Gym business...does it make sense?

Mahendra Singh Dhoni has started a new venture – SportsFit World Private Limited – suggested the Economic Times copy of the last week. The company, which MSD has formed along with his business partner and manager Arun Pandey, would be opening a chain of fitness centers (or gyms) across India. The new partners plan to open 200 gyms across the country over the next five years. Options for going alone or through franchisees is still in the works. With this, MSD would join the league of Talwalkars, Gold's Gym, Fitness One and Snap Fitness.

I shall here try to explore the gym business for the readers of this blog.

For the sake of understanding, let’s assume that we have taken the franchise of Gold’s Gym on April 1 2012. Establishing a fully-loaded Gold’s gym can cost anything between Rs. 3 crores to Rs. 5 crores, assuming that the land/building is not owned but taken on lease. A reasonable size would be say 7,500 sq ft of area. Similar to most master franchisees, Gold’s Gym would require that we buy the fitness equipment from them or their subsidiaries. They would also have their say in the choice of interiors and related infrastructure. So, it’s better, we assume this to be a sunk cost with no options of saving even a penny.

Assuming that we already have a location in mind, it is generally said that the fitness center can be expected to kick-start operations in about three months. Taking into consideration that all goes well, our cash outflow till the date of inauguration – i.e. July 1 2012 – would stand at Rs. 5.37 crores (including Rs. 18.75 lacs as interest and Rs. 15.75 lacs as rent). I assume that the investment amount has been taken as loan from friends who seek 15% pa interest; while the rent is Rs. 70 per sq ft. In other words, we are down Rs. 5.35 crores on the date of opening.

Let’s focus now on the cash inflows for the year ending March 31, 2013. Say the membership fee to our gym costs Rs. 25,000 per annum (which are very much premium charges) and the total memberships sold averaged 600 for the first year of operations. This means that during the period July 1 2012 to March 31 2013, we generate cash inflows to the tune of Rs. 1.5 crores. After adjusting for the franchisee royalty of Rs. 11.25 lacs (i.e. 7.5% of revenue), we are left with net cash inflows of Rs. 1.39 crores.

Coming to the operational costs, we now focus on the rentals, staff salaries, electricity charges, and other administrative costs payable during the year. Rent payments of our gym come at Rs. 47.25 lacs (nine months only), staff salaries are Rs 20.0 lacs (Manager, Trainer, Junior Trainer, others), electricity charges are Rs. 9.0 lacs (Rs. 1 lac per month), while administrative costs are Rs. 2 lacs. All this adds up to Rs. 76 lacs and results in an Ebitda margin of 40%, which is very much the industry norm. Seems good until now, right!

Having paid the operational costs and royalties, we now need to pay Rs. 56.25 lacs as finance charges for the loan taken from friends for the nine months, as we have already added the interest for three months in sunk costs. Amortization of the pre-operative expenses of Rs. 35 lacs over the next ten years would mean a deduction of Rs 3.5 lacs from the P&L account this year. Taking these into consideration, we arrive at a profit before tax of just Rs. 1.75 lacs for the first year. Hold on, as we are yet to pay a corporate tax of 30% on this amounting to Rs. 52,500 to the government. At the end of March 31 2013, we end our first year with a net profit of 1.22 lacs.

Good luck MSD!

Mad Over Donuts...seriously

Last week, my sister called me up while returning from work, asking me to get her “Double Trouble”, a popular donut (doughnut) flavor available at the Mad Over Donuts (MOD) outlet near my office. She asked me to buy two donuts after having eaten one at the Juhu outlet the very same evening.

I have seen the MOD outlet several times while going to / returning from my office, but never in my two years have I felt the urge to even visit the orange-colored place to buy anything. You can blame it on my traditional/conservative thinking because I usually stay away from such firangi places which are frequented by the new generation of Indians these days.

Anyway, since the request for donuts had come from my little angel (who is also my life), I finally made it to the MOD outlet that evening for the first time and bought two pieces of Double Trouble. I also bought two espresso coffees which I shared along with my friend accompanying me that day and paid Rs. 185 for all the things. I guess the donuts came for about Rs. 50/- each, which I thought were quite reasonably priced.

The person serving me at the outlet informed that it was a franchisee store; which tinkled the businessman in me. Few days later, I started to research about MOD. And guess what did I find? I found that MOD is not an international brand like Dominos, Mc Donalds, or Pizza Hut, but a home grown one. This came as a real surprise to me since I always thought MOD was an up market (premium) foreign brand.

So, who are the people behind MOD – India’s first donut chain? Well, it all started when a young man named Lokesh Bharwani (probably a sindhi, suggests the surname), who was working in Singapore, thought of an opportunity to serve donuts to Indians. Lokesh roped in Kishi Arora (a beautiful chef) and took the plunge after spending one full year to research and develop the product with a team of food science specialists.

The start may have been slow, since the first MOD outlet opened its doors only in March 2008. The reason could also be that Lokesh wanted to play all his cards right and avoid failure. The gameplan worked and MOD expanded really fast. The company is now present through 35 stores across Delhi, Mumbai and Pune. According to media reports, Mirah Group (owner of Rajdhani and Falafels) was quick to spot the opportunity to invest in the craze for donuts and picked up one-third stake in MOD in 2010.

Now, comes another good piece of information. Last week, I had this guest at my place (an Indian, residing in Dubai) and he happened to visit the neighborhood MOD store yesterday with his friend. While casually chatting up with him last night, we engaged in discussing the donuts served at MOD and what he thought about them. Well, he had an interesting thing to share with me. My friend told me that MOD is costlier than Dunkin Donuts and Krispy Kreme, the international favorites for donuts. Moreover, he said that the donuts served by MOD good, but, not as soft and creamy as the ones he eats at Dunkin Donuts and Krispy Kreme in Dubai. Which means that Lokesh could be generating better profit margins than the international players. Anyway, whatever be the case, I know one thing. Lokesh is presently doing a roaring business and his MOD has a great fan following, including my little princess.

I wish him and Kishi all the luck.

Logistic companies Arshiya and Gateway Distriparks generate investor interest

The last week of this financial year witnessed a lot of bulk deals. I, therefore, would only be discussing selective candidates here at my discretion.

Credit Suisse Singapore was seen picking-up shares worth Rs. 12.5 crores in Arshiya International, a supply chain and logistic company, which has made it to the Ceejay House of Worli from an unknown office building in Marol, Andheri. Seller here was Citigroup.

Buying interest was seen in another company named Gateway Distriparks, which operates in similar space as Arshiya International. Morgan Stanley and Indea Absolute Return Fund were the buyers here, picking shares worth Rs. 37.7 crores and Rs. 8.3 crores each.

ICICI Prudential Mutual Fund bought shares worth Rs. 12.2 crores in Career Point, a tutorial company, from HDFC Mutual Fund. Few interesting things about Career Point: 1) the stock is available at 52-week low and could make for a good investment, 2) expected IPO of Mahesh Tutorials could be seen lifting investor interest, and 3) the company has some really strong backing of institutional investors.

However, ICICI Prudential Mutual Fund was seen selling shares in Shilpa Medicare. The fund house sold shares worth Rs. 7.9 crores to TANO Mauritius India. Shilpa Medicare counts Baring India and Pivotal Securities among its shareholders.

During the week, New York Life Investment Management India Fund bought shares worth Rs. 6 crores in Jabalpur-based Commercial Engineers & Body Builders. Since, they already own 12% outstanding shares in the company, the additional buying of shares indicate confidence among the existing investors.

Asian Satellite Broadcast (a Subhash Chandra company) was seen buying into IVRCL. Asian Satellite Broadcast acquired a total of 13 million shares at an average price of Rs. 60.44 per share, this week.

And lastly, my all-time favorite Supreme Infrastructure is again back in the list since Kitara Capital bought additional shares worth Rs. 2.9 crores at an average price of Rs. 288 in the company.