Motilal_Oswal_DreamFolks_Initiating_Coverage_Note.pdf (4.4 MB)
Motilal Oswal Coverage On Dreamfolks Services Limited
DreamFolks had a decent Q3 performance (in absolute terms) – with revenue up 50% YoY + gross margins up 15% YoY. However in terms of margin %, both gross margins / EBITDA were down YoY.
I wrote a detailed article covering the performance of DreamFolks - here
Here’s a summary of DreamFolks Q3 performance 
Pros
- DreamFolks launched ‘The DreamFolks Club’ – an exclusive membership program where it can bundle together it’s various services into a package. There are 4 package variants (ranging from INR 6,999 to INR 99,999). This is to cater to people who don’t have debit cards / credit cards and still want to avail benefits.
- The preliminary focus of the program would be to attract large enterprise customers (B2B) who can buy such programs to rewards their employees / customers / channel partners. However a normal individual can also buy into the membership directly from the website.
- Entered into partnership with Grey Wall (Russia’s largest lounge operator) whereby Indian passengers will gain access to airport lounges + railways lounges in Russia.
- Expanded their presence in railway lounges in Chennai & Old Delhi – the company continues to maintain 100% coverage in railway lounges in India.
- Added two new services - Pathology testing & Gifting services
- Major growth drivers will be increase in credit card penetration (currently 5.5%) and growth in air passenger traffic
Cons
- Credit card companies are moving from fixed benefits model to spend based model which will impact the volumes for the company
- Other services (e-SIM, Visa services, Golf, Spa) contribute <2% of total topline. Management expects these services to contribute around 20% in the next 4-5 years (I think the management should aggressively push for this in the next 1-2 years and not 4-5 years)
- Employee benefit expenses have increased due to increase in ESOP cost
- Q4 is expected to be flat in terms of topline / bottomline sequentially
Concluding Thoughts
I think the membership program has potential, but how much? Can it be profitable? Can it scale? Do they have some sort of pricing power here? I hope the management can answer such questions in the future.
The company already has 95% market share of the card based lounge access market – so not a lot of room to grow unless air passengers grow and more credit cards enter the market. The impact of shifting to a spend based model by credit card companies will have to be seen over the next few Qs.
Disclosure: Recently sold all my position in the stock due to low confidence in the B-model. Tracking, will buy if it falls atleast 30% from CMP
Would it be right to exclude the sub-contract expenses to get to the real revenue number??
Had mentioned this point earlier in the blog (Dreamfolks services Ltd- Business analysis | Multipie) about the mismatch of remuneration.
A good point here is the remuneration of KMP has been changed significantly and the directors who didn’t have an active role in the business haven’t been paid remuneration (Though there is a jump in sitting fees now.)
The key to growth would be as you pointed out and too think is :
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Air Passenger Growth ( likely with growth in discretionary spending by Indians, observe that there is no growth in Marico, however leisure spending and travel has increased. )
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Credit Card Growth - still lot of room to play.
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Company focusing on playing the corporate benefits card, which many MNC and top Indian companies can on-board.
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Company to increase the circumference of offerings across leisure and travel.
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Company to expand internationally organically or with tie-ups …
With more airports across Indian cities, infra and travel increasing … a long term play for alteast next 3-5 years… the margin pressure is real though and hence the sales growth can’t fizzle out !!
Will Dreamfolks Services become a Multibagger?
The most affected sector during Covid-19 was the Travel Sector. This sector was the most undervalued during the time. But it was known that it will revive once Covid is over. The problem is when it will revive. The patience to let the sector revive was the key. So keeping this sector in focus, I saw that a company called Dreamfolks Services is coming out with an IPO in August, 2022. The price for the IPO was Rs. 308-326 per share.
DreamFolks Services Ltd is India’s largest airport service aggregator platform facilitating an enhanced airport experience to passengers leveraging a technology-driven platform. Dreamfolks facilitates customers of Clients’ access to the following airport-related services (i) lounges, (ii) food and beverage (iii) spa, (iv) meet and assist, (v), airport transfer (vi) transit hotels /nap room access, and (vii) baggage transfer. They facilitate access to 100% of the 54 lounges currently operational in India. The business is an asset light model.
The one issue that I could see in the company was their revenue concentration during that time. They are heavily reliant on a few clients and derives a significant part of its revenue from lounge access-related services from select Clients.
The Q1FY24 results were not as good as the Q4FY23 results as shown below.
The reasons stated for such a bad result was that revenue in Q4FY23 included the impact of a one-off project up fees received during the quarter. One-off abnormal increase in Common Area Maintenance charges has led to increase in lounge cost. The escalation used to be 7-8% but this time it was 15%. Time lag between contract renewals on both supply and demand side has impacted the Gross margins. EBITDA decline in Q1FY24 is partly associated with ESOP charges.
Q2FY24 & Q3FY24 results were quite well as shown below.
Fundamentally, they have started diversifying their business into the following services.
They are also strengthening its global presence through partnership with Grey Wall – one of Russia’s leading lounge operator. They have also entered in to the Malaysian Market. They have on-boarded one of the key players in the airport lounge space in Malaysia, by offering thier technology w.r.t. card-based lounge benefit management. This is a different model where the lounge operator, in addition to being a service provider, also acts as a client for us to provide such lounge benefit management platform. They have also collaborated with Plaza Premium Group.
In order to increase their client base, they have on boarded new age fintech companies like FI Money and also added an e-commerce company to their roster of clients. They are also expanding their presence in railway lounges by partnering with new railway lounges in Chennai and Old Delhi. They continue to maintain 100% coverage in railway lounges across India as well. They are also adding new services like Pathology testing across India, through a strategic partnership with Healthians & Gifting services, through collaboration with My Flower Tree, allowing customers to send flowers, cakes, planters and more to friends and family. They have also partnered with Eco-Mobility, a car rental service provider. They will now extend its fleet of luxury chauffeur-driven vehicles to DreamFolks customers under the newly launched DreamFolks Club memberships. They have also collaborated with a premium Salon chain named Looks Salon which shows their diversification efforts beyond travel. They have also diversified by providing E-Sim Solutions for International Travellers & have already on boarded one of the largest network providers to offer the solution.
These fundamental changes should definitely help them achieve diversified revenue streams but again patience is key in these cases.
Until recently, the stock was not covered by any big brokerages. In February, 2024, Motilal Oswal initiated coverage on the stock and sees an upside of 34% in the stock.
The company listed at a price of 550 and then corrected back to Rs. 350 in Dec, 2022. When the company declared Q4FY23 results, they had seen a very huge YOY growth in FY23 vs FY22 results which took the price to make a high of almost Rs. 850 in July, 2023. The price then corrected and made a low of Rs. 450 in Sept, 2023 after the Q1FY24 results were declared. The price has also been very range bound between Rs. 450 & Rs. 600 during Q2 & Q3 results. I have accumulated this stock with an average price of Rs. 515 hoping that the companies changing fundamentals will discount in the price and it will go back to the levels of Rs. 850.
Seeing the fundamental changes in the company, I think this stock should become a Multibagger in the coming future but need to wait for the story to pan out. Patience in holding this stock is key to generating returns.
Let me know what you think in the comments section!
Happy Investing!!!
I strongly believe that the competitive intensity will increase going ahead as the Indian air travel market is growing players like Priority pass have higher incentive to enter the market. DFS claims 95% share in credit card-based lounge usage so it would be very sensible for these players to pitch lower rates to credit card companies. All these things the company is doing seems that they want to transform from the aggregator model to a full service model which will stretch the working capital cycle as well and the negative working cycle is unsustainable.
Any contra view here?
The company’s business model involves negotiating with airport lounge owners and credit card companies, offering a software platform to facilitate transactions between them.
Revenue is generated from credit card companies on a per-passenger basis, with payments made to lounge owners through the software.
However, the flaw in this model is that the company transitions from a technology provider to a bulk B2B booking business, resulting in low CFO and high receivables. Despite the thriving nature of the business
due to increased passenger traffic, temporary issues such as credit card restrictions and lounge availability arise.
However, the fundamental flaw in the business model makes it difficult for me to consider investing.
Please share your opinion.
As long as they are limited to indian market then there will not be any exponential growth revenues, growth from increase in air traffic and lounge foot fall only drive the business.
Deals with the lounges in foreign countries only add some minimal contribution because these deals will allow indian card holders to utilize the lounge access in those countries, but what i am looking since listing is winning a single deal to offer lounge services to banks/card network providers of foreign countries in their homeland and abroad for their customers. This is not happening since listing, management keep on saying that this kind of deals will take time to close.
Recently, there has been a devaluation of credit card incentives. Credit cards and banks provide significant revenue to DFS.
To access lounges, banks are asking its customers to spend a certain amount. Like customers will have to spend a minimum of 10k/month to access the quarterly lounge benefit.
These have been on most issued entry level cards which i think will have a short term impact on dreamfolks revenue. I intend to quiz the management about it in the next concall.
Agreed. But they are also diversifying their revenues. Railway Lounges (which is an even bigger market than airport lounges plus Govt plans to make Railways better) and Golf Services, Salon Services etc etc as mentioned in my Blog Post.
Recently i visited lounge at Hyderabad airport, still there are long ques to enter the lounge and lounge is full of pax, i think there may not be any impact on this lounge access business model changes on the dreamfolks, indeed i am expecting good number in Q4. if it is the case then again re rating is possible
All these other services contributing very less amount to the revenue (<5%).
Not much margin & Per pax revenue in the railway lounge services, its yet to emerge as there are only few limited number of lounges in the railway stations.
Agreed. But eventually it will grow and it makes sense to stay invested for the long term. The price is also showing some breakout signs so lets see.