As the markets take a turbulent turn, another IPO is upon us. This time it’s a niche business that serves the airport lounge industry with no listed peers — Dreamfolks Services.

The company is an airport lounge access aggregator platform and provides services to all card networks in India including Mastercard and Visa, and major credit and debit card issuers like ICICI Bank, Axis Bank, HDFC Bank, SBI Cards. It also provides clients a bouquet of services to engage end customers and loyalty program management. The company takes a cut of each transaction that is executed at an airport lounge.

Dreamfolks has no listed Indian peers, and there are few operators with scale providing similar services. But its deals with lounge operators and other service providers aren’t exclusive. Its global peers include Dragon Pass and Priority Pass.

Dreamfolks Services’ Rs 562-crore IPO is entirely an offer for sale by its promoters. The promoters will sell up to a 33% stake in the company. The IPO’s price band is Rs 308-326, which values the company at around 109 times its FY22 earnings per share. The company’s implied post-listing valuation is around Rs 1,700 crore. The IPO is open between August 24-26.

Should investors take a look at Dreamfolks Services’ expensive share sale? 

Business growth is pegged to card penetration and growth in air travel

There are two primary drivers of Dreamfolks’ growth in revenues - the number of credit and debit cards issued, and growth in air travel. If its customers issue more cards and those cardholders travel more, the propensity to use airport lounges increases. Many credit and debit card issuers bundle airport lounge access for their customers. In FY20, Dreamfolks had a 95%-97% market share of India-issued debit and credit cards-based access to airport lounges.

According to a report by Frost & Sullivan referenced in the company’s red herring prospectus, there were 57.23 million credit and debit cards in India with lounge access in 2021. This is expected to rise to 130.11 million by 2030, according to the report.

But only 8% of the population eligible for lounge access used the facility, indicating very low penetration in India. India is still at the introductory stage of the airport lounge product lifecycle. As India’s GDP grows,air travel picks up and new airports are developed, people using airport lounges will increase.

Before the Covid-19 pandemic hit the world (pre-FY20), an average of 7.5 million passengers accessed domestic and international airport lounges in India through all means. This includes credit and debit cards.

As travel picks up in FY22, Dreamfolks is back in black

With its business linked to growth in airline passenger traffic, Dreamfolks posted losses in FY21 as the pandemic crippled the aviation industry. This led the company to post a loss in FY21.

But the company’s gross profit and EBITDA margins are still below pre-pandemic levels even though it posted a profit in FY22. In fact, the company’s gross profit margin is way below FY20.

Limited flights into and out of India due to regular travel restrictions led to slower recovery in the company’s performance in FY22.

Even though the average revenue per passenger was way above pre-pandemic levels (FY20) at Rs 800.3, the company’s average gross profit per passenger fell 2.3% YoY to Rs 128.1 in FY22. The fall in margins also led to lower return on equity in FY22 (19.8%) compared to FY20.

Add to this the fact that Dreamfolks’ operating cash flows turned negative in FY22, due to higher working capital needs. This raises the question of whether the high valuation is justified.

Valuation a function of market dominance

Investors should keep in mind that any business that has a near monopoly in its industry usually commands a high price when it goes for an IPO. Still, the valuation at 109 times FY22 earnings does seem expensive at this juncture.

This is especially true as the company’s return on equity hasn’t recovered adequately after air travel returned post the pandemic-induced lockdowns over the past two years.

It seems the company expects investors to pay a premium for its dominance in this space and the growth potential of India’s airport lounge access market. With India planning to set up nearly 200 airports over the next 3-4 years, there is tremendous scope for growth in the airport lounge access industry. But the pricing of the IPO might not leave enough money on the table for investors. This is something those who bid for the issue need to keep in mind.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation