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
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.