Dreamfolks Services conducted conference call on 10 August 2023 to discuss the financial results and performance of the company for the quarter ended June 2023. Ms. Liberatha Kallat – Chairperson & Managing Director, Ms. Giya Diwaan – Chief Financial Officer and Mr. Balaji Srinivasan - Chief Technical Officer and Executive Director of the company addressed the call

Highlights of the Concall

• There was a robust demand for travel driven by a large shift in people's propensity to spend on travel from their growing disposable income. And also, every month of FY 2023, the number of passengers carried by airlines domestically has surpassed the pre-COVID level and is reaching new highs. As per the DGCA data, passengers carried by Indian domestic airlines during Q1FY '24 were 38.6 million as against 32.5 million during the corresponding period of the previous year, indicating a growth of 19% year-on-year. This growth in footfall can be attributed to revenge travel strength, greater propensity to travel by air as against the other modes of travel. And the recovery in business travel results also suggests that this surge in air passengers is in a significant proportion stemming from first-time flyers.

• India's aviation industry is expected to grow at CAGR of 5.8% for the next 2 decades. By 2040, Indian aviation is predicted to accommodate 430 million additional air passenger journeys compared to 327.28 million in FY '23. To support this growing demand in the number of passengers, India requires strong airport infrastructure.

• Currently, India has 140 operational airports, including international, domestic and custom airports, has experienced remarkable growth in recent years emerging as one of the fastest-growing industries in India. India is expected to be the third largest aviation market by 2024 as for the IBEF report.

• India's aviation industry has set a target of increasing the number of airports in the country by 140 to 220 by 2025. In December 2022, Airport Authorities India and other developers have targeted to spend approximately Rs 98,000 crore in the next 5 years for expansion and modification of existing terminals, building new terminals and strengthening of runways among other activities.

• Some major airports that are inching closer to completion and expected to begin operations in the coming years are the Noida International Airport; Chaudhary Charan Singh Airport, Lucknow; Navi Mumbai International Airport; and Shri Ram International Airport, Ayodhya

• The fleet sizes are also expected to significantly ramp up from 700 airplanes today to 1,200 to 1,500 in coming 4 years.

• India has witnessed a notable surge in the use of credit cards in recent years. This transformation has had a profound impact on the country's payment system, completely revolutionizing the way in which people manage their finances in the country, which was traditionally relied on cash transaction, has undergone a revolutionary change as plastic money is becoming the new norm.

• As per the Reserve Bank of India data there were only about 2.9 crore credit cards in 2017 which has surged up to over 8.6 crore in April 2023. This represents a CAGR of approximately 20% from 2017 to 2023. It is expected that the number of credit cards in India could well surpass the 10 crore milestone as early as 2024.

• As per RBI data there were 25 crore merchant transactions in April 2023, representing a total value of Rs 1.33 lakh crore, more than double of the value of debit card transaction of Rs 53,000 crore.

• There are several drivers behind the increased adoption of credit cars in India. Firstly, the overall banking ecosystem is revolutionizing and growing, especially with the increase in the number of banks, credit cards and fintech sign-ups and start-ups and new-age companies to promote the use of credit card. The card usage online has turned to 60% of the card spend, primarily across hospitality, travel and leisure and consumer durables. The total value of credit card transaction is expected to reach Rs 51.72 trillion by FY'27, expanding at a CAGR of nearly 39.2% during FY 2022 to 2027. Meanwhile, during the same period, the volume of credit card transactions is projected to expand at a CAGR of around 26.4%.

• According to industry sources, currently, only 30% to 40% of the bank's credit card portfolio is given free lounge access. For card issuers, providing lounge access to their customers at airport is increasingly becoming a key aspect of their customer acquisition and loyalty program, and there is still huge potential to increase the credit and debit card penetration in the country.

• An important factor that will drive the industry is the integration of cards with the Unified Payment Interface system, UPI, which is estimated to result in 30x increased credit card usage in India. The credit card penetration in India is still around 5.5%,

• The growing inclination of travelers to use airport lounges and the increasing awareness around the lounges and one's own card benefits have led to the rapid growth in the lounge infrastructure. The number of airport lounges in India currently stands at 58, with a total area coverage of around 400,000 square feet.

• Although the lounges are currently experiencing a situation of excess demand, deliberate efforts are being made to declutter the lounges, expand the space of the interesting ones and open additional lounges to meet the demand.

• Currently, only a small percentage of eligible credit and debit card holders utilize airport facilities, but the future growth potential is phenomenal due to rising awareness and evolving preferences.

• Of the total passengers that travel during the quarter, Dreamfolks facilitated lounge access and other ancillary services for 2.6 million passengers in Q1 FY'24 as against 1.8 million passengers in the corresponding quarter, signaling a 44% growth year-on-year.

• The company also have 100% coverage of railway lounges in nation as well and are growing rapidly as railway stations continue to get modernized. Overall, it see a very significant increase in sustainable air traffic levels, followed by a demand for value-added facilities like lounges, spa services, food and beverage outlets and more.

• The company collaborated with Plaza Premium Group, a global leading airport hospitality provider with the world's largest network of independent airport lounges, to include over 340 plus Plaza Premium Lounges in over 70 plus major international airports into the DreamFolks global lounge network, offering an enhanced travel experience to its members worldwide starting July 24, 2023. This collaboration will facilitate extensive coverage of Plaza Premium Lounges across 4 continents including key travel hubs such as Australia, Canada, the United Kingdom, Hong Kong, Florida, Brazil, Italy, Indonesia, Malaysia, Singapore, Dubai, Saudi Arabia, Jordan and more.

• Revenue grew 66% to Rs 266.3 crore in Q1FY24 on the back of continuing uptick in passenger volumes, steadily growing take rate and increasing preference to avail airport services.

• The company is making attempt to penetrate into global markets, starting with Asia Pacific and the Middle East

• Margins dropped during the quarter due to 3 reasons - first one is having mismatch escalation in costs with vendors versus increase in price points with clients that occur annually, second is an unexpected cost escalation and one-off revenues in the previous year quarter and the third is investment in human capital. There is a time gap between the cost escalations for the lounge operators versus the pricing rate change for its clients. The pricing typically lags the cost increase, and hence, Q1typically will have this phenomenon, and once the price has changed in Q3 and Q3 for clients, this mismatch corrects itself. Secondly, there was one time significant increase in the CAM (common area maintenance charges), by 3 times levied by the airport operator to the lounge operator, which adversely impacted its overall renewal costs. Therefore, operator cost increased by 10-15% instead of usual 5-8%. The company believes this abnormal escalation is a one-off and, hopefully, will not occur in future. Next, the previous year quarter had a one-off project revenue, which led to higher margins for the last quarter. It was a onetime fee against the consulting development and setup of a new upcoming lounge. Without this revenue, margin would have been around 14-15% for the last year quarter as opposed to 17%. And there was increase in employment benefit expenses in the nature of ESOP charges which has added around 15% to its employee costs. All these 3 factors contributed to the drop in the margins.

• The company will absorb a cost of Rs 6.3 crore on account of the ESOP expenses in FY2024.

• The company has changed its margin guidance from the 14-15% that it was reporting over the last couple of years to a more conservative 11-13%. This also assumes high-margin business from some of its other services like golf, et cetera.

• The company expects a topline growth of 60-65% in FY2024.