Buy DreamFolks Ltd for the Target Rs. 140 by Motilal Oswal Financial Services Ltd
Challenging reset
Rail and global lounge initiatives emerge as initial rebuilding
* DreamFolks (DFS) posted a sharp revenue decline of 41% QoQ / 35% YoY to INR2.0b in 2QFY26, reflecting the significant disruption following the suspension of domestic lounge services (~90% of revenue). EBITDA was down 56% QoQ/48% YoY to INR120m, and EBITDA margin contracted to 5.8% (-190bp QoQ/-150bp YoY). Consolidated PAT stood at INR112m, declining 30% YoY and 47% QoQ, with a 5.5% margin. For 1HFY26, DFS’s revenue/EBITDA declined 13.0%/15.0% YoY. We expect its revenue/EBITDA to dip 49.0%/7.0% YoY in 2HFY26.
* DFS reported a weak quarter, with revenue down 41% QoQ / 35% YoY due to the suspension of domestic lounge services. Recent developments at the company make us cautious about its growth visibility. Domestic lounge services, contributing ~90% of revenue, have been suspended following the loss of key contracts, which has created a major gap in the business and reduced near-term visibility.
* During the quarter, DFS announced the acquisition of Ten11 Hospitality LLP, giving it access to railway lounges in Chennai, Mumbai, and Vadodara. This is the company’s first step toward expanding into rail lounges and running directly rather than relying on a third party. While this business is still small, it provides a new avenue to rebuild scale over time.
* Management indicated that the full impact of lounge disruptions will be visible from the next quarter. The outlook for non-lounge services and the ramp-up of railway lounges will be key areas to track. We expect it will take a couple of quarters for the company to stabilize operations and for a clearer picture to emerge around revenue recovery.
* DFS still has established relationships, and it has experience in running travel-related services. However, the current phase will require rebuilding the business mix. We remain watchful as the company navigates this transition and evaluates how rail lounges and non-lounge services can support growth going forward.
* Given the ongoing disruption, we retain our cautious view while monitoring how the business mix evolves over the next few quarters. We value DFS at INR140/sh (14% potential upside), based on 11x FY27E EPS. Reiterate BUY.
DFS turns to rail lounges with Ten11 acquisition
* DFS's 2QFY26 revenue was down 41% QoQ/35% YoY to INR2.0b.
* EBITDA was down 56% QoQ and 48% YoY to INR120m in 2QFY26. EBITDA margin stood at 5.8%, down 190bp/150bp QoQ/YoY.
* DFS’s consolidated PAT stood at INR112m (down 30% YoY/47% QoQ), with a PAT margin of 5.5%.
* On the strategic front, DFS announced the acquisition of Ten11 Hospitality LLP, which operates key railway lounges in Chennai, Mumbai, and Vadodara (with Chennai operational and the remaining locations expected to commence soon).
* Recent developments make us cautious about DFS’s near-term growth visibility. The suspension of domestic lounge services - contributing ~90% of revenue - following the loss of key contracts with Adani Digital and Semolina Kitchens has materially disrupted the business model.
* Management’s commentary around the evolving situation and the trajectory of its non-lounge offerings will be important to watch, with the full impact of disruptions likely from the next quarter. We believe it will take a couple of quarters for clarity to emerge on both the non-lounge and rail lounge businesses.
Key highlights from the management commentary
* The quarter marked a period of strategic transition as the company exited the domestic airport lounge program and realigned its model toward diversified travel and lifestyle services.
* Global lounge access continues to scale meaningfully, supported by rising international travel trends and DreamFolks’ expanded touchpoint network.
* The company highlighted that 3Q revenues will decline, reflecting the absence of domestic airport business contributions.
* Contracts with banking partners remain active; however, some of the replacement programs (railways, lifestyle bundles, etc.) will go live over the coming months.
* Global lounge revenue doubled YoY and contributed ~13% to the quarter’s revenue, with strong traction in international markets.
* The company acquired Ten11 Hospitality, giving it direct operational presence at Chennai, Mumbai (going live in 10–15 days), and Vadodara (in a couple of months). Chennai Lounge is already operational.
* Railway lounges typically operate on a 5–7 year lease model where the operator builds and maintains the lounge.
* Railway lounges will cater not only to cardholders but also to walk-in customers, expanding the revenue pool.
Valuation and view
* The suspension of domestic lounge services and the resulting loss of scale create limited visibility in the near term. The company is shifting its focus toward nonlounge and rail lounge services, but these areas will take time to meaningfully contribute. Given the ongoing disruption, we maintain a cautious view while monitoring how the business mix evolves over the next few quarters. We value DFS at INR140 per share (14% potential upside), based on 11x FY27E EPS. Reiterate BUY.
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