Over the past three months, Talwalkar Lifestyles Ltd (now split into two companies), once considered a steady, conservative and successful Marathi enterprise, has crashed. The shares of the demerged entities hit a 52-week low on 9th October. The shares, which traded at Rs393 in 2015, are penny stocks now, trading in single digits, as whispers of fudging of profit & loss and balance sheet do the rounds.
It is already known that the company has been defaulting on interest payments, has massive borrowing and nearly three-fourths of the promoter shareholding is pledged. But that is not the reason why statutory auditors and independent directors of its listed companies rushed for the exit, exactly when the stock price began to crash around July. Typically, rating agencies woke up in August to downgrade both demerged entities.
We learn that the fall of the Talwalkars, India’s largest fitness group, is not about a business gone bad due to the economic slowdown. Like DS Kulkarni, and Punjab and Maharashtra Cooperative Bank (PMC Bank), this appears to be a case of brazen fudging of turnover and membership numbers and cooking up profits, to play the market-cap game, to keep raising more money and piling on debt. Some large investors are categorical that this is the case.
The music stopped around July 2019 when investors began to ask tough questions after the demerger and wanted better returns. According to my sources, that is the time when the group admitted to massive problems and its marquee investors began to dump the stock. After that, things seem to be spiralling out of control.
Today, its lenders are frantically trying to salvage their loans. Three weeks ago, there was a contentious meeting of lenders at which they decided to appoint a forensic auditor. The biggest exposure is to Axis Bank (which is also its debenture trustee) and Indostar Capital Finance Ltd, while others, reportedly, include Lakshmi Vilas Bank Ltd, The South Indian Bank Ltd, Hero Fincorp, Indian Bank and Andhra Bank.
To understand the debacle, let’s go back to the beginning. Around 2002-03, the Talwalkar family, comprising 88-year old MadhukarTalwalkar and his sons Prashant and Girish, got together with Anant and Vinayak Gawande and Harsha Bhatkal (who ran Popular Prakashan, a publishing company) to set this sleepy gymnasium company on to the path of high growth and glamour.
The moving force behind their extraordinary growth over the next decade and fund raising is understood to be Anant Gawande (to raise funds) and Harsha Bhatkal (a management graduate and marketing whiz). Mr Gawande and Mr Bhatkal were able to raise funds repeatedly from marquee investors in India and abroad as they sealed high-profile tie-ups and collaborations beyond the simple gymnasiums. Investors happily bought into the rosy projections of high growth numbers, based on the rising trend of Indians becoming fitness conscious.
These tie-ups included the 50% investment in Zorba-Renaissance Pvt Ltd, owned by the 27-year old yoga sensation Sarvesh Sashi. This joint venture boasted investments by Jennifer Lopez, David Giampaolo, Mark Mastrov, Alex Rodriguez, Malaika Arora, and even Paresh Sukthankar, then of HDFC Bank, in December 2015.
Another tie-up was with the famous David Lloyd Leisure, a high-end, membership-based club, which resulted in a joint venture (JV) called DLL Talwalkars Club Private Limited. It just opened its first club in Pune earlier this year under the David Lloyd Leisure Clubs Talwalkars (DLT Clubs) brand. It also acquired Power World Gym, Sri Lanka’s largest chain, and signed up an exclusive master franchise with Snap Fitness Inc for six South East Asian countries. There were many more.
In 2016, they decided to demerge the business. In the 2017-18 annual report, chairman Prashant Talwalkar says, “The core gym business was spun off to Talwalkars Lifestyles Limited while the wellness business was nested in Talwalkars Better Value Fitness Limited. One share held in the erstwhile Talwalkars Better Value Fitness Limited generated one share in the gym Company and one share in the wellness Company.” In effect, the high-profile tie-ups were in Talwalkar Better Value Fitness Ltd (TBVFL), while the gymnasiums, which were the core activity, remained in Talwalkar Healthclubs Ltd (THL).
Keeping share prices high was part of the game-plan. In 2017, the promoters even invested Rs41.38 crore at a high Rs313 per share, through a preferential offer, to demonstrate their confidence in the performance.
When the demerger was completed in March 2018, the company was at its boastful best. In the same annual report, Mr Talwalkar claimed, “We believe that following the demerger, the enhanced transparency arising out of business segregation will attract focused investors; the growth of each of the business will unlock and enhance value for the respective shareholders across the foreseeable future.”
He added that the “gym business of the Company was always high-margin, while the wellness business was cash-intensive in its nascent business-building years.”
None of it was really true. While the forensic audit will reveal the extent of the rot, there are plenty of indicators that things were cooked up. As one investor says, “When the split happened and the balance sheets came in, things looked different. Until the companies were remained one, a lot of the money raised was explained away as having been invested in growth and expansion.” Since 2018, some investors have wanted the gym business sold and debt reduced.
By July 2019, they had run out of options. The stock prices began to crash, large investors stampeded out and there were a spate of resignations from independent directors of both companies and statutory auditors.
Independent directors who resigned include the high-profile advocate Mrunalini Deshmukh, MG Bhide (former chairman of Bank of India), Dinesh Afzalpurkar (former chief secretary of Maharashtra) and Raman Maroo.
At that time, Anant Gawande was on television claiming that all was well and that he was clueless about why the stock price was crashing. The public shareholding in these entities is a high 60%+ and they have taken the maximum hit in the collapse.
Lakdawala and Associates (also statutory auditor for the failed PMC Bank) had audited Talwalkar Better Value Fitness Ltd (TBVFL) in 2017-18, but resigned in February 2018.
The story of MK Dandekar, who took over the statutory audit of TBVFL, is even more curious. The auditor’s report has this to say on the accounts for year-ending March 2018: “The Company’s operating effectiveness and internal control system for Revenue from Operations with regard to Fees and Subscription is not commensurate with the size of the Company and the same needs to be strengthened by the Management. A material weakness is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
And, yet, it also says that this did not affect its audit opinion. Many auditors find this strange and think there should have been a clear qualification. But MK Dandekar resigned in August 2019 citing the company’s failure to provide satisfactory responses to their queries.
August 2019 was also when the Talwalkar companies defaulted for the first time; this was followed by a rating downgrade by CARE and ICRA. Things have gone rapidly downhill since then.
On 2nd October, Bloomberg Quint reported that both Talwalkar group companies had defaulted again. TBVFL failed to pay up interest of Rs94 crore; it has an outstanding debt of over Rs203 crore. THL defaulted on a mere Rs2.5 crore payment; its debt is over Rs463 crore. The net debt is a high Rs719.4 crore. As against this, it has Rs139 crore of cash and investments, according to its annual report for the year ended March 2019. Moreover, over 70% of the promoter holding is pledged. One can well imagine the panic this has caused among lenders.
We also learn that its many JV partners have also been saddled with large borrowings and are scrambling to arrange funds, buy out the shareholding of the Talwalkars and find other ways to survive. Sources say, Sarvesh Shashi of Zorba-Renissance is now also looking at buying out the Talwalkar stake and strike out on his own, subject to lenders’ approval.
Clearly, a lot has been going wrong. Only a forensic audit will reveal what was fudged, where the money has gone and how many people in the management knew what was going on.
Note: I emailed a set of detailed questions to Prashant Talwalkar, Anant Gawande, Vinayak Gawande and Harsha Bhatkal seeking their comments and feedback and followed it up with text messages to all. Their response, if they come, will be added to this column. We also wrote to several lenders, including Axis Bank, but have not heard from them. Others, who have provided information, have wanted to stay anonymous.
Amidst declining volumes of passenger vehicles, new model launches would provide only limited, short-term respite to original equipment manufacturers (OEMs), while increased vehicle launches along with the entry of new players in the utility vehicles (UVs) segment, would intensify competition, leading to a gradual change in the market share of incumbent OEMs over the medium-to-long term, says a research note.
In the report, India Ratings and Research (Ind-Ra) says, demand for new launches typically drops after two-to-three months thus broad-based revival remains elusive.
"The initial pick-up in volumes could be the result of launch offers and/or customers’ penchant to migrate to the latest optimal choice in the market. The subsequent fall in sales suggests that the demand arises from a small segment of the consumer base, and it loses momentum with time, reaffirming our view that the sector is yet to witness broad-based revival. Unless the sector recovers, upcoming launches would be only marginally beneficial for OEMs and would not result in any meaningful improvement in the overall sales volumes," it added.
From the beginning of 2019, OEMs have launched approximately 25 new models under different categories such as utility vehicles (UV), sedan, and hatchback with an average of two models launched each month.
Ind-Ra’s study shows that the sales of these new vehicles were strong in the initial two-to-three months post the launch, but declined in the subsequent months. For example, the volumes of TATA Harrier, launched in March 2019, have declined on an average by 24% on a month-on-month basis. A similar trend was observed in the case of Honda Civic (2019), Mahindra Alturas G4 and Hyundai Venue.
According to the ratings agency, new launches could help OEMs remain competitive in the market. It says, "The multiple vehicle launches by OEMs could be partly attributed to the considerable investments made by these companies in previous two-to-three years in the designing and commercial development of these cars. We believe that, amidst a slowdown in the sales volumes, the new launches could enable OEMs to remain competitive and also monetise their investments to some extent."
Ind-Ra study also reveals that increased number of customers are preferring UVs, where competition is intensifying.
Since the beginning of 2019, the UV segment has displayed greater resilience to de-growth compared to passenger cars, signalling growing customer preference for the former. Out of the 25 new launches in YTD 2019, 61% were UVs and 14% were crossovers. According to industry sources, over the remaining portion of 2019 till 2021, OEMs plan to launch over hundred new models, more than half of which would be UVs.
Earlier, only few OEMs such as Toyota, Mahindra & Mahindra and Tata Motors had UV models. However, Ind-Ra says, since 2016, OEMs such as Hyundai, Maruti Suzuki and foreign players such as Jeep, MG Hector, and Kia have also entered this space. Therefore, competition in the segment has increased multi-fold, while the life-cycle of UVs has shortened.
“Hence, we believe the market shares of OEMs in the UV segment are likely to change in the medium-to-long term, especially in case of incumbents. For instance, during April-August 2019, the market share of Maruti Suzuki, Honda Cars, Toyoto, Mahindra & Mahindra and Tata Motors declined by an average of 1.47% yoy, while that of Hyundai Motors increased by 7%," it concluded.
Reliance Jio Infocomm Ltd (Jio) while intensifying its agitation against Telecom Regulatory Authority of India (TRAI), has decided to charge 6 paisa per minute from all users who will call any other operator. Jio, however, says, since it will be providing equivalent data for the value of this top up voucher, there would be no increase for its subscribers.
In a statement, Jio says, "...for all recharges done by Jio customers starting Wednesday, calls made to other mobile operators will be charged at the prevailing interconnect usage charge (IUC) rate of 6 paise per minute through IUC top-up vouchers till such time that TRAI moves to zero termination charge regime. Presently, this date is 1 January 2020."
There, however, will be no 6 paise per minute charge on all Jio to Jio calls; all incoming calls; calls made from Jio to landline calls; and calls made using WhatsApp or FaceTime and similar platforms, the company added.
(*Equivalent minutes with IUC charged at 6 paise per minute, with additional charge for GST and processing fee, and duration of each call rounded up to nearest minute.)
IUC is a cost paid by one mobile telecom operator to another, when its customers make outgoing mobile calls to the other operator's customers. These calls between two different networks are known as mobile off-net calls. IUC charges are fixed by TRAI and are currently at 6 paise per minute.
Jio says since 2011, TRAI has repeatedly affirmed its stand that the IUC charges should be brought done to zero. However, after bringing down the IUC charges to 6 paisa per minute from 14 paise per minute from 1 October 2017, and promising to make it zero, the regulator has not done anything, Jio alleges.
It says, "Relying on the repeated stance of TRAI and the amendment already made to the regulations reducing the IUC to Zero, Jio continued to pay IUC from its own resources to Airtel and Vodafone-Idea among others while offering free voice to its customers. So far, in the last three years Jio has paid nearly Rs13,500 crore as NET IUC charges to the other operators."
"Unfortunately, after the above order in 2017, while the incumbent operators reduced voice tariffs for their 4G customers, they continued to charge exorbitant tariffs to their 35 - 40 crore 2G customers, and in fact increased the tariffs for voice calls to around Rs1.50 per minute. They also charge a minimum of Rs500 per GB for data from their 2G customers," Jio added.
According to the Reliance group company, the price differential of free voice on Jio network and exorbitantly high tariffs on 2G networks causes the 35 - 40 crore 2G customers of Airtel and Vodafone-Idea to give missed calls to Jio customers and its network receives 25 to 30 crore missed calls on a daily basis.
"This huge missed call phenomena converts the incoming calls to Jio into outgoing calls from Jio to other operators. The 25 to 30 crore missed calls per day should have resulted in 65 to 75 crore minutes of incoming traffic to Jio. Instead, the call back made by the Jio customers results in 65 to 75 crore minutes of outgoing traffic. But for the effects of the tariff differential, especially the missed call phenomenon, the off-net voice traffic is already symmetrical now for Jio. It is being made asymmetric by the other operators by keeping their 2G voice tariffs high," it says.
While levying 6 paisa per minute from its subscribers for making calls to other operator, Jio says it will provide additional data entitlement of equivalent value based on IUC top-up voucher consumption to ensure no increase in tariff for customers.
"Post-paid customers will be billed at 6 paise per minute for off-net outgoing calls with increase in free data entitlement to the extent mentioned above," it added.