DreamFolks Services IPO: How good is it?

In our previous part of DreamFolks Services IPO story, we read about the key details of the IPO. Here we will answer some questions about DreamFolks Services and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No. The company's profit before tax for FY22 was Rs 20.5 crore.

2) Will DreamFolks be able to scale up its business?
Yes. As the number of air travelers, airports, and cards issued grows, DreamFolks will be able to grow simultaneously.

3) Does DreamFolks have recognisable brands truly valued by its customers?
Yes. The company has a strong brand visibility among its customers due to being a dominant player in the market.

4) Does DreamFolks have high repeat customer usage?
Yes. Frequent air travelers who use lounges automatically become regular customers of DreamFolks.

5) Does the company have a credible moat?
Yes. Its relationship with card issuers, card networks, and lounge operators and their dependency on DreamFolks gives a moat to the company. Relationship with card issuers attracts lounge operators and relationship with lounge operators attracts card issuers.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The company does not operate in a regulation heavy industry and is not prone to geopolitical risks. Although it has an indirect threat from card issuers and networks. If any major card issuer or network is restricted from onboarding new customers, it will affect the growth of DreamFolks.

7) Is the business of the company immune to easy replication by new players?
Yes. While it is easy to start a platform, it is incredibly difficult to build a relationship that DreamFolks has built.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. Since DreamFolks is the dominant lounge access provider, it cannot be substituted.

9) Are the customers of DreamFolks devoid of significant bargaining power?
Yes. Customers do not have any other substitutes which are as big or well connected as DreamFolks.

10) Are the suppliers of DreamFolks devoid of significant bargaining power?
Yes. While DreamFolks is heavily dependent on a few clients, those clients do not have any other major lounge access platform to supply their services to.

11) Is the level of competition the company faces relatively low?
Yes. DreamFolks is the only major lounge access platform in India. But we would like to point out that there are various companies overseas that do this because DreamFolks has aggressively expanded outside India in the last year.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. The promoters will continue to hold 67 per cent stake post-issue.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The company's managing director Liberatha Peter Kallat, and non-executive directors Mukesh Yadav and Dinesh Nagpal have combined experience of more than 15 years.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes. We have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes. The company does not have any litigations involving it or the promoters.

16) Is the company's accounting policy stable?
Yes. We have no reason to believe otherwise.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free from pledging.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
Yes. Its three-year average ROE and ROCE are 22 per cent and 29 per cent respectively. Its current ROE and ROCE are 20 and 24 per cent respectively.

19) Was the company's operating cash flow positive during the last three years?
No. The company posted negative operating cash flow in FY22.

20) Did DreamFolks increase its revenue by 10 per cent CAGR in the last three years?
No. Its revenue fell by 12 per cent in the last three years. We would like to point out that this fall was due to the effect of COVID on air travel industry.

21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
Yes. The company is net debt free and has an interest coverage ratio of 15 times.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. This business does not require a high level of working capital for day to day activities.

23) Can the company run its business without relying on external funding in the next three years?
Yes. The company has an asset-light business and its growth is directly correlated to cards issued and growth of the air travel industry.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. Its short-term borrowings have decreased by 52 per cent per annum from Rs 2 crore to Rs 25 lakh.

25) Is the company free from meaningful contingent liabilities?
Yes. The company does not have any contingent liabilities.

Stock/Valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No. The stock offers an operating earnings yield of 1.3 per cent.

27) Is the stock's price-to-earnings less than its peers' median level?
Not applicable. There are no listed peers of the company. It will list at a P/E of 104.8 times.

28) Is the stock's price-to-book value less than its peers' average level?
Not applicable. There are no listed peers of the company. It will list at a P/B of 20.7 times.

Also, read our earlier story on DreamFolks Services IPO to learn about key IPO details and important company information.

Disclaimer: The author may be an applicant in this Initial Public Offering.