talwalkars better value fitness ltd Management discussions

Global economic overview

In 2017, a decade after the global economy spiraled into a meltdown, a revival in the global economy became visible. Consider the realities, every major economy expanded and a growth wave created jobs. This reality was marked by ongoing growth in the eurozone, modest growth in Japan, a late revival in China and improving conditions in Russia and Brazil leading to an estimated 3.7% growth in the global economy in 2017, 60 bps higher than the previous year.

Outlook

The outlook for advanced economies improved, notably for the eurozone, but in many countries inflation remained weak, indicating that prospects of GDP growth were being held back by weak productivity levels and rising dependency ratios. Prospects of emerging market and developing economies in sub-Saharan Africa, the Middle East, and Latin America remained lacklustre with several countries experiencing stagnant per capita incomes. Fuel exporters were particularly affected by protracted adjustments to lower commodity revenues. Global growth forecasts for 2018 and 2019 were revised upward by 20 bps to 3.9%, reflecting an improved momentum and the impact of tax policy changes in the US. (Source: WEO, IMF)

Indian economic overview

After registering a GDP growth of over 7% for the third year in succession in 2016-17, the Indian economy headed for somewhat slower growth, estimated to be 6.7% in 2017-18. Even with this lower growth for 2017-18, GDP growth averaged 7.3% for the period from 2014-15 to 2017-18, the highest among the major economies. This was achieved on the back of lower inflation, an improved current account balance and a reduction in fiscal deficit-to-GDP ratio.

After remaining in the negative territory for a couple of years, export growth rebounded during 2016-17 and strengthened in 2017-18. Foreign exchange reserves rose to US$ 414 billion as on January 2018. (Source: CSO, Economic Survey 2017-18)

Outlook

The World Bank projected Indias economic growth to accelerate to 7.3% in 2018-19 and 7.5% in 2019-20. Strong private consumption and a growth in the services sector are expected to continue supporting economic activity. Private investments are expected to revive as the corporate sector adjusts to the GST. Over the medium-term, the introduction of the GST is expected to catalyse economic activity and fiscal sustainability by reducing the cost of tax compliance drawing informal activity into the formal sector and expanding the tax base. The recapitalisation package for public sector banks announced by the Government of India is expected to resolve banking sector balance sheets, enhance credit to the private sector and spur investment inflows.

(Source: IMF, World Bank)

Estimation for FY2017-18 versus FY 2016-17
	2017-18	2016-17
GDP growth	6.7%	7.1%
GVA growth	6.4%	9.0%
Per capita income growth	8.3%	9.7%
(Source: Press Information Bureau)

Global health club industry overview and outlook

The global health club industry earned revenues worth US$87.2 billion in 2017 via >201,000 clubs serving 174 million members across the world. The top-10 markets across the globe accounted for a

>66% share of the overall fitness club member base and 71% of the overall sectoral revenues. The US led the market with 60.9 million members in 2017 compared to 45.6 million in 2008, growing at a CAGR of ~3%. Germany came second in terms of number of members (10.6 million). The US was also the market leader in terms of number of clubs (38,477), followed by Brazil (34,509). The US led in terms of revenues as well (US$30 billion), followed by Germany (US$5.6 billion) and the United Kingdom (US$5.5 billion). 22 million members working out at

>25,000 fitness clubs across the Asia Pacific generated US$16.8 billion in revenues in 2017. Australia and New Zealand accounted for the highest penetration rates with 15.3% and 13.6%, respectively. Looking ahead, the fitness market shows signs of rapid growth and professionalisation in Hong Kong, Singapore and Japan with penetration levels of 5.85%, 5.8% and 3.3%, respectively. Prospects of growth remain bright in the Philippines, Thailand, Indonesia, and India with penetration levels of 0.53%, 0.5%, 0.18% and 0.15%, respectively.

(Source: IHRSA)

Indian health club industry overview

Compared to 38,477 in the US, the club count in India was pegged at 3,800 in 2017. Owing to this huge under-penetration in the country, pegged at 0.15%, the industry is expected to grow briskly. The fitness industry of the country was pegged at H95,000 crore, growing at ~18% whereas the value of the Indian fitness retail market stood at ~ H7,000 crore in 2017. The health and fitness industry in India has come a long way with several global players entering the fray and numerous homegrown fitness start-ups and online apps becoming a part of the everyday lives of the average Indian. At the end of FY2018, revenues earned by the Indian fitness market were pegged at US$ 908 million. The segment is estimated to grow at CAGR of 9.3% between 2018 and 2022, totaling a market value of US$

1,296 million. The wellness industry in India has evolved from its nascent unstructured beginnings in the early 90s to occupy a comprehensive ecosystem today. The Central Government set up the Department of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy to showcase the efficacy of these early healthcare systems in the modern world. Its on the back of developments like these that the Indian wellness industry is estimated to earn a whopping H1.4 trillion by 2020 and generate >3 million jobs. Furthermore, with 100%-FDI being allowed in the sector and a growing awareness regarding health and wellness among Indians, the health club industry is looking towards the future with optimism. The Indian Government is also launching a number of other programmes like the Make in India initiative to promote the wellness industry by bringing in more investments. Last but not the least; the yoga segment has grown by leaps and bounds during the past few years. ~35% of the fitness enthusiasts part of

India Inc. prefer to take part in yoga classes rather than going to gym or embrace other fitness trends like body weight training, aquatic therapy, kick-boxing, pilates, zumba and other dance workouts, indicating its mass appeal.

Emerging yoga trends

Mobile apps

Mobile apps are enabling users to seek guidance and posture details to perform yoga as per their convenience.

Musical Yoga

This is a form of yoga that involves music in the background so as to allow the practitioners to focus better on their postures by using the inherent rhythm.

Yoga vacation

This is a form of yoga that involves going to exotic locations to practice the postures for a few days.

Floatation Yoga

This is a form of yoga that involves balancing oneself atop a floating surfboard and warrants body balance and physical awareness.

Beer Yoga

This is a form of yoga that involves doing yoga while sipping beer so as to use the calming effect of the beer to make yoga more relaxing.

Acrobatic Yoga

This is a form of yoga that involves fusing with a partner to practice specific yoga postures.

Awareness about alternative fitness techniques (%)

TRX suspension	7
Pilates	29
Rope workouts	31
Aqua fitness	19
Cross functional training	37
Crawling workout	11
Body combat	18
Martial arts	56
Zumba	63
Aerobics	74
Bodyweight training	51
High-intensity interval training	31
Kick-boxing	51
(Source: Economic Times)

(Source: Times of India, Economic Times, Franchise India, ASSOCHAM, Indian Retailer)

Demand drivers

Demographic dividend: 1.34 billion people make India is home to the second-largest consumer base in the world. With the expectation of India becoming the youngest country in the world by 2020 (average age of 29), the country is likely to become one of the biggest prospective markets for health clubs.

Rising incomes: The GDP of the country was pegged at 6.7% in 2017-18. Correspondingly, Indias per capita GDP increased from H1,03,219 in 2016-17 to H1,11,782 in 2017-18, growing at 8.3%. The growth in GDP in turn has increased disposable incomes, driving consumption levels.

(Source: Economic Times)

Obese population: By 2025, India is expected to have >17 million obese children compared to 14.4 million in 2017, taking it to the second spot among 184 countries in terms of childhood obesity. 21% of the total population of the country is overweight, amounting to 155 million people. Furthermore, 16% of adult men and 22% of adult women in the country are overweight.

Gross under-penetration:

Compared to ~38,477 fitness clubs in the US (the worlds largest market),

India has a paltry ~3,800 fitness clubs. This is despite the fact that Indias population is >3x that of the US. Even when compared with China, the most populous nation, Indias penetration is only 0.15% with ~2 million members, while China with fewer clubs (~2,700 fitness clubs) has a penetration of 2.98% with ~4.52 million members. (Source: IHRSA

Asia Pacific Health Club Report 2018)

Increasing awareness: Increasing awareness among the masses abouttheneedtostayfit has led community centres in residential societies and apartment complexes across Tier-II and III cities being equipped with gymming amenities.

Furthermore, few multinational fitness chains and gyms have also started taking the franchisee route to enter India.

Peer influence: Fitness, as a social trend, has been gaining momentum over the years. It is more than likely that members of a group will be influenced The peer influence of the people leading a healthy lifestyle has been driving the demand for the industry since quite some time now.

Growing urbanisation: Urbanisation is one of the major factors behind the growth of the health and wellness sector. Migration from rural areas to cities during the year continued to gain steam (33.2% in 2018) due to a variety of reasons such as better job opportunities and educational facilities and is expected to reach 36.2% by 2025. (Source: Worldometers)

Health issues: 70 million people in India are diabetic while 50 million are heart patients. 100 million

Indians pressure because of stress, obesity, genetic factors and unhealthyofothers. eating habits. 89% of the population suffers from stress compared to a global average of 86%, increasing the demand for gymming services.

(Source: Hindustan Times)

Risk management
Economic risk:	Mitigation: Talwalkars Better Value Fitness Limited offers the full range of
A slowdown in the economy could impact the Companys growth. ering. The Company has a multi off -	fitness services with value-added offerings to its customers, enabling people from different economic background to buy in to the services offered by the Company. This diversified portfolio enables it to cushion itself from an economic slowdown, making it possible to report reasonable earnings from brand strategy which targets both each the classes and the masses. The various value-added services it offers fall under different time-based packages, enhancing affordability.
Competition risk: An intensely competitive marketplace can be detrimental for the Company.	Mitigation: The Indian fitness industry is largely underpenetrated (0.15% in 2017), indicating that the scope for growth is immense. Talwalkars Better Value Fitness Limited aims to capitalise on these incipient opportunities by prudently expanding its presence across the value chain. The Company aims to target both the affordable fitness segment and the premium fitness segment.
Personnel risk:	Mitigation:
The lack of skilled instructors could the quality of services offered by the Company.	The Company provides periodic training (online and on-site) across each of its centres. This has enabled the Companys personnel to affect hone their skills on a regular basis and stay abreast of emerging sectoral trends.
Accessibility risk:	Mitigation:
Clients prefer a centralised and accessible location and an inability to ensure that can be detrimental to the Companys prospects.	Talwalkars Better Value Fitness Limited believes in locating its health clubs at centralised locations, making them accessible for both the masses and the classes. As a means to this end, the Company conducts studies with respecttolocation-specific profiles demographic before setting centres up.
Financial risk:	Mitigation:
Unavailability of funds at competitive rates could affect organisational viability.	The Company closely tracks its funding requirements and ensures the availability of sufficient funds at competitive rates, indicating the Companys financial robustness.

Financial review

The highlights of the Companys financial performance for the year ended March 31, 2018 are mentioned hereunder:

		( RS million)
Particulars	2017-18	2016-17
Total Revenues	580.84	496.83
EBITDA	391.07	311.17
Depreciation and amortisation	178.72	126.17
Profit before tax	109.14	106.52
Profit after tax	87.75	61.28

Revenues: Total Revenues during FY2017-18 increased by 16.91% to reach H580.84 million.

EBITDA: EBITDA during FY2017-18 increased by 25.68% to reach H391.07 million, largely because of improved operational efficiencies.

Depreciation: Depreciation during

FY2017-18 stood at H178.72 million, compared to H126.17 million during FY2016-17.

Finance costs: Finance costs during FY2017-18 stood at H103.22 million, compared to H78.49 million during FY2016-17.

Tax expenses: Tax expenses during

FY2017-18 stood at H21.39 million, compared to H45.24 million during FY2016-17.

Net profit: Consolidated net profit during FY2017-18 stood at H87.75 million, compared to H61.28 million in 2016-17, registering a y-o-y growth of 43.20%.

Human resources

While fitness may be a lifestyle choice for many, it unfortunately is not the foremost career choice. Talwalkars Better Value Fitness Limited believes that its competitive advantage lies within its people. The Companys people bring to the stage a multisectoral experience, technological experience and domain knowledge. The Companys HR culture is rooted in its ability to subvert age-old norms in a bid to enhance competitiveness. The Company always takes decisions which are in alignment with the professional and personal goals of employees. The employee count stood at ~200 as on March 31, 2018.

Outlook

The Company enjoys a unique positioning in India and plans to grow by leveraging its string-of-pearls strategy. The Companys multiple brands and diversified portfolio across the wellness segment allows it to shore up its profitability with relative ease. The

Company intends to monetise eight of its properties and to pay back debts. The Company also plans to deepen its pan-India footprint and venture into countries with similar demographics. On the financial front, the Company hopes that the demerger will mean that it no longer needs to stay shackled to the existing infrastructure and grow revenues and improve margins independently.

Internal control systems and their adequacy

The internal control and risk management system is structured and applied in accordance with the principles and criteria established in the corporate governance code of the organisation. It is an integral part of the general organisational structure of the Company and involves a range of personnel who act in a coordinated manner while executing their respective responsibilities.

The Board of Directors offers its guidance and strategic supervision to the Executive Directors and management, monitoring and support committees. The control and risk committee and the head of the audit department work under the supervision of the Board-appointed Statutory Auditors. The system is under constant review by the Chairman, Managing Director, COO, CFO and a few others, which ensures any discrepancies are immediately noted and suitable action can be taken in case of any lapses.