Most air travellers would have availed lounge access in domestic and international airports through their debit or credit cards. They would also have correctly figured that card issuing entities like HDFC Bank, SBI, ICICI etc tie up with lounge operators like Plaza Premium or Aspire lounges to provide access to their cardholders.
But perhaps it is not commonly known that this tie-up is done through an intermediary which has virtual monopoly with 95% market share of all card-based access in India translating to 68% market share of total lounge access in FY22 across domestic airports.
Least known would be the fact that this intermediary which goes by the name Dreamfolks Services (DS) is listed in India.
DS has tie ups with lounge operators on one end and card issuing banks like HDFC, ICICI etc, card networks like Visa and corporate clients on the other end.
It is a fairly simple business. Whenever an eligible card holder uses the facilities of a lounge, the lounge operator bills DS and DS in turn bills card issuer with a mark-up.
In a highly underpenetrated and rapidly rising country like India, this should mean high growth in air travel, thereby high growth in lounge access, thereby high growth for DS, right? Well, yes, um, sort of.
Factors in favor of high growth for DS are as follows:
- Air travel penetration in India is low. It is expected to grow at double digit rates for many years which will create that many more travellers.
- Card penetration at 3% is again quite low in India. This too is expected to grow at high rates leading to many of these travellers becoming potential customers.
- Govt is rapidly constructing more airports which will mean more lounges and therefore more lounge usage.
All the above are more or less certain to happen. So, are there any roadblocks that could stand in the way of DS and unfettered high growth in its revenues and profits? Turns out, there are a few.
- Market share is so high that there can only be downside to it. While it has no domestic competitor, international companies like Priority Pass have not increased their focus to India because the pot of honey is yet very small (DS earned PAT of only 70 odd crores in FY22 and FY23 each) which is not alluring enough to attract these biggies. High growth can attract their attention leading to loss of market share.
- DS has wafer thin margins with no bargaining power as on both sides there are big institutional players. All DS can do is charge them a small convenience fee for its services with very limited pricing power. Q1FY24 brought this out vividly when airports increased CAM (common area maintenance charges) steeply. Lounge operators increased their rates accordingly. However, DS could not pass on the costs immediately to card companies and its GPM fell to around 8% from 13-14%.
- Lounge access is expensive and card companies foot the bill from the MDR (merchant discount rate) that they earn on spending by the cardholder. This is an income stream which RBI can disrupt by reducing MDR rates in its drive to lower the cost of digital transactions in India. If MDR is reduced, card companies will reduce lounge access to its cardholders thereby impacting traffic negatively.
- Govt is on privatization drive of airports. As of now, DS has contracts with lounge operators of airports run by AAI. After privatization, the new management may not tie up with DS for lounge access.
- Despite being a monopoly, DS has no moat. Its tech stack is easily replicable as evidenced by its small workforce of 72 people at the end of FY23 including top management. If Priority Pass wants, it can offer better terms to card companies and take the business away without any operational disruption.
To mitigate the above, management has taken certain initiatives. It has tied up with VFS Visa Centres to provide premium lounges for visa seekers. It has also tied up for ‘Visa At Your Door Service’. It has collaborated with Matrix to provide international e-sim to travellers. It is increasing its airport offerings beyond lounge access to meet and greet, spa etc.
Q1FY24 disappointed the markets and the stock has fallen over 35% since then. In concall post Q1FY24, management sees this unexpected increase in CAM as a one-off event and does not expect such episodes in future.
Past 5 year growth (FY18 to FY23) has been very strong with revenues up 4.6x at 773 cr, PBT up 5.7x at 97 cr, PAT up 6x at 73 cr. Management is guiding 50% topline growth in FY24 with margins expected to climb back to 12-13% by year end.
At FY23 eps of @ Rs 14, it is trading at reasonable PE of 36 due to the steep fall post Q1FY24 numbers while enjoying ROE of 60% and having nil debt. Dreamfolks is a play on higher consumer and premiumization spending in India. After Q1FY24 debacle, it is available at reasonable valuations. If its margins are able to go back to 12-14% range by the year end and no serious competition arises, growth will happen at high rate for the company leading to decent rerating. It will be interesting to see how next few quarters pan out.