Dreamfolks IPO: Apply only for listing day gains

Dreamfolks Services Limited is tapping the capital markets with its offer for sale of 1,72,42,368 shares in a price band of Rs 308-326. The issue opens on Wednesday the 24th of August and closes on Friday the 26th of August. The issue would garner Rs 531.06 crores to Rs 562.10 crores at the price band mentioned.

The company is into the business of providing services at the airport which includes lounge, meet and greet, baggage assist, nap pod etc. It has recently entered into lounge access at railway stations in collaboration with IRCTC at nine stations.

The company earned its entire revenue from the domestic operations with less than 1 per cent of its revenues coming from the overseas lounges that it works with. Further, of the domestic revenues, almost the entire revenue came from the lounges and less than 1 per cent came from the other airport services. Further, of the lounge's revenue, almost the entire revenue came from credit/debit card sources where the issuer takes care of the payment. This effectively means that as of date, Dreamfolks revenues are from just one revenue stream which is the domestic access to lounges through banks credit/debit cards.

The company has built up a big base and is present in 121 countries, has a market share of 95 per cent of all India issued cards, 68 per cent share of lounge access volume in India. It has also built a proprietary technology platform ensuring customised solutions.

While the credit card growth would be manifold without doubt, there is a big catch in the same. Not every credit card comes with lounge access. It is with higher end cards which typically are paid cards (fee-based cards) and have limited access to lounges of say one or two a quarter. In short, the idea for the card issuer is to entice the customer to opt for the card and use the lounge access once in a while. Further, the use of the lounge even if available is difficult because very rarely does one have so much time to go to the lounge. Majority of passengers reach the airport 'just in time' for the flight. It is mainly used by in-transit passengers who have a lay-off at the airport between flights.

Dreamfolks offers a bouquet of services but the only one which is popular as of date is the lounge access. It needs to aggressively market and sell the other services if its revenues have to go up in any significant manner.

Coming to the company's performance, it had clocked revenues of Rs 282 crores for the year ended March 2022. It had a profit after tax of Rs 16.25 crores. The three promoters of the company have taken emoluments of roughly Rs 8 crores amongst themselves for the year. What would be their remuneration going forward is not quite clear. However, Rs 8 crores on a net profit after providing for the above is 1/3rd. Yet another way of looking at the same is that they have taken effectively a royalty on revenues of 2.8 per cent. In either case this looks steep and unfair for shareholders who wish to participate in the company.

The company earned an average realisation per passenger of Rs 800 for the year ended March 22. This was higher than the Rs 752.14 per passenger in the year ended March 2020. Even though the revenue per passenger has grown by roughly 7 per cent, the gross profit per passenger has fallen from Rs 138.28 to Rs 128.14. While covid-19 is a standard explanation, there are concerns why this did happen. The receivables of the company have risen sharply and were at Rs 90.5 crores in March 22. This is roughly four months' revenues.

The EPS of the company on a fully diluted basis is Rs 2.98. Based on the price band, the PE band for the company is a staggering 109.40 times the EPS at the top end of the price band. Further the NAV of the company is Rs 15.73 which makes the issue at the top end of the band to be a steep multiple of 20.72 times.

The business is unique and needs to deliver on its potential. Currently it is bogged down and highly dependent and focused on just one business and geography. The risk of card issuers reducing lounge access linked to card spends is always a possibility which could make things difficult for Dreamfolks.

There is currently a very active grey market which mitigates the risk of this business. Apply for listing gains and only if you are able to sell on the first day of listing. Thereafter one need to allow the company to declare its June and September results before any clarity of its future is ascertainable.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)