100231178_IPO NOTE Talwalkar

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PO Note Talwalkars Better Value Fitness

ecommendation Buyice Band Rs 123-128/-dding Date 21 st -23rd April 2010

ead Manager India Infoline Ltd.

Retail Application-Detail At Cutumber of shares 50 Sharespplication Money Rs 100000mount Payable Rs 100000

Share AllocationIB 30,25,000on-Institution 9,07,500etail 21,17,500tal 60,50,000

Offer Structure for different categories IB 50%

NI 15%etail 35%ot size 50 sharessue Size 74.42-77.44 Crorece Value 10

Nitesh Bang 022-4062 [email protected]

INDUSTRY OVERVIEW

The wellness services industry is a fast growinsector in India today. It encompasses a largenumber of service segments including beautyservices (salon, treatment based beautyproducts), personal health counselling,rejuvenation (Yoga, Spas) and fitnesssegments. Within this, the Fitness segment, vizGyms, is experiencing healthy growth rates ancurrently has an estimated market size of USD113mn.

As of 2008, there are 765 fitness clubs in Indiawith total membership of 0.23 millionmembers.(Source: as per the statistics of TheIHRSA Asia Pacific Market Report, 2008)Indian fitness industry is a hugely underpenetrated market compared to severaldeveloped and developing countries in theworld.

For instance, 16.0% of the US populations hav

fitness club membership compared to a mere0.4% for Indian markets (taken for Top 7cities). This is despite the fact that India has thhighest incidence of diabetes people in theworld pegged at 50.8 million people.


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comparison of Indian market with other markets is presented below: Presently, the fitness industry is in its nascent stages. The industry is very fragmented with

majority of the market being dominated by a large number of mom-and-pop gyms. Every cluboffers similar basic gym facilities and there is complete lack of product differentiation. Themarket also appears to have a shortage of talent, since qualified personal trainers, nutritionconsultants and professional managers are scarce, which also contributes to the lack of differentiation.

This high degree of fragmentation, lack of product differentiation, and customer pricesensitivity result in prevalent price competition and low margins.

Yet, on the other hand, awareness about fitness and a healthy lifestyle is growing; along with

higher disposable incomes and a growing young population. India presents a huge opportunityfor the health and fitness industry with over 65 towns having a population greater than 500,000as per Census 2001 statistics.

Clearly, there is a huge supply-demand gap in the health and fitness industry. There is a visiblepent-up demand for quality health & fitness services at affordable price. This is where theorganized sector has stepped in.

To tap this vast potential, organized domestic players brands like Talwalkars and Fitness One

along with international chains like Gold Gym and Fitness First have announced expansionplans into India, attempting to have a national footprint. Market share of top 5 players bynumber of clubs is 14.4%.

This compares with over 40% market shares in Japan and Singapore and about 20% inMainland China, Australia and New Zealand for the top 5 players. Thus, the organized playersin India have huge scope of consolidation going forward.


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rowth Drivers for Fitness Industrydia has a population of around a billion which is growing at a rate of about 1.7%. A global industryport suggests that in general, more people between the ages of 18-54 exercise. However, in India ageoup 20-44 can be mainly identified as prime market for fitness clubs. The proportion of people in thee group of 20-44 is projected to go up from 37% in 2006 to 39% in 2011 and 40% in 2016. This is andition of approximately another 4.6cr and 4.2cr in terms of population between 2006-11 and 2011-16spectively.put things in perspective, even if assume a modest 1% of this eligible population enrol into fitness

ubs, the potential addition to fitness market could be approximately 0.46 mn and 0.42mn respectively,hich is very significant compared to the total current membership of about 0.23mn in the fitnessdustry

creasing incidence of lifestyle diseases

Significant changes in lifestyle related to lack of physical activity and increased consumption of fast foods among both affluent and working class population has led to the greater need for healthylifestyles through sports, fitness centers and counselling on dietary habits.

According to International Diabetic Federation (IDF)s latest report released at the 20th annualWorld Diabetes Congress in Oct 2009, India leads the world in the number of people sufferingfrom diabetes and by 2030; nearly 9 per cent of the country's population is likely to be affectedfrom the disease. About 50.8 million people are now suffering from the looming epidemic of diabetes, followed by China with 43.2 million.

IDF estimates that Type 2 diabetes constitutes about 85% to 95% of all diabetes cases in developedcountries and accounts for an even higher percentage in developing countries.

There is a huge emphasis on regular exercise to prevent obesity and diabetes. IDF estimates that upto 80% of type 2 diabetes is preventable by adopting a healthy diet and increased physical activity.

rowing realization of a need for healthy lifestyle

Awareness in the country on diseases like diabetes is increasing. According to AC NielsensGlobal Online Consumer Survey findings released in Feb 2009, 54 percent Indian respondentsthink they have issues with their weight. About 80% people said they exercise at least once a week.

Going to a gym is second most preferred option for exercise after walking.


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USINESS

verview One of the largest fitness chain in India (Source: as per the statistics of The IHRSA Asia Pacific

Market Report, 2008) offering a diverse suite of services including gyms, spas, aerobics and healthcounseling under the brand Talwalkars. Talwalkars has pioneered the concept of gyms in Indiaand today is a recognized name in the health and fitness industry.

anagement Structure

ur Competitive Strengthse believe that the following are our principal competitive strengths which have contributed to ourrrent position in the industry:

rand Equity We believe the long existence of our brand and the strength of our brand equity enables us to stay

ahead of the competition. Today, we are one of the largest fitness chains in India. Our brand Talwalkars known for

consistent standardized quality offerings has a good brand recall which helps in breaking thecompetitive clutter within the industry.


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oducts & offering

andardized and Quality Offering In an unorganized and fragmented service industry with a large untapped demand, we provide

quality service consistently across all our locations. One of the key investments in a health club isthe fitness equipment.

We maintain high quality standards by procuring our equipment from reputed internationalmanufacturers, viz., Precor from the US, Rebar from China, etc. Several key issues such asflooring, air conditioners, generator back up, wet area designs, etc are benchmarked to a modelhealth club and quality guidelines followed.

We buy all these balance equipment from reputed companies like Daikin (for Air Conditioners),Powerica (for Generator Sets), etc. Besides, we have a residential training academy at Thane wherewe offer a 4-6 weeks induction training period for our trainers.

This ensures that all the health club staff is trained to offer the same kind of services across all ourlocations. We believe that this consistency factor in providing quality service gives us asubstantial edge in this competitive and unorganized market.

arket Leadership One of the largest fitness chains in India as per the statistics of the IHRSA Asia Pacific Report,

2008. We operate 58 health clubs in 28 cities across the country serving over 55,000 members.Being a pioneer in the health and fitness industry, we enjoy a significant lead over our competitors.


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n India Presence In a fragmented health and fitness industry, where the demand for quality services is high while the

supply is largely unorganized (primarily from singly city operators) and non-standardized, webenefit immensely due to our pan India presence.

Our Company has been able to achieve a country wide foot print, which we believe may be verydifficult to replicate.

We are currently present in 28 cities belonging to 12 states of the country from where we operateour 58 health clubs. And we believe our continuous expansion plans will further enhance our brandvisibility on pan India basis.

stribution Strategy

bjective of the issue

lwalkars Better Value Fitness Limited, operating health clubs under the brand name Talwalkars hasday, become one of the largest fitness chain in India (as per the statistics of IHRSA 2008 Asia Pacificport). As on the date of this Red Herring Prospectus, we have 58 health clubs dotting across 28 citiesIndia with over 55,000 members. To excel our growth we intend to increase our presence and reachrther broadening our member base.

he objects of the Issue are:

) Setting up of additional health clubs;) Repay certain unsecured loans availed by us; and) Meet Issue related expenses.

ur Company believes that listing will enhance our Companys brand name further and create a publicarket for its Equity Shares in India. The main objects clause of our Memorandum of Association andjects incidental to the main objects enable us to undertake existing activities as well as the activities for

hich the funds are being raised through this Issue.


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VESTMENT RATIONALE

edit Rating

O Gradinghe issue has been graded by CARE and has been assigned IPO Grade 3 indicating averagendamentals.

y success factors for the industry Location, availability of quality gym equipment, range of add-on facilities, skills and experience of

gym staff, membership pricing and club ambience are some of the key success factors in theindustry. A fitness club taking care of all these factors can expand its membership base veryrapidly.

cation: A dominant driver for gym selection is convenience of location. In fitness industry, a 15-minute

driving distance in metro cities is considered as the maximum anyone would travel for a gym.Hence, to target a particular locality, setting up a gym in near proximity is essential.

cilities: Gym equipment like cardio, strength and free weights from reputed suppliers are an integral part of

quality service offering. Additionally, basic facilities like separate area for warm up and free styleexercise, locker rooms for customers and juice bars are necessary to create a differentiated product

offering. Advanced facilities like aerobics, spas, spinning equipment, sauna bath, massage and personaltraining programs etc can help attract more members as well as enhance revenues from existingmembers thus increasing profitability of the gyms.

uality Gym staff: The most important success factor in a service industry is the quality of the service staff. It is

essential that gym trainers are knowledgeable, experienced, has good communication skills and issoft-spoken.

In absence of any accrediting body for gym trainers and instructors, a customer is quick to form his

own perception of the service levels at a particular fitness club. The ability of the local clubmanagement to maintain the service quality levels has a major impact on a clubs success.

ral Marketing In a locality with more than one gym, most people make a decision of which gym ton based on word of mouth recommendations by existing members who could beends/families/acquaintances. Additionally, fitness industry has a very peculiar characteristic thatrolment often happens in groups of two or more, which could be either friends or relatives. Thus,rvice quality offered to existing members has a direct and major impact on future potential of garneringore memberships.


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ice: Customers tend to look for best price and quality proposition. Typically, a young person in his

early twenties would be ready to pay about 12,000 p.a. while customers in the 30s and 40s wouldbe ready to try the advanced facilities in a gym which would cost an additional INR 2,000-10,000.

hallenges for the Health & Fitness Industry

ck of Standardization The industry does not have established standards for the infrastructure facilities, trainers

qualification, quality of services, type of equipment etc. There are no accreditation agencies in India for regulating the quality of service offerings being

offered. Thus, the unorganized sector suffers from this customer perception of variable standards inservice offering.

ck of Accredited Training Institutes Industry is facing a shortage of properly trained and skilled professionals. There is no ready pool of

trained staff available. This is a critical problem area in a service industry which relies onknowledge, expertise and good soft-spoken skills of the gym staff.

gh cost of Equipment India does not have quality equipment manufacturers. The duty structure on the imported gym

equipment inflates the cost, which leads to higher service cost for the members. Thus, majority of

the industry comprising of the unorganized gyms are not able to provide such world-classequipment.

gh real estate rentals/prices Real estate rentals/prices are increasing significantly, which makes it difficult to find a suitable

location for the health club. This prevents a new entrant from ramping up and gaining scale veryrapidly.

ck of Government focus Unlike in most developed countries, the sector doesn't have an industry status in India. There are

no tax deductions for fitness center memberships in India. However, in some developed nations, the fitness centre membership is tax deductible. Other

nations such as the US are lobbying for it. Indian government doesnt make a substantial allocation for investing in the preventive health of

the people unlike in most developed countries where government sets community fitness centers,parks & recreational areas for physical activity.


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mparison with other markets

The global health club industry has grown at an impressive rate. In 2008, it generated an estimated$68.2 billion in total revenue, a YoY growth of 10.9% serving nearly 117,500,000 members.

Global health club memberships have gone up by 10% from last year. To cater to this increasingmembership strength, the number of health club facilities worldwide has reached 122,000, a 12.9%

jump from last year. Poor health & fitness conditions of the general public at large, combined with a heightened

national emphasis on daily exercise for good fitness have been key contributors to high health clubpenetration rates in several countries.

To give an idea, anti-diabetic medications form a whopping US$21bn pa market globally. Dailyexercise and healthy diet can substantially bring down this healthcare spends. In US for example,lifestyle diseases are the largest contributors to US healthcare spend according to a McKinsey &Co. report.

Widespread campaigns emphasizing a healthy lifestyle have shown results. 16% of total populationin US is enrolled in itness clubs.

On a per-visit basis, a health club membership is a better buy than a night at the movies, an eveningat a concert, a trip to a baseball game, a few hours at a spa, or even a trip to the hair stylist.

In recent years, two other factors have begun to change the industrys exclusive reliance on retailsales.

The first of these factors is the involvement of corporations. Today, according to IHRSAapproximately 31% of Americas larger corporations subsidize the health club memberships of their employees. The percentage of companies that are providing such subsidies has increasedsignificantly in the past several years.

The second factor is the involvement of health insurers. An increasing number of HMOs, including Blue Cross, Pacificare, Aetna, Cigna, Oxford, Destiny,

Harvard Pilgrim, Tufts, and Wellpoint, either reward their subscribers for their involvement inexercise programs or make payments to health clubs based on their subscribers usage of thesefacilities.

Lifestyle related diseases are restricted not just to the developed markets. Even developing nationsface a mounting risk of large number of people suffering from diseases like diabetes. For instanceamong the BRIC nations, China is staring at a massive accumulated income losses of USD 558bn

for 2005-15.sk Factor affecting the company

Brand Image Competition Pricing Pressure Ability to grow number of health clubs and broaden the base of customer General Economic Business Condition


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Disclaimer

e information contained in this report is obtained from reliable sources and is directed at market professionals andtitutional investors. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of any offers to,y or sell the securities or commodities mentioned in this report. Ajmera, and/or its affiliates, may or may not havesition in securities mentioned in this report. No representation is made that the transactions undertaken based on theormation contained in this report will be profitable, or that they will not result in losses. Ajmera Associates Ltd and/or itsresentatives will not be liable for the recipients investment decision based on this report.


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100231178_IPO NOTE Talwalkar

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