Corporate governance issues cast shadow on promoters though business prospects seem to justify IPO valuation.
|
DREAMFOLKS OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 562 Cr |
| Fresh Issue | Nil |
| Offer for Sale | 1,72,42,368 equity shares |
| Face Value | Rs 2 |
| Price Band | Rs 308 – 326 |
| Mkt/Bid Lot | 46 Nos. |
| M-Cap | Rs 1703 Cr |
| Equity Cap | Rs 10.45 Cr |
| Free Float | 33% |
| Lead Managers | Equirus Cap and Motilal Oswal |
| Registrar | Link Intime |
| Listing | BSE, NSE |
|
INDICATIVE ISSUE SCHEDULE |
|
| Opening : 24-Aug-2022 | Closing : 26-Aug-2022 |
| Allotment : 01-Sep–2022 | Refunding : 02-Sep–2022 |
| Demat Credit : 05- Sep–2022 | Trading : 06- Sep–2022 |
The Offer
New Delhi-registered but Gurugram-headquartered Dreamfolks Services Ltd (DSL) is coming out with its maiden public issue valued Rs 562 Cr. The IPO is an offer for sale of 1,72,42,368 equity shares by the company’s three promoters. The offer is being made through the book-building route with a price band of Rs 308-326 for Rs 2 paid-up share.
Applicants should bid for a minimum lot of 46 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on September 6, 2022. Equirus Capital and Motilal Oswal Investment have been roped in as managers to the offer. Link Intime will be acting as registrar to the issue. The bidding opens on Wednesday, August 24 and closes on Friday, August 26, 2022.
Lineage
According to DSL’s offer document, Liberatha Kallat (46), Mukesh Yadav (51) and Dinesh Nagpal (56) are the promoters of the company. However, none of the present directors were involved in the promotion or formation of the company. DSL was originally incorporated as Believe Tradelink Private Ltd in April 2008 by Gulshan Madan and Vijay Ram Sharma with a capital of Rs 1 lakh, consisting of 10,000 shares of Rs 10 each equally held by the two signatories to the MoA.
More than three years later, on August 10, 2011, Sharma transferred 1700 shares in favour of Mukesh Yadav and 3300 shares in favour of Dinesh Nagpal at par value. After almost two and a half years further, on January 15, 2014, Madan transferred 3300 shares in favour of Liberatha Kallat and 1700 shares in favour of Mukesh Yadav at a price of Rs 200 a piece.
What was the business of Believe Tradelink and on what basis the Rs 10 paid-up shares were valued at Rs 200 in 2014 are not revealed in the offer document. Subsequent to the transfer of shares to the present promoters the company’s name was changed to Dreamfolks Services.
Until March 30, 2018, the company’s issued capital remained at just Rs 1 lakh. On the last day of fiscal 2018, the company came out with a whopping 474:1 bonus issue thereby enlarging the capital base to Rs 4.75 Cr. On September 10, 2021 the company went for a stock-split, sub-dividing the Rs 10 paid-up share into 5 shares of Rs 2 each. Fifteen days after the stock split, the company made another bonus issue in the ratio of 1.2:1 thereby increasing the equity capital to Rs 10.45 Cr.
A noteworthy aspect of DSL is that, except the initial contribution of Rs 1 lakh at the time of incorporation, the company has not raised any additional equity capital. Unlike other hi-tech and fintech start-ups that tapped the market recently, DSL has received no share premium or private equity funding. The company’s two bonus issues were made out of earned surplus. Even after the bonus issues, the company’s earned surplus stood at more than Rs 71 Cr at the end of fiscal 2022.
However, an intriguing aspect of DSL is, two of the three promoters, who have real estate business background and drew a hefty remuneration of about Rs 8.5 Cr each for last three fiscals, have relinquished their executive positions and remain on the board as non-executive directors. Another point worth noting is, though the three promoters would continue to collectively stake in 67% in DSL’s equity even after the offer for sale, their investment cost, which is negligible before the IPO, will be extremely negative after the offer for sale. This could pave the way for dumping specially by the `non-executive’ promoters after the lapse of the lock-in period, which is in this case six-months to eighteen months.
Key Management
The backbone of DSL management is Liberatha Kallat, who attained the `promoter’ status in 2014. She is designated as the Chairperson and Managing director of the company. She holds a bachelor’s degree in science from Andhra University. She has been responsible for the strategy and overall management of DSL since 2014. She has, in the past, been associated with Indian and global multinational companies such as Taj GVK Hotels, PepsiCo India, Premium Port Lounge Management Company and Pernod Ricard India.
Balaji Srinivasan (45), who has been with DSL since 2019 as Chief Technology Officer, has been elevated to the post of Executive Director since October 2021. He holds a diploma in software and systems management from NIIT, New Delhi. Prior to joining DSL, he reportedly held senior management positions at start-up ventures such as FarEye and also held the position of Vice-President at Genpact India.
Stakeholders
Currently the promoters are holding the entire equity capital of Rs 10.45 Cr. Liberatha Kallat, the CMD, holds 33% while non-executive directors Mukesh Yadav and Dinesh Nagpal hold 34% and 33% respectively. Post-offer for sale, Kallat, will hold 25%, Yadav and Nagpal will have 21.5% and 20.5% respectively. Whereas the cost of holding of Kallat would be Rs 104.27 negative, Yadav’s cost works out to Rs 189.50 negative and that of Nagpal comes to Rs 198.78 negative!
Business Model
DSL is an airport service aggregator facilitating an enhanced airport experience to passengers leveraging a technology driven platform. Its asset-light business model integrates global card networks operating in India, credit card and debit card issuers and other corporate clients, including airline companies with various airport lounge operators and other airport related service providers on a unified technology platform. The company facilitates customers of their clients’ access to airport related services such as lounges, food and beverage, spa, meet and assist, airport transfer, transit hotels /nap room and baggage transfer. DSL’s dominance is underpinned by its facilitating access to 100% of the 54 lounges currently operational in India.
DSL reportedly began effective operations in 2013 by facilitating lounge access services for the consumers of Mastercard. Currently, it claims to provide services to all the Card Networks operating in India including Visa, Mastercard, Diners/Discover and RuPay, and many of India’s prominent card issuers including ICICI Bank, Axis Bank, Kotak Mahindra Bank, HDFC Bank and SBI Cards. Over the years, the company has transformed from being an airport lounge access aggregator to an end-to-end technology solutions provider for designing and delivering services that enhance the airport experience.
Airport lounges have grown steadily in India in last 5 years. Any airport with a passenger movement of around 5-6 million a year can accommodate a successful lounge. The top 24 Global Airports average at around 7 lounges per airport. Indian Airports average at around 2 lounges per airport. The Indian lounge market is expected to grow at 4 times of the current market size. India issued Credit/ Debit cards are a primary mode of access to the domestic lounges and it accounts to around 80%. In this segment, DSL holds almost 95%-97% of the domestic India market lounge share.
Financial Track
The asset-light business model of DSL produced its most impressive financial performance in fiscal 2020. The company achieved record revenue of Rs 367 Cr and posted a profit of over Rs 31 Cr against a capital of only Rs 4.75 Cr. The pandemic played havoc in fiscal 2021 which dragged the company’s bottom line into red. The company seems to have bounced back in the second half of fiscal 2022. Barring unforeseen circumstances, DSL thus could post decent growth in the near term.
|
Dreamfolks Financials (in Cr) |
|||||
| Period Ended |
Mar-22 |
Sep-21 | Mar-21 | Mar-20 |
Mar-19 |
| Revenue |
282.5 |
85.06 | 105.63 | 367.04 |
248.28 |
| Operating Profit |
22.55 |
1.83 | -0.38 | 45.09 |
23.41 |
| OPM% |
8.0 |
2.1 | -0.4 | 12.3 |
9.4 |
| Other Income |
1.49 |
1.17 | 2.48 | 0.77 |
0.21 |
| EBIDTA |
24.04 |
3.00 | 2.10 | 45.85 |
23.62 |
| EBIDTA % |
8.5 |
3.5 | 1.9 | 12.5 |
9.5 |
| Interest |
1.43 |
0.66 | 0.75 | 0.71 |
0.40 |
| Depreciation |
2.13 |
1.05 | 1.55 | 1.59 |
1.36 |
| Tax |
4.78 |
0.72 | 0 | 10.32 |
8.63 |
| Net Profit |
16.28 |
1.11 | -1.45 | 31.68 |
15.31 |
| Equity Capital |
10.45 |
10.45 | 4.75 | 4.75 |
4.75 |
| Reserves |
71.72 |
54.21 | 59.55 | 60.76 |
29.42 |
| Borrowing |
1.28 |
1.5 | 2.02 | 3.09 |
2.04 |
| Fixed Assets |
13.90 |
10.5 | 11.50 | 6.00 |
3.60 |
Valuation
The upper price band of Rs 326 discounts DSL’s last audited earnings more than 104 times which may look very steep. Nevertheless, the price discounts the company’s pre-pandemic peak earnings (of fiscal 2020) about 54 times which is reasonable for a company like DSL whose dominance is well established in its business domain.
The prospects of the company largely depend on the smooth functioning of airports across the globe. Assuming that the pandemic is under check, the future course of the stock will be decided by the mood of the two `non-executive’ promoters who control about 42%, out of the post-offer promoters’ stake of 67%. How these promoters, who had to face massive remuneration cut from the company, are going to react after the lock-in period thus remains to be seen.
|
Dreamfolks’ Fundamentals |
|
|
Financials (Rs Cr) |
|
| Market Cap |
1703 |
| Borrowing |
1 |
| Fixed Assets |
14 |
| Revenue |
282 |
| EBIDTA |
24 |
| Net Profit |
16 |
| Equity Cap |
10 |
| Reserves |
72 |
|
Stock Features |
|
| Current Price (Rs) |
326 |
| Face Value (Rs) |
2 |
| Book Value |
15.73 |
| Promoter Stake % |
67 |
| Debt/Equity |
0.02 |
|
Profitability |
|
| OPM % |
8.0 |
| Net Margin % |
5.7 |
| Cash EPS |
3.52 |
| Earnings Per Share |
3.11 |
|
Growth |
|
| CAGR 3Yr Sales % |
4.4 |
| CAGR 3Yr EBIDTA % |
0.6 |
|
Return |
|
| RONW % |
19.8 |
| ROCE % |
26.3 |
|
Discounting |
|
| Price/Earnings |
104.7 |
| Price/Cash EPS |
92.6 |
| Price/Book Value |
20.7 |
| Price/EBIDTA |
70.9 |
| Price/Revenue |
6.0 |
| Price/Fixed Assets |
122.2 |
|
Distribution |
|
| Dividend % |
0 |
| Yield % |
0 |
| Pay-out % |
0 |
Concern
DSL management seems to score poorly on the corporate governance front.
- The company’s audited financial statements for fiscals 2019 and 2020 omitted to mention the details of certain related party transactions that were undertaken by the company. While they have rectified the omission in the audited special purposes consolidated financial statements and their Restated Consolidated Financial Statements forming part of the IPO Red Herring Prospectus, they have not done so for the audited financial statements.
- DSL has in the past inadvertently made certain erroneous and incomplete filings with the RoC for appointment of directors and approval of employee stock option plan.
- It has also in the past delayed in making statutory filings for sub-division of shares, increase in authorised share capital and appointment of managing director. What’s more, the company is unable to trace the board resolutions with regard to change of the registered office!