Explained: Can Cult.fit succeed where Talwalkars stumbled?

Cult.fit is trending as the fitness company prepares to hit Dalal Street with its public issue, raising ₹950 crore through a fresh issue and an offer for sale of 17.8 crore shares. New investors naturally feel excited about the IPO, as it is the first major public issue from the fitness industry in nearly a decade. The company, which started in 2016, backed by venture capital funds, is now knocking on the doors of the equity markets to raise fresh capital for expanding its fitness centres across India.

The DRHP highlights that India’s middle class is increasingly spending beyond essential expenses, especially on fitness and health, which holds a bigger opportunity to tap. It also argues that India is highly underpenetrated in terms of fitness subscriptions, as less than 1% of Indians hold a fitness gym membership, as compared to 25% in the US and 5.5% in China.

The pitch looks similar to what another fitness chain claimed in its DRHP in 2010. However, it failed to sustain in the long-run. Yes, we are talking about Talwalkars, a then 50-year-old household fitness name, which aimed to become India’s largest fitness chain but eventually failed.

Cult.fit’s IPO has revived the memories of Talwalkars Better Value Fitness, which got listed in 2010, but later went into bankruptcy proceedings over the misrepresentation of its books of accounts.

Boom and bust of Talwalkar’s

Talwalkars Better Value Fitness got listed on the bourses to fund its next phase of expansion. The company became the first listed gym entity. At its peak, the company operated 152 centres across 80+ cities in India, serving over 2 lakh customers. It further collaborated with UK-based David Lloyd Leisure Group to develop luxury clubs and heavily invested in boutique yoga centres.

In a major value-unlocking move, the company decided to demerge its business into two entities, namely Talwalkars Better Value Fitness and Talwalkars Health Clubs. The primary business housed lifestyle, wellness, yoga and aerobic segments, while Talwalkars Health Clubs took over the gym operations and were listed separately in 2018.

However, despite the demerger, the company continued to use the same bank accounts and shared common branches, creating operational overlap.

What went wrong with Talwalkars?

In 2019, the company defaulted on a minor interest payment of ₹3.5 crore, despite the balance sheet showing ₹77 crore in cash and bank balance. This alarmed investors, and the sentiment completely turned for the company as the share price plunged 70% in July 2019. Following the complaints of panicked investors, the SEBI appointed KPMG to conduct a forensic audit, which unravelled a major accounting fraud with fictitious book entries and fund diversion. The accounting records claimed a cash balance of ₹94 crore as of March 31, 2018, which later turned out to be a mere ₹5 crore after examination.

Soon after, landlords started shutting down the gyms over non-payment of rent, which resulted in a complete halt of operations. Axis Bank, which held the bank accounts of both entities, took them to NCLT proceedings under the IBC for defaults. No major buyers came forward to buy the assets owing to the complicated and manipulated books of accounts, which subsequently resulted in the liquidation of the companies. Consequently, Talwalkars Better Value Fitness was sold to a bidder for ₹15 crore. The NCLT order mandated a complete capital reduction held by the promoter group and public shareholders, valuing their ownership at zero.

What did Cult.fit do differently, where the Talwalkars failed?

Essentially, both companies aimed at the same goal of capturing India’s underpenetrated fitness market. But the one with 50-years of legacy and a proven track record failed, while the other one succeeded. The difference lies in the operating business model and the evolving fitness and health market in India.

In summary

Cult.fit IPO comes at a crucial point where the business model is thriving with strong metrics. According to Redseer’s report cited in the DRHP, Cult.fit is four times larger than its closest competitor and generates 14 times more revenue. However, the company now intends to enter the asset-heavy business model with its IPO proceeds despite being a loss-making company.

The company plans to set up Cult Elite and Cult Neo centres and has earmarked ₹276 crore of the IPO proceeds for the expansion. Cult Elite is a hybrid fitness centre format offering equipment-based gym workouts. The Cult Neo is a pro segment gym format offering a standardised fitness experience with in-house designed equipment. Both require heavy capex for further expansion. Whether Cult.fit manages to navigate the challenges that Talwalkars faced during their expansion remains to be seen and closely watched.