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Competition intensifies

Non-lounge segment expected to provide some respite

• DreamFolks (DFS) posted a revenue growth of 8.8% YoY to INR3.5b, in line with our estimate of INR3.5b. Gross profit was up 24% YoY to INR466m, with a gross margin of 13.3% (up 210bp QoQ). EBIT margin came in at 7.5%, up 60bp YoY. Consolidated PAT was INR213m (up 24% YoY), above our estimate of INR193m, with a PAT margin of 6.1%. The company’s revenue/EBITDA/ PAT grew 8.8%/18%/24% YoY in 1Q. We expect its revenue/EBITDA/PAT to grow 5.3%/8.4%/19.6% YoY in 2QFY26.
• DFS terminated programs with two banks and is assessing the broader impact—currently limited to lounge services. Management also indicated that additional banks could be under pressure. Increased competition in lounge services was highlighted, with airport operators beginning to act as aggregators. The company sees potential in non-lounge and international lounge services to offset the pressure. However, non-lounge services, despite being a higher-margin segment, contribute only ~6–7% of revenue, and any meaningful impact on overall revenue may take time to materialize.
• Gross margin improved significantly by 160bp YoY, aided by price revisions during the quarter and a favorable shift in product mix. While still at an early stage, management indicated that the business model may evolve from a per-transaction structure to a subscription-based model, bundling lounge and non-lounge services to enhance the customer value proposition.
• The stock has declined ~30% over the past month following the recent developments and now trades at 6x forward P/E. This makes valuations appear undemanding at current levels. While we remain constructive on the long-term growth opportunity of the lounge market with DFS wellpositioned to benefit, we remain watchful amid rising competitive intensity, the entry of airport operators into the space, and the recent loss of banking contracts. We believe that the company will also continue to invest in nonlounge service as a diversification drive, which can provide revenue stability in the medium term. We value DFS at INR160 per share (implying a 28% potential upside), at 10x Mar’27E EPS. Reiterate BUY.

In-line revenue & beat on margins; credit cards in circulation rose 7.1% YoY

• DFS' 1QFY26 revenue was up 11% QoQ / 8.8% YoY to INR3.5b, in line with our estimate of 3.5b.
• DFS’s revenue split was 77% domestic and 23% international in this quarter.
• EBITDA was up 18% YoY and 35% QoQ to INR 269m in 1QFY26, above our estimate of INR259m. EBITDA margin stood at 7.7%, up 130bp/60bp QoQ/YoY.
• Domestic passenger traffic was down 2.7% QoQ to 42.0m vs. 43.2m in 4QFY25.
• Consolidated PAT stood at INR213m (up 24% YoY/42% QoQ), above our estimate of INR193m, with a PAT margin of 6.1%.
• Credit cards in circulation increased 7.1% YoY to 111.2m, vs. 109.8m in 4QFY25, while the average spending per credit card increased by 7.9% YoY to INR50.2k in 1QFY26.

Key highlights from the management commentary

• Looking ahead, DFS remains focused on three strategic priorities: diversifying into non-lounge services, scaling enterprise partnerships, and expanding its geographic footprint in global markets.
• The enterprise segment continued to gain traction, with new client wins in the travel industry.
• While competition previously centered around technology, commercial operators have also started entering the space. To counter this, the company is diversifying into non-travel packages to enhance its value proposition.
• Its proprietary technology platform enables the creation of customized packages, which would be difficult or time-consuming for other operators to replicate.
• The company is exploring potential acquisitions or partnerships and is actively building its international business to support growth.
• Management foresees increased competition and is strategically bundling nonlounge services with lounge offerings to increase stickiness with clients.
• Gross Margin (GM) stood at 13.2% in 1QFY26. The company is shifting its product mix towards high-margin non-lounge services. The business model is expected to evolve from a per-transaction basis to a subscription-based model.

Valuation and view

• While we remain constructive on the long-term growth opportunity in the lounge market with DFS well-positioned to benefit, we remain watchful amid rising competitive intensity, the entry of airport operators into the space, and the recent loss of banking contracts. We see that the company will also continue to invest in non-lounge service as a diversification drive, which can provide revenue stability in the medium term. We value DFS at INR160 per share (implying a 28% potential upside), at 10x Mar’27E EPS. Reiterate BUY.

Key highlights from the management commentary

• Quarterly performance & outlook Looking ahead, DreamFolks remains focused on three strategic priorities: diversifying into non-lounge services, scaling enterprise partnerships, and expanding its geographic footprint in global markets.
• The enterprise segment continued to gain traction, with new client wins in the travel industry.
• While competition previously centered around technology, commercial operators have also started entering the space. To counter this, the company is diversifying into non-travel packages to enhance its value proposition.
• Its proprietary technology platform enables the creation of customized packages, which would be difficult or time-consuming for other operators to replicate.
• The company is exploring potential acquisitions or partnerships and is actively building its international business to support growth.
• DFS reported revenue of INR 3.5bn in 1QFY26, up 11% QoQ and 8.8% YoY.
• Lounge services contributed 93% to the revenue, while non-lounge services accounted for 7% in the quarter.
• Management foresees increased competition and is strategically bundling nonlounge services with lounge offerings to increase stickiness with clients.
• The company terminated programs with two banks and is currently evaluating the broader impact. Several other banks may also be under pressure. While contracts have not been fully cancelled, some programs have been paused.
• Concurrently, the company is co-developing new programs with banking partners, highlighting its continued strength in lifestyle-driven card benefits.
• On the international lounge front, DreamFolks now operates across 850+ global touchpoints.
• In addition, non-lounge services like Golf Access, Airport Transfers, Meet & Assist, Social Club Access, and Mall Coffee Services have grown to over 3,000+ touchpoints. Many of these premium offerings are gaining strong traction.
• Gross Margin (GM) stood at 13.2% in 1QFY26. The company is shifting its product mix towards high-margin non-lounge services. The business model is expected to evolve from a per-transaction basis to a subscription-based model.
• EBITDA increased by 18% YoY and 35% QoQ to INR 269mn in 1QFY26, aided by price revisions implemented during the quarter.
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