Liberatha Peter Kallat, Chairperson and Managing Director , Dreamfolks Services Limited

16 Dec 2022 , 11:35 PM

Help us understand the company's business model
 
We are a dominant player and India's largest airport service aggregator platform facilitating an enhanced airport experience to passengers leveraging a technology driven platform.
 
Our business model, by design, is asset-light and our ability to scale up our business requires minimal incremental capital deployment resulting in high operating leverage. This is one of the key reasons that we have a strong track record of delivering consistent growth along with high capital efficiency.
 
Our business model integrates global card networks operating in India, credit card and debit card issuers and other corporate clients, in India, including airline companies, with various airport lounge operators and other airport related service providers on a unified technology platform. We facilitate consumers’ access to the following airport related services (i) lounges, (ii) food and beverage (iii) spa, (iv) meet and assist, (v), airport transfer (vi) transit hotels /nap room access, and (vii) baggage transfer.
 
For our clients, our comprehensive airport lounge coverage in India and a single point access to all lounge operators in India is a vital link to manage customer loyalty and retention / enables them to provide consumers value added services as part of their customer engagement and loyalty management programs. Moreover, our platform is, integrated with the information technology systems of our clients. Thus, details like the benefits for each card variant, the benefits availed by consumers, and the accounting pertaining to use of the lounge services by the consumers are maintained and monitored through our systems. This further strengthens our client relationships since we address the (i) front-end i.e., validating and providing access to lounges as well as (ii) the back end in terms of maintaining the benefits and utilization of usage for end-consumers of the lounges. We generate most of our revenue through a per passenger basis, which is recognized through the swipe or tap of the card by the consumers when accessing one of our services / on our platform.
 
Similarly, for lounge operators, our tie-ups with all card networks with operations in India and some of India’s largest card issuers facilitate a steady stream of lounge users being routed through us. In fact, at certain airport lounges in cities such as Ahmedabad, Bengaluru, Cochin and Mumbai, we account for more than 80% of the total lounge.
 
Our business model is also human resource light. As at March 31, 2022, our work force comprised just 60 full time employees including our senior management team.
 
What are the company's key strengths?

We are the largest and dominant airport lounge access provider in India. Our dominant position is underpinned by our estimated market share of over 95% in Fiscal 2022 of all India issued Card Based access to domestic lounges in India. We have coverage across 54 operational airport lounges constituting 100% of airport lounges in India, as at March 31, 2022. Further, in Fiscal 2022, we catered to approximately 68% of the overall lounge traffic in volume across all lounges in Indian airports (both the domestic and international lounges).

We have entrenched relationships with marquee clients including global card network providers in India and prominent Indian and global banks and corporates. We have tie-ups with all the 5 Card Networks operating in India including Visa, Master Card, Diners/Discover and RuPay. Further, some of India’s largest Card Issuers are also among our key clients including ICICI Bank Limited, Axis Bank Limited, Kotak Mahindra Bank Limited, HDFC Bank Limited (in respect of debit card lounge program) and SBI Cards and Payment Services Limited. In Fiscal 2022, we enjoyed over 95% market share in the India issued Card Based transactions for lounge access.

In addition, we also have tie-ups with some of India’s prominent corporates including airline companies, telecommunications company, OTA, loyalty aggregators, and other corporates such as Interglobe Aviation Limited, Go Airlines Limited, Air Asia (India) Limited, Vodafone Idea Limited, Jet Privilege Private Limited, Hettich India Private Limited, Easy Trip Planners Limited and Mahindra Holidays and Resorts India Limited. Our Clients rely on our Services to provide the airport enhancement experience to their customers as a part of their customer acquisition and engagement endeavors. Our industry dominance, partner eco-system and service offerings coupled with our robust technology platform enables us to attract new clients. Our total number of Clients has grown from 14 during Fiscal 2018 to 50 as at March 31, 2022.

We have a strong business moat due to flywheel effect led by clients and operators network. Given our dominant position in the airport lounge access market, we have been successful in building a bridge between our Clients and airport lounge Operators. Our position in the industry enables us to create interdependencies for our service offerings through our unique value proposition enabling us to attract newer clients and Operators, which helps us further strengthen our position in the market.

We are also able to capitalize on the growing consumer base of air traffic passengers and card users without incurring any direct, consumer acquisition cost. Given the nature of our business model, the acquisition of the consumers is done by our clients. The accretion in our consumers occurs with a growth in our client base, the number of outstanding credit cards and debit cards, and the frequency of travel and lounge access.

Finally, our business model, by design, is asset-light and our ability to scale up our business requires minimal incremental capital deployment resulting in high operating leverage. This is one of the key reasons that we have a strong track record of delivering consistent growth along with high capital efficiency. Our revenue from operations have increased from Rs986.99 million during Fiscal 2017 to Rs1,659.95 million during Fiscal 2018 to Rs2,482.81 million during Fiscal 2019 and to Rs3,670.43 million during Fiscal 2020, at a CAGR of 54.93%. Also, during the same period our profit before tax has increased from Rs81.14 million in Fiscal 2017 to Rs166.39 million in Fiscal 2018 to Rs218.66 million in Fiscal 2019 and to Rs435.57 million in Fiscal 2020, at a CAGR of 75.10%. Our return on capital employed was 76.93%, 78.83%, 61.48% and 63.46% in Fiscal 2017, Fiscal 2018, Fiscal 2019 and Fiscal 2020, respectively.

Share with us your growth strategy?

We intend to focus on increasing our wallet share with our existing Clients by identifying cross-selling opportunities that our diversified set of services offer. We also plan to continue to nurture our relationships with our Clients, to expand our association beyond airport lounge services to the full bouquet of services that we offer, and increase their contribution to our total revenue from operations. We plan to increase the stickiness of our clients through deeper integration of their systems with our platform, which will allow us to generate recurring revenue and aid the aim to increase our wallet share from each client.
 
We plan to consistently establish new relationships or extend existing relationships as and when the opportunity arises to capitalize on the expected growth in airport lounges driven by inter alia the growing air traffic and passenger traffic, development of new airports and government initiatives. We will continue to strive to maintain our 100% coverage of airport lounges by expanding our coverage across new airport lounges. In addition to specific solutions for card Networks and card issuers and the other sectors we cater to, we also want to focus on customer engagement and loyalty solutions for corporate clients and build specific solutions for them. We also plan to create ancillary revenue opportunities for clients in the online travel agency and airlines industries.
 
With reference to enhancing our market penetration, we intend to penetrate deeper into our existing sectors that we cater to by expanding our client base. We plan to increase the number of our clients in the banking, telecommunications, OTA, airlines sector. While some of these sectors such as banking have a number of entities that we could focus on, other sectors such as telecommunications despite not having many players are critical since each player added could significantly increase the number of Pax that we could cater to. Further, we propose to cater to the diverse requirements of these disparate entities by continuing to develop and build bespoke domain-specific solutions, tools, and portals for integration and management of the various airport services.
 
We plan to replicate our deep knowledge of the industry, technology innovation, process expertise, and business model across new high growth markets. We are in the process of leveraging our well-entrenched relationships with our global clients for expanding our footprint to geographies like the CEMEA (Central and Eastern Europe, Middle East, and Africa) and South-East Asia.
 
On technology front, we intend to continue to develop bespoke solutions for our clients using our platform that focus on both maximizing the value for the Consumer, and better manage the overall program and engagement cost for the Client.

What are the macro-opportunities for your company?

We are able to capitalize on the growing consumer base of air traffic passengers and card users without incurring any direct, consumer acquisition cost. The Indian domestic air travel passenger is expected to grow at a CAGR of around 36% between 2021 and 2025. The international Indian air travel market is expected to almost grow at 31% CAGR between 2021 and 2025. In the long term the domestic market is expected to grow at a CAGR of around 14% and the international market is expected to grow at around 15%. The total Indian travel market is expected to surpass 1 billion by 2040.
 
The rise in passenger growth will be supported by an increase in the number of airports, fleet and infrastructure wherein the total number of operational airports is expected to reach 295 by 2040; these are a combination of second airport within the same city and new Greenfield projects. As of FY 2022, there were around 5 airports that handled more than 10 million passengers, compared to 3 airports in FY 2021. This is expected to grow multifold and reach 47 by 2040. This is expected to be a key opportunity with the possibilities of multiple lounge options at these airports.
 
Presently, the AAI has approved the privatization of 6 major airports which including, Bhubaneshwar, Varanasi, Amritsar, Trichy, Indore, and Raipur. Other smaller airports which are to be privatized are Jharsuguda, Gaya, Kushinagar, Kangra, Tirupati, Jabalpur, and Jalgaon. In this initiative, the lease to be issued would include smaller airports clubbed with larger ones. This initiative is expected to promote the upgrade of both non-profitable airports and profitable ones. The upgradations for these airports are expected to enhance the customer experience. Therefore, the privatization of airports can be viewed as a key opportunity for lounger operators in terms of exploring new markets.
 
UDAN (UdeDesh ka Aam Naagrik) aims to link underserved and unserved airports in the country. The Regional Connectivity Scheme (RCS) aims to increase inter-regional connectivity by connecting 70 airports through 128 routes operated by five airlines. According to the latest findings, of 70 airports, 31 are unserved and 12 are underserved. An under-served airport is one that has less than a flight per day, whereas an unserved airport has none. The Ministry of Civil Aviation has approved 780 new air routes as part of the UDAN scheme for regional air connectivity, which will result in an increase in air passengers.
 
How do you expect margins to move in the future? What are the key margin drivers?
Despite of challenges related to COVID-19, in FY 2021 we were able to sustain profitability at EBITDA level. Our EBITDA margin in FY 2021 was 1.94%. The number of Pax was 1.38 million and our average revenue per passenger increased to Rs765.46 in FY 2021 compared to Rs752.14 in FY 2020. We able to sustain our Gross Profit margin in FY 2021 to 17.13%.
 
We reported 3.53 million number of Pax in FY 2022 compared to 4.88 million number of Pax in FY 2020 and EBITDA margin in FY 2022 was 8.46%. The expected increase in number of passengers from 120.8 million in FY 2022 to 293 million in FY 2025 as per F&S Report indicates a positive outlook for the sector. The rise in air passengers and propensity to travel will reflect positively in our numbers, since we have a 100% coverage of airport lounges in India, and are the dominant player in providing airport lounge access. Since our business model, by design, is asset-light and our ability to scale up our business requires minimal incremental capital deployment, we are able to benefit from a high operating leverage. This is expected to reflect favorably on our margin profile and profitability once our revenue profile normalizes from the downturn seen in the pandemic.
 
Our plan is also to focus on increasing our wallet share with our existing clients by identifying cross-selling opportunities that our diversified set of services offer.
 
On the international front, we were able to increase our presence to 59 countries in Fiscal 2021 and 121 countries in Fiscal 2022. Contrary to several companies across sector, we were successful in expanding our reach globally during the COVID-19 pandemic and subsequent lockdown. We were able to increase the number of touch points overseas to 1,172 in FY 2022 and 364 in FY 2021 compared to zero in FY 2020. Moreover, in line with our asset light model, all of this expansion was done with minimal capital expenditure. This increased footprint and touchpoints are expected to pay off in the long term due to economies of scale and operating leverage.
 
Share with us the key challenges facing the company. How are you mitigating the same?

The COVID-19 pandemic had hit the global travel and aviation sector adversely, due to lockdowns and travel restrictions. It was a challenging time for economies across the world, particularly in sectors that were hit hard. Travel, tourism and aviation were some of the worst hit sectors, and it was one of the most challenging times we have faced. However, we tried our best to mitigate the challenge when it came.

To begin with, we were relatively better off in financial terms due to our tech-centric, asset-light, human-light business model. This business model proved to be a blessing, and we managed to stay profitable at an EBITDA level even through the depth of the pandemic i.e. in FY 2021. The second part of our strategy to mitigate the impact of the pandemic, was our aim to come out stronger from it. So we focused on bolstering our presence, and increasing our international footprint. In FY20 we only had coverage of 223 touchpoints in 57 cities across just one country — India. However, now as we start to put the pandemic behind us, Dreamfolks has 1,416 touchpoints in 536 cities across 121 countries. We have used the crisis, and turned it into an opportunity to scale up. We believe that our business model, and the high operating leverage that we enjoy because of it, will continue to benefit us extensively in the medium to long term.