IPO Size: Rs. 562 cr 

• Entirely offer for sale (OFS) by 3 promoters (100% stake to reduce to 67%)

Price band: Rs. 308-326 per share

M cap: Rs.1,703 cr, implying 33% dilution

• 10% reserved for retail (against 35% generally), as net loss in FY21 on covid. Post listing, retail (+ HNI) float will be low at 8.25%.

IPO Date: Wed 24^th Aug to Fri 26^th Aug 2022, Listing Tue 6^th Sep 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Airport Lounge Aggregator

Dreamfolks is a 9 year old company, aggregating airport lounges mainly for credit and debit card issuers, with India accounting for over 95% revenue, despite presence in 120 countries. Operating on an asset light model, company is a B2B player and hence does not incur customer acquisition costs. The lounge user is actually a customer of the card issuing company, who is in turn company’s customer.

Business Model

Company ears Rs. 800 in revenue from card issuing companies, for each lounge access, and 85% of this is paid to the lounge operator. Gross margin is 15%, with net profit of Rs. 50-60 per access, implying growth to be mainly volume led. While Dreamfolks enjoys 68% market share, based on overall lounge access volume in India in FY22, it lacks significant moat, with low barriers to entry and insignificant technology differentiation. Also, contract with card issuers and lounge operators is for 4 years average, with hardly any exclusivity.

‘External’ Growth Factors

Company’s volume growth is not in its own hands, but fully driven by external factors, mainly rising air traffic and increasing card issuance in the country.

Debit card issuance has already stagnated in India and of the credit cards, only 8% use lounge (global average of 12-13%). Thus, although credit card universe is increasing, lounge user universe will remain quite smaller in absolute terms. Assuming a credit card penetration of over 3x (like US) even in the next 15-18 years, when India is at 0.3x currently is also a very far-fetched way of analyzing the opportunity. Even in an optimistic scenario, if the opportunity is very compelling, competition can intensify on low entry barriers.

Stretched Valuation

On 3.5 million lounge activation by the company in FY22, it clocked Rs. 282 cr revenue, with net profit of Rs. 16 cr and EPS of Rs 3. Pre-covid, FY20 revenue stood at Rs. 367 cr on 5 million lounge activations, with PAT of Rs. 32 cr and EPS of Rs. 6.

Since H1FY22 was impacted due to covid 2.0, even if FY20 EPS of Rs. 6 is discounted by the issue price, the resultant PE multiple is 54 times, which is very expensive for B2B operations.

While there are no direct peers, another listed travel industry giant, IRCTC with its monopoly, B2C business and large scale of operations (annual PAT double Dreamfolks’ annual revenue) is ruling at a lower PE of 45x. One may also draw some parallel with asset-light businesses in other industries like financial services, wherein CDSL and CAMS, operating at 40% net margin (over 8% for Dreamfolks) are trading at PE multiples of 38-41x, having corrected from peak multiple of 55x earlier. Thus, Dreamfolks valuation multiple lacks comfort, in relation to broader market peers.