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The Business of Dreamfolks ✈️
Decoding the business of India's largest airport services aggregator
In 2008, Liberatha Peter Kallat, was a general manager at Plaza Premium Group, the multinational operator of some of the best airport lounges in the world. Her main role at the company was to increase the number of air passengers availing the services of the Plaza Premium’s lounges at the Indira Gandhi International Airport in New Delhi.
It was a tough job.
Less than 5% of India’s population at the time travelled by air and a miniscule percentage of that availed services of an airport lounge. For a price conscious country, longue services at the airport were a luxury limited only to business class travelers. Debit and credit cards were possessed by a few and even fewer were aware about the free airport lounge perks as part of their card service.
However, things were changing.
Since 2008, air passengers in India have increased at a CAGR of 11.64%. In absolute terms, this means that more than 200 Million Indian passengers will travel by air in 2022 vs less than 50 Million that used to in 2008.
More airports in India were opting to build a lounge and banks were issuing more debit and credit cards with airport longue perks. The international airport lounge aggregator at the time, Priority Pass, had a very small presence in India and considered India to be a very small market not worth investing in.
There was a clear vacuum in the market for an India focused lounge aggregator that helped connect lounge operators at airports with customers of card issuing companies availing lounge perks.
So in April of 2008, Liberatha left her job at Plaza Premium Lounge and registered ‘Believe Tradelink Private Limited’ with registrar of companies in New Delhi.
Fifteen years later, in 2022, Believe Tradelink Private Limited would IPO as Dreamfolks Services Limited and become the largest lounge and airport service aggregator of India.
This is how the business of Dreamfolks works.
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Current Business of Dreamfolks
Dreamfolks business is simple.
In its IPO document, it describes itself as an ‘airport service aggregator platform’. In simple terms, the company is the middle man that helps airport service operators (like lounges, food and beverage stores, spa chains, meet and assist operators etc.) seamlessly provide services to customers that are leveraging their credit or debit card perks at the airport to avail such services.
The below visualization is an example of a really simplified version of their service.
In real world, there are millions of passengers and tens of banks, corporate clients etc. issuing cards with airport service perks and tens of lounge and airport service operators in India. Dreamfolks finds its use in facilitating business through all of them in a seamless fashion.
A more comprehensive version of Dreamfolks services is show below.
As evident from the above visualizations, there is indeed a need for a middle man that can work with banks, card networks and service providers to facilitate business.
However, there are no ‘network effects’ or ‘proprietary technology’ at play here. Anyone with little bit of capital and inclination to replicate Dreamfolks business can do so without any headwinds.
Lets explore this a bit in detail.
Industry Structure for Airport Service Aggregator
To explore the industry structure in depth, we will be leveraging the Porter’s Five Force Model. The model will help us understand the business of Dreamfolks, its competitive advantages (if any) and current industry structure in depth.
If you’re unfamiliar with Porter’s five forces, you may read the below Twitter thread to familiarize yourself.
Dreamfolks Porters Five Force Analysis
Below is a detailed five force analysis for the industry Dreamfolks operates in.
Few things are evident from this analysis.
Dreamfolks does not have any bargaining power with either its suppliers (airport services) or its buyers (card issuing companies). As such the margin profile for Dreamfolks is razor thin. The company works on a single digit EBITDA margin spread and has indicated in various interviews that margin gap between the price it has to pay to lounge operators vs the price it charges to card companies cannot exceed 15%.
Further, Dreamfolks does not have any leverage to increase its commission or margin spread rates. On both sides of its business (airport service and card issuing companies) the market is highly concentrated.
Though the barriers to entry are less, so far no one has challenged Dreamfolks business. It has so far operated and continued to gain market share without any competitor resisting. Apart from Dreamfolks, the only other lounge aggregator that operates in India is Priority Pass. Priority Pass has largely ignored the business in India as the market was too small but in future, if it gets aggressive, it wont take much for it to regain market share from Dreamfolks.
Dreamfolks technology stack is off the shelf and can be replicated easily. This is evident by the expenses and staff that company keeps to upkeep its technology stack. For the year ending 2022, technology spend by the company was Rs 79 lakhs and only 12 out of the 60 people it employs, were full time technology developers.
Its clear from the above analysis that instead of being a ‘platform technology business’ like the company has so far advertised itself, it is a low margin commodity technology business without any barriers to entry that is thriving because of the absence of any real competitors in the space it operates.
Having said that, it doesn’t mean that this is a bad business or doesn’t have any future growth triggers. The company has been investing in building new lines of revenue growth, some of which we will explore in the next segment.
Revenue Profile & Growth Triggers for the Company
The current revenue profile of Dreamfolks is 95% lounge service fee and 5% fee related to other airport services like food & beverages, meet and assist, airport transfers etc. The company has 60% market share of all lounge traffic and 99% market share of all lounge traffic paid for by cards.
All 60+ lounges spread across India are part of its portfolio with about 12 lounges exclusively catering to Dreamfolks and not its competitors like Priority Pass. However, these 12 lounges are in non metro and tier 2 cities that do not attract much footfall. The top lounges in the country (based in Delhi, Mumbai and Bengaluru) do not have any exclusive arrangements and are free to cater to both Dreamfolks and its competitors like Priority Pass.
There are several growth triggers for the company both in the short, medium and long term. Some of these are explored below.
Increase in overall air passenger traffic and passengers availing lounge access
The biggest growth trigger for the company is the continued increase in air passenger traffic within India. About 8% of existing air passenger traffic avails a lounge access and as more air passenger increases in India, the more the number of passengers availing lounge services, there by aiding Dreamfolks to expand its topline growth.
To aid in increase air passenger traffic, Government of India has launched UDAN scheme which is focused on building air travel access to Tier 2 and 3 cities there by allowing more citizens of India esp. in non economic zones to travel by air.
This bodes well for Dreamfolks, whose revenue growth is tied at hip to increase in domestic air travel.
Railway Lounge Access
Another area of growth for the company is access to lounges at railway stations. Dreamfolks currently has 8 railway lounges in its portfolio and is expected to enroll more as Indian Railways get modernized.
Though at nascent stages, this revenue line has a lot of potential for future growth.
Foray into South East Asia and Middle East Markets
Dreamfolks has saturated the Indian airport lounge market. For it to grow fast, it needs to expand overseas into South East Asian and Middle Eastern markets. While the company has presence in most countries via partnerships with local lounge operators, it does not have any tie ups with banks and card issuing companies of these countries.
At present, Dreamfolks only makes money whenever an Indian card holder avails access to an international lounge at one of the overseas location partnering with Dreamfolks. As such, the percentage of overall revenue that Dreamfolks generate with overseas operations is miniscule.
To fix this, company has begun exploring partnerships with banks and card issuing companies in local geographies.
Ancillary businesses like loyalty program management
Another promising area of growth for Dreamfolks is foray into loyalty management programs for corporates and organizations. While the company doesn’t have any active offerings at the moment, it has expressed a desire to build such offerings in near future.
Clients other than Card Issuers opting to provide lounge perks
In its intention to diversify client base from banks and card networks, Dreamfolks is now partnering with corporate clients, telecoms and online travel agencies.
For example, Vodafone Idea’s highest tier postpaid plan allows its customers to avail 4 free international or domestic lounge access. Dreamfolks is the servicing agent behind that perk.
Risks to the Company
MDR rate changes by RBI
The biggest risk to the business of Dreamfolks is RBI reducing MDR or Merchant Discount Rates. Merchant Discount Rate is charged by card issuing companies every time you transact with a debit or credit card. The fee generated from MDR is what powers the perks (lounge access, cashback etc.) provided by card companies to its customers.
RBI until very recently has been focused on reducing costs of digital transactions including card based transactions. In its recent discussion paper, dated Aug 2022, RBI has expressed a desire to reduce these rates even further.
While the policy is only at discussion stage at present, if and when RBI reduces MDR in India, it is expected that card issuing companies will lower the perks available on its cards. Since majority of Dreamfolks business is based on lounge perks being availed by debit and credit card customers, any reduction in said perks will significantly impact the overall revenues of the company.
Competitor like Priority Pass getting aggressive and willing to work with a lower margin rate than Dreamfolks
The second big risk to Dreamfolks business is its competitors like Priority Pass (who have so far overlooked India) getting aggressive in gaining market share and willing to work at a lower margin rate than Dreamfolks. Since banks and end customers do not care which backend service (Dreamfolks or Priority Pass) helps in availing lounge access, Dreamfolks may lose a significant chunk of its revenue in such a scenario.
Priority Pass already has a tie up with Kotak Bank to provide lounge access to its highest tier customers.
Collison Group, the owner of Priority Pass also recently boosted its India leadership by announcing a dedicated country head, a first for the company. Sumit Prakash, an industry veteran will now lead the India & South Asia business for Priority Pass.
The company has also launched a dedicated India focused service for airport lounges.
High Working Capital and Lack of Financial Controls
Dreamfolks until 2021, didn’t have a Chief Financial Officer. It hired one in late 2021 as it prepared for IPO. There have been several instances when Dreamfolks as a Private Limited company failed to file its financial statements properly with the Registrar of the Company. Even in its maiden conference call in Nov 2022, the company’s CFO found it hard to explain simple details on working capital cycle and receivable vs payable days to investors. Further, the company’s CFO is paid just 30 lakhs in annual salary vs more than 3 crores, the company’s CMD (Liberatha) draws annually. This mismatch in pay for top management (other than promoters) highlights the lack of quality talent available to the company.
The company also has more than 50% of its net sales as receivables and while receivables as a percentage of sales is expected to reduce over time, the company has written off bad debts every year in the three year financial documents it has provided at the time of IPO. Moreover, the provision for bad debts by the company remains awfully low and is not in accordance with the previous years bad debt trend.
In my view the company lacks appropriate financial controls and needs to invest in this area to appropriately represent its financials.
Inability to tie up with overseas card issuing banks and Competition from established aggregators in international market
The company’s foray into international markets will only start contributing to topline meaningfully if and when it is able to tie up with overseas card issuing companies. Any challenges to tie up with said companies will hamper any growth in overseas market.
Further, there are established players like Priority Pass, Lounge Buddy and Dragon Pass that already operate in the international market. These players have strong relationships with both banks and lounge operators and it is expected that Dreamfolks will face a lot of competition to break its competitors hold in these markets.
The company’s valuations at the time of writing this article are okay and not necessarily a bargain. The company is expected to publish an EPS of ~10 for the year ending March 2023, which puts its current PE at 37.
The main trigger for growth remains the growth of domestic air passenger. The company in my view is a proxy for air passenger growth in India.
Growth in Air Passengers → Growth in Lounge Access → Growth in Dreamfolks Sales
The company has low fixed and operating costs. With just 60 employees and low technology spends, the company can generate a faster than normal growth in bottom line as topline continues to expand. However, since the delta between the rates charged by Dreamfolks to banks and card issuing companies vs the amount it has to pay to lounge operators is fixed at 15%, I do not expect a high double digit EBITDA margin growth.
Being an asset light business, the company has high asset turnover, which in turn helps it to generate more than 20% ROCE even with single digit EBITDA margins.
In my view, Dreamfolks is a decent business that is available at ‘okayish’ valuations today.
There are issues with the company with regards to its financial controls and regulatory overhang on merchant discount rates.
However, it fits as an excellent proxy for an investor looking to add some exposure to the growth of aviation sector in India.
For an investor in this company, the key metrics to track are
Growth of passengers availing access to an airport lounge
RBI decision and policy feel on Merchant Discount Rates
Company’s ability to build new engines of revenue growth (Railway Lounges, Loyalty Programs, International Business etc.)
I hope this write up helped you understand the business of Dreamfolks in a holistic manner. If you enjoyed reading this and have any feedback or insights, please share by leaving a comment below 👇
Thank you for reading, see you in the next one.