Dreamfolks services limited( DFS)

Here is my understanding of the business.

Let me begin with the stakeholders involved and then the business model.

Consumer: People who avail of lounge services by paying through a credit card (or sometimes debit cards).

Lounge operator: Simply put, the company that owns/runs lounges at the airport. They provide services including food and beverage, place to rest and entertainment to customers. The cost is ~Rs 700 for using a domestic lounge.

Card providers: Usually the banks (HDFC, SBI, etc.) offer credit card services to consumers. Few credit cards have perks which include a certain number of free access to the lounge, access to the golf course, etc.

Dreamfolks Services (DFS): In my opinion, this is a software company that claims to have a proprietary platform of lounge access management.

DFS’s Business model:

1. The consumer wants to enter the lounge. She swipes her credit card.
2. DFS platforms check eligibility to enter. The eligibility check is based on multiple criteria including:
   a. If the card falls under the free lounge access program
   b. If the consumer has any remaining lounge visits from the quota
3. DFS pays the lounge operator Rs 700 and allows the consumer to avail its service
4. DFS adds a markup of about 12.4% (which was ~15% earlier) and charges the bank ~Rs 786
5. Bank pays DFS in around 100 days (which explains high receivable days)

Key considerations

1. Is there “moat”?:
   I am inclined to say no.
   Is it possible for banks to cut DFS out of the chain and build their own platform? I think certainly possible, but it may not be economical for the banks. If HDFC builds the lounge access platform, it will save 12% on Rs 700, which is Rs 84 per consumer per lounge access. It will not be material for HDFC given its huge size. The same is true for ICICI, SBI, Axis, etc.
   Can a smaller bank or a technology player come in to disrupt?
   I think certainly possible, we will have to wait and watch.
   Can banks and lounge operators squeeze the margins?
   Yes, they can and the lounge operators did it last quarter.

2. Revenue growth:
   Banks want more number of users to use credit cards. Hence to entice customers, they offered free lounge access by bearing the cost. Hence, revenue growth is a function of the number of people with eligible credit cards AND the frequency of air travel. Also increasing the number of airports and increasing the size of existing lounges will help. If revenue growth slows or stops due to any reason, valuation may get rerated.

Summary
I think the business is the result of a very smart founder who has extensive experience working at lounge management firms. The founder saw a gap where the banks were not interested in dealing with multiple lounge operators and their technology interface. Banks simply wanted to focus on, well, banking. The lounge operators wanted to focus on F&B, and hospitality rather than creating a technology platform that will interact with multiple banks’ APIs.

We must celebrate that the founder is a lady who made it big in the world of business. Kudos to Ms. Kallat. But I am currently not sure if this can be a long-term bet. I am watching the margins carefully.

I could be completely wrong, please do your own diligence.

Hope it helps!
Mahesh