we got about Rs 6.5 crore, Rs 65 million from franchise revenue. If you remember over the last 4-6 quarters we have been seeing franchising should become an important part of our business and we have now almost 50-55 gyms on franchise out of 176. The second reason is that we did a qualified institutional placement (QIP) in June-July for about Rs 107 crore, Rs 1,070 million. A significant part of that money, almost Rs 90 crore is still in our bank balance and that treasury income is another Rs 5.5-6 crore. But, yes the margins have been on the upper side because the value added activities and last time I had promised Sonia we will open yoga, so we have opened 37 yoga centres.Sonia: I am very excited to know that because Reema and I are really big fans of yoga and this zorba that you incorporated across all your centres. What kind of incremental margins do you get from this business alone?A: Once, within a gym, if we do zorba, it will not cost more than about Rs 15-20 lakh because it is done in a particular way. So, for example, they have certain interactions on multimedia platforms, etc. but if it standalone, it may cost another Rs 5-10 lakh more. The idea is to go to about 100-120 zorba in the next 12 months out of which, we are about 40 now approximately. Initially, we will start within gyms and then standalone. So, it could be even in your studio or anywhere else. The idea is to try and propagate that. I think we have an excellent partner in yoga in Sarvesh, in zorba. We believe it has got an international possibility going ahead. But right now, our focus is doing within gyms and doing outside. We need about 250-300 sq ft. and these are all kinds of yoga. So, they are doing yoga which is interactive, multimedia, normal yoga. So, there are different classes within that. We are doing a major campaign on June 20, I believe is world yoga day. And hopefully, that will take it further to the next level.Sonia: So, from 40 to 120 scale up that you will do, what will that do to your blended margins?A: The yoga margins are much more than normal margins because you just need a yoga instructor. We do not need equipment. There is small equipment introduced for the purpose of excitement. So, essentially, we believe that the margin upscale, on an annual basis, once they are all opened, could be about 150-200 basis points.Reema: What about the franchise revenue because if you continue to increase your revenues from the franchisee business, that will continue to aid your margins. Rs 6.5 crore in this quarter, how much do you foresee in FY17 and the upside to your margins on account of that?A: We did Rs 6.5 crore last year, just as a correction. Essentially, we believe that going ahead, we already had in pipeline about 12-15 gyms which will be on franchise, which will open over the next 2-3 quarters. We will own about 30 gyms in the next three quarters, as in the company. So, we expect to be at a figure of about 210-215 by the end of the financial year 2017. Each franchisee gives us an upfront royalty and a continuing royalty. And that just aids our income fairly dramatically. Also, advertising cost gets shared. So if it is in a city which matters to us, then let us say it is in Pune or it is in Hyderabad, then the advertising cost also gets shared among all of them. So, the margin due to that, only franchising could be a bit more again. Sonia: Do you have any more value added products that you will be looking to introduce because now, there is a fad of crossfit as well. So many new things are coming up in the market. Anything that you could perhaps launch which will aid your volume and margins further?A: We have experimented just now with an idea called TRX, you may have heard of it and cattle bell, these are again free floor exercise format. What we have been acutely aware of is March 31, 2016 we turned cash flow positive. This is something we wanted to do for a long time and I know for a fact that our investors have been wanting and craving for. So, we turned cash flow positive, our outflow is Rs 78 crore and our inflow is Rs 85 crore. We would like to maintain that position which means we will introduce only those activities and those many gyms which will keep us cash flow positive still going ahead. So, kettlebell, TRX are wonderful activities. Going ahead we will get many more activities. Yoga was not on the anvil. We do not have a juice bar. Right now, we are talking with a nutraceutical company to help us with their entire range of omega products, omega-3, flaxseed, etc. because we do not sell them right now.Sonia: So, what is the investment you are looking at there?A: In that it will be literally zero, because they will stock it, we will keep it as a showcase, and because people come and say, you know what, we are dieting, or we are exercising, what should we take along with it, so if there is a multi-vitamin to be taken or an omega supplement, it is available right there. So, these small things could be done.Reema: If I look at your balance sheet, your long-term debt is about Rs 300 odd crore. You are cash flow positive. You are sitting on unutilised QIP money of Rs 90 crore, why not pay the long-term debt?A: Actually, this is an often asked question. We do not have a cash credit facility. We do not have an overdraft facility. All our loans are term loans and that too from one singular bank, State Bank of India and some debentures. If I prepay a term loan, one is I have to pay a penal interest. Two is the money which was raised for QIP was for a specific purpose which is for acquisitions, new ideation and David Lloyd. So, we would rather keep that money for that, because for that, I cannot take money from the bank. For putting equity into another company, I do not get money from a bank. So, which is why we have kept the two segregated presently, but I am sure, going ahead, if we do not find need of it, if we do not do any major acquisitions and that does not fit in our philosophy, or we do not add a value addition, then some part of it will definitely flow into our debt.Sonia: You spoke about this health foods segment as well. So, it just got me thinking, what kind of revenue growth do you think you could get from this because so far, you are not into health foods at all. If you look at it in a big way, you think it could contribute to your revenues?A: I will just differentiate. Health food and vitamin supplements are two different categories. In health food, we are already there and we have taken a significant chunk which is our food based weight loss programme. But as far as supplements go, that is a huge part of what can happen, because if you understand, lots of people are now recommended multi-vitamin tablet, something on calcium, something on vitamin C and non of this is available right at our gym level. So they actually have to go out and do that. So, if we can do a tie up which is what is on the anvil with somebody who can help us to create that infrastructure or superstructure within gyms, it could add in terms of margin, a lot may not be in terms of topline, because the topline may not be great.