Buy DreamFolks Ltd For Target Rs.430 by Motilal Oswal Financial Services Ltd
Air traffic to drive revenues
Minimum spend for credit cards dents margins
* DreamFolks (DFS) posted a revenue growth of 7.3% QoQ/11.5% YoY to INR3.4b, in line with our estimate of INR3.3b. Gross profit was flat YoY and down 2.5% QoQ to INR382m, with a gross margin of 11.2% (down 110bp QoQ). EBIT margin came in at 6.5%, down 220bp YoY/50bp QoQ. Consolidated PAT was INR169m (down 16% YoY/up 5% QoQ), below our estimate of INR189m, and PAT margin stood at 5.0%. The company’s revenue grew 14.5%, while EBITDA and PAT were flat in 9MFY25 vs. 9MFY24. We expect its revenue/EBITDA/PAT to grow 17.5%/3.2%/4.8% YoY in 4QFY25. We reiterate our BUY rating on DFS with a TP of INR430, implying a 19% potential upside.
* Management had pulled back its FY25 growth guidance last quarter, indicating mid-term uncertainty. The company has also been experiencing headwinds due to changes in minimum spend criteria by banks (~95% of revenues). However, we believe its strategy to diversify into enterprise clients (especially OTAs) and non-lounge services, such as F&B outlets, will help stabilize revenue streams. It expects to increase enterprise clients to 20% of its clientele over the next 4-5 years.
* DFS experienced dampened gross margins due to changes in the volume mix resulting from change in minimum credit card spends. However, management has maintained its FY25 margin guidance of 11-13% for gross margins. We believe continued pressure in credit card spend criteria may keep margins tight.
* That said, over the long term, DFS will be the direct beneficiary of growth in the lounge market. However, we see near-term pressure from changes in the minimum credit card spend criteria, which could affect growth. Thus, we cut our target multiple to 20x (earlier 21x). We value DFS at INR430 per share (19% upside), at 20x Dec’26E EPS.
In line revenues and miss on margins; pax volumes up 9.2% YoY, while average spend per card remains flat YoY
* DFS' 3QFY25 revenue was up 7.3% QoQ /11.5% YoY to INR3.4b, in line with our estimate of 3.3b.
* DFS’s revenue split was 76% domestic and 24% international in this quarter.
* EBITDA was down 16.1% YoY and flat QoQ to INR230m in 3QFY25, below our estimate of INR259m. EBITDA margin stood at 6.7%, down 220bp/60bp YoY/QoQ.
* Domestic passenger traffic was up 9.2% QoQ to 42.8m, against 39.2m in 2QFY25.
* Consolidated PAT was INR169m (down 16%YoY/up 5% QoQ) below our estimate of INR189m, with a PAT margin of 5.0%.
* Credit cards in circulation increased 10.4% YoY to 108.1m, vs. 106.1m in 2QFY25, while the average spending per credit card was flat YoY to INR52.1k in 3QFY25
Key highlights from the management commentary
* DFS successfully added 13 enterprise clients, including MakeMyTrip and TBO. The company is strategically expanding its enterprise client base to diversify beyond banking clients.
* Over the next 4-5 years, business from enterprise clients is projected to contribute 20% of the company's revenues. Currently, approximately 95% of revenues come from banking and networking clients.
* The company remains focused on growth and diversification. Expansion into international lounges and the introduction of F&B services, such as coffee, are expected to drive more transactions and reduce costs.
* The company is initially targeting the Middle East market for international expansion.
* Bank clients continued to raise minimum spending thresholds on cards, focusing on high-value users. This shift affected the company's volume mix and exerted slight pressure on gross margins.
* F&B unit values are 60% of lounge values, but the propensity to consume F&B is higher due to the wide range of options available to customers. This is a key element of the company's strategy to expand F&B outlets.
* The company’s guidance for gross margin remains intact and is expected to remain within the range of 11% to 13%.
Valuation and view
* India's airport lounge market is still in its early stages, with the number of users expected to grow exponentially in the coming years. DFS will be the direct beneficiary of the growth in the lounge market going ahead. . However, we see near-term pressure in minimum credit card spend criteria affecting growth. Thus, we cut our target multiple to 20x (earlier 21x). We value DFS at INR430 per share (19% upside), at 20x Dec’26E EPS. Reiterate BUY.
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