Thread by @barathmukhi

#DreamFolks is a co that creates and manages cozy airport lounges.

These lounges are comfortable waiting areas at airports where people can relax, have some snacks, and enjoy special services before their flights.

Dreamfolks makes money by charging a fee from people who want to use these lounges, and in return, they provide a nice and relaxing experience for travelers.

In a way, DreamFolks acts like a Toll Bridge because the people who need to go from one side (the airport lounge counter) to the other (the luxury lounge) need to pay DreamFolks a toll.

In FY2022, 68% of all lounge traffic in Indian airports (Domestic & International) went through DreamFolks' toll bridge.

In India, 80% of customers who need access to lounges do so through Credit and Debit cards.

Let's talk about each of the stakeholders in DreamFolks' business.

First the card network providers.

Visa, Mastercard and Rupay represent the card network providers and need to get paid in order for the payment to go through.

So if I was to use an ICICI credit card to access a lounge, how do Mastercard / Visa get paid?

The answer lies in Merchant Discount Rates.

Damn these jargons.

Merchant discount rates are like a small fee that businesses have to pay when customers use credit cards to buy things.

It's a bit like when you give someone a dollar, but they only get to keep 95 cents because 5 cents goes to the credit card company.

The parties that get paid out of the Merchant Discount Rate / MDR are the

1. Card issuing bank (ICICI Bank in my example)

2. Visa/Mastercard/Rupay

3. Bank that provided the PoS machine

So if my ICICI card was swiped on an HDFC machine, HDFC too, would get a cut out of the MDR

Moving on to the next party in this arrangement - The banks / card issuers.

As per DreamFolks' DRHP document, the 4 major card issuing banks are HDFC, SBI, Axis and ICICI.

And as stated earlier, a significant chunk of customers use their cards to access airport lounges.

Now, not all debit/credit cards come with the benefit of free lounge access.

As per DreamFolks, only 8% of cards are eligible for these lounge freebies.

The other ways that DreamFolks gives lounge access to customers is through their app and through vouchers.

Amazon - DreamFolks vouchers / gift cards

Moving onto the next party.

These are the lounge operators - The guys who own the physical assets at airport lounges.

These are the major lounge operators in India.

Travel Food Services - The biggest lounge operator in India at the time of DreamFolks' IPO.

Next we come to the growth drivers of this co.

What are the potential future growth drivers in this co?

One, the number of flyers in India should increase over time and a good chunk of them are likely to go to lounges.

As per the govt's civil aviation site, the number of air travellers in India were higher in 2019 than they were in 2022.

So wrt air traffic, we are talking about pent up demand + future growth potential here.

Second, growth in number of lounges. As of today we have 61 lounges in India and this number is likely to grow over time.

Not just growth in the number of lounges. There is also a trend of existing lounges becoming bigger and bigger over time.

In 2014, the average lounge size was 2169 Sft.
By 2023, it had grown to 13000 Sft.

The next one comes from the centre's UDAN scheme, which is basically targeting 3 objectives.

1. Better connectivity to underserved airports

2. Boost air travel for a larger population and increase the number of first time air travellers.

The civil aviation ministry of India is looking at 200 airports in India.

One more potential outcome is that the number of airports & flyers increasing could lead to exponentiality.

Here's a recent statistic, from MoCA.

Each of these numbers leads to more lounge visitors.

One more trend is that of these visitors spending more at lounges, resulting in better realizations for DreamFolks.

One more trend is that of these visitors spending more at lounges, resulting in better realizations for DreamFolks.

What is important to know about DreamFolks is that they started their business in 2012, at a time when established MNCs like Priority Pass and Dragon Pass were already present.

Yet DreamFolks was able to take market share from much larger players.

How do we know that?

In Nov 2022, Priority Pass appointed him as the Country Director for India and South Asia.

Let's talk about Priority Pass now. It is a UK based co. which was started 30 years ago.

What is important for us is that they were able to grow at high rates in spite of having a revenue base that was 25x larger than DreamFolks.

Same story at Dragon Pass.

Note: These numbers are from DreamFolks DRHP and subsequent no's are not available.

This means DreamFolks were able to gather a large market share from larger MNCs, in spite of being late entrants.

Will competitors get aggressive in the future leading to things heating up in this space?

Again, at this point, we don't know.

There's already are Priority Pass cards issued by Kotak and other banks.

Lets talk about some risks now.

Risk # 1

Low cash flows in comparison to profits and high receivables.

So far I haven't been able to find a satisfactory response to this question and this is perhaps a question that will get answered over time, perhaps.

High receivables as per 2023 Cash flow statement. 2023 annual report awaited for more details.

Risk # 2

Recently RBI officials were in the mood of reducing MDR rates on cards.

This could mean lesser fee income for credit card companies.

There is a possibility they will remove/reduce some of the perks such as lounge access.

To me, this is the weakest link in the chain.

One recent but unconnected example is that of SBI Cards revising their cashback & lounge access benefits on some of their cards.

Risk # 3

While high return ratios are good, they are also likely to result in attracting a lot of competition.

Philip Fisher stated it best.

Risk # 4

Diworseification. Holding cash is hard for some of us. So is the case with a lot of company managements.

They recently acquired Vidsur Golf and that gave DreamFolks' customers access to 1800 Golf courses worldwide.

To be fair, there are co's like ClubLink, Boxgroove and Players Club that are the DreamFolks equivalent for Golf courses.

Will DreamFolks be able to replicate airport lounge success in the Golf business?

We'll have to see.

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