Talwalkar is a classic case for fraud and con artist in action- promoter siphoning investor money but very convincing and showing how genuine they are.
The funny story is when the stock price crashed in July-19, the promoters came to ZEE News on 24 July and stated that they were not aware of what happened and who sold them and what caused the crash. He also reiterated the fact the company is AA rated. Within two weeks company was declared default by the credit rating agency and could not pay few (3 to 4 cr) of interest on their loans. This rating shows the quality of the rating agency and the supreme quality (?) job they are doing.
If the rating is reduced by a notch, it is understandable, but AA to default within two weeks is fishy- from promoters as well as from credit rating.
I have been an investor in Talwalkar for 5+ years and believed (foolishly) that they are saying. I was about to exit, within a couple of weeks as, I have made up of the mind and about to exit, but the crash happened, and I ended up getting an experience instead of investment returns. To quote a sage “Experience is what you get when you do not get what you want”
Some of the value picker members( @zygo23554 and @Marathondreams) were spot-on in detecting something fishy and warn fellow investor, but I failed to act on it in time. Hence I deserve rubbing my rose for decades to come and vows not to repeat the same mistake.
The story started first when management stated their intention to sell properties worth 120 cr, which were recorded as assets on their balance sheet. After debating for a few quarters, the promoters created a financial engineering marvel by doing spin-off- splitting one company into two separate companies.
Talwalkar Better value fitness (lifestyle) and Talwalkar Health clubs (Gym) with an assumption that a lifestyle company will be loaded with debt and other company (Gym) will have less debt. However, after the spin-off, they loaded the Gym company again with debt. In FY 2019, they increased the debt of the Gym company by whooping 50% in 12 months.
The spin-off took around 4 to 6 quarters, and the company was listed sometime in March 2018. Considering that the lifestyle company to be listed in March 2018, one would have expected financial results of the lifestyle company to be published with a later date (say Dec 2017). But they published the result of the lifestyle company all most two years back and never published recent result despite investor (myself included) asking them for latest result. As a result, in March 2018, the only result which was available for lifestyle company was March 2016. This should have a first sign to smell, which I did (partially ) and existed the lifestyle company.
Little did I know that they would launch a full-scale drain on company’s financial on Talwalkar Gym. Here I forgot to act on the wisdom of a Warren Buffett - “You cannot make a good deal with a bad person”. If their intention were somewhat scrupulous for one company, it could very well be same for other companies in their portfolio as well.
Some other Key points:
-
Promoters started building an empire- buying company across health- yoga chain, Gym in Chennai, Mumbai, online business, nutrient business and even ventured in Srilanka. As this was not enough, they won a master franchise for a gym in 5/6 different countries in east Asia.
-
They have choreographed 20% PAT growth for many many years. Respected value picker member as had raised the timely flag of it as I had to rub my nose, so it happily ignores it.
-
When the lifestyle business was listed, there was confusion if it was a gym business or lifestyle business. In fact the listing price for lifestyle business happened as if it was a gym business. For some days, there was confusion which was gym business and which was lifestyle business.
I was thinking of writing this on Talwalkar thread, but the thread will join the history book. But the current thread is the right places in my view as others will keep referring the story at a later date and hopefully learning and avoid similar fraudulent activity in future (History does not repeat but Rhime).
I am sure many people are aware that Motilal Oswal has lost money in Manpasand beverage. Mr Ramdeo Agrawal is very candid about it, and in one of the interview, he was reflecting on Manpasand investment. MOSL smell some fraud in the company but hoped that it would go away, but it didn’t and end up in history book. Mr Agrawal said if he senses a fraud, it is worth running away from the company the moment you know, even if you sell 100 bagger potential in the stock.
Moneylife has done the exceptionally well job of describing what’s happened. Highly recommended.