Will the Stock of DreamFolks Recover?

As a kid I was taught, all that glitters is not gold.

As I grew up and experienced life, I realised that the world works on perception and a lot of things in life are superficial.

There is a saying in Hindi which echoes this sentiment...

"Jo Dikhta Hain Who Bikta hain" What looks good sells faster and better.

As analysts we often discover stocks based on observation and people's perception about brands.

Seeing Sachin Tendulkar hit straight drives with a firm grip holding an MRF bat, many people till the late 1990s considered MRF as a manufacturer of Cricket bats and not tires.

MRF started to aggressively advertise its tires, so the masses could associate tyres with it.

As analysts, such observations about people's perception of brands helps us discover stocks.

An example is the brand Jockey and its parent company Page Industries.

As an investor you can invest in a company making good products which address a need. You can then ride the journey of those products becoming a brand.

This is difficult. You require patience. The chances of failure are also high.

The second way is to ride well known brands and hope for them to become mega brands.

Jockey was a decent brand 15 years ago. Investing in Page industries even 10 years ago would have fetched you great returns.

If you ask me personally, I prefer companies which have strong products or solutions that could become brands or a service which would be indispensable creating a strong need among customers.

As an analyst tracking the midcap and the smallcap space, it is pertinent to find stocks which glitter but at the same time be wary of whether they are gold or not.

One such stock which I was excited about was a company which I discovered a year ago when travelling on a holiday.

I'm sure most of you would agree, that the choice of credit/ debit cards, to a great extent, is directly proportional to the airport lounge visits and the free movies we get in a year.

On a lighter note, the rush at airport lounges resembles a fish market in the true sense.

As an analyst it's an opportunity to study the company managing the lounges.

So, lets get straight to the point, also let me warn you that my enthusiasm didn't have a happy ending.

The company I'm talking about is DreamFolks Ltd.

In simple terms it is the Zomato of the airport lounge industry.

The company through its proprietary technology integrates the cards issued by the banking industry with the airport lounges and charges a fee for doing it.

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All the banks and the two main card network providers - Master Card and Visa - are its clients while lounges across the country are its suppliers.

The company has 1,700 plus touch points across the globe.

Seeing the rush at airport lounges and the way domestic air traffic is shaping up, I was gung-ho about the company. I mean, 136 m people travelled by air in FY23 registering a growth of 60% in a year.

Reading more about the company, some of the statistics blew my mind.

# 95% market share in card-based lounge access in India. Majority of the entry to a lounge in India happens through cards.

# DreamFolks accounts for 68% share of the overall lounge access volume in India.

# Revenues grew by almost 3x in FY23 with a return on equity and return on capital employed at 46% and 62% in FY23.

This company is a near monopoly in the domestic lounge market. So let me give you a brief on how the eco system works.

Every bank issuing a credit/ debit card who wants to gain customers gives complimentary access to lounges, the cost of which is borne by the bank and termed as customer acquisition cost.

For every visit to the lounge, the bank pays DreamFolks Rs 1,000-1,200 per person. That is the revenue for DreamFolks.

DreamFolks integrates all the cards in to its system and enables the banks and the card holders to maintain data regarding the card usage.

When you visit a lounge, DreamFolks employees swipe your card and give you access to the lounge.

For these services, DreamFolks keeps a certain percentage and passes on the remaining to the lounge operators who is offering you the infrastructure space as well as food and beverages.

As an investor, the business model looks fabulous and too good to be true. However, the numbers corroborate this.

In terms of opportunity, my assumption was as follows. There are 85 m credit cards issued in India while there are 945 m debit cards. That is a cumulative number of 1 bn cards in India.

Out of 1 bn cards only 57 m people use it for airport lounge access. That is a miniscule percentage of less than 6% people who use cards for airport lounge access.

On the other hand, with the domestic air traffic volumes shooting up, the air traffic going ahead is only expected to rise.

In terms of airport infrastructure, there are 147 operational airports in FY23 with 61 lounges. India is expected to have 235 airports with 150 lounges over the next 7 years by FY30.

Seldom do you find a company in an industry which has demand as well as supply both growing along with company enjoying near monopoly in the aggregator space.

After all, all that glitters was looking like gold.

In terms of revenue and profitability growth, the company was growing at 70-100%.

The stock was trading at 55 times P/E multiple.

While the valuations were definitely on the higher side, the street didn't care as the company was doubling profits post normalisation after the pandemic.

Just when the stock price was hitting all time highs and brokerages increasing target price, the stock after its first quarter FY24 results, nosedived by 30% in a week.

So, here was the problem...

The profit for the quarter declined and operating margins halved.

The reason?

In the supply chain of the entire lounge business, DreamFolks is the weakest link.

Lounge operators increased their fees charged to DreamFolks while DreamFolks could not pass it on to banks. After all, giving free privileges at lounges is a cost to the bank.

The increase had to be absorbed by DreamFolks turning out to be a structural issue. The business model after all was not so resilient.

This is exactly what happens when high PE stocks falter on growth. The EPS gets de-dated and the valuation multiple too gets aggressively cut.

After all, it was a too good to be true story.

The stock is precariously priced at current valuations. If earnings continue to moderate then I believe the business model has serious issues.

What do you think?

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)