Oyo warns of delay in profitability; Strengths and weaknesses of the startup Ipo-Bound

By Ethel B. Collier Last updated Oct 2, 2021

OYO Hotels & Homes on Friday filed preliminary documents to launch an initial public offering (IPO) to raise Rs 8,430 crore. OYO Hotels & Homes – also known as OYO Rooms – is the first hotel company in India to apply for a market listing since 2019. The proposed IPO will include a new issue of shares valued at Rs 7,000 crore and an offer to sell (OFS) of shares valued at Rs 1,430 crore. Its promoters include Founder and CEO Ritesh Agarwal and the Japanese conglomerate SoftBank.

OYO’s move follows Zomato’s public offering in July, which garnered strong investor interest.

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Here are some of the main strengths and weaknesses of OYO Rooms, as mentioned in its draft prospectus on red herring (DRHP) filed with the market regulator SEBI:

Strengths

light business model on assets; the showcases listed on the OYO platform do not belong to the company

Income streams: accommodation, booking commission, value-added services, rental income

Lean cost structure

Ability to be capital efficient

Constant improvement of technological offerings for clients and customers keeps its platform profitable

Ability to scale the business at minimal marginal cost

Strong growth in the number of pre-COVID storefronts

Significant share of demand via D2C channels; India’s share of direct demand (measured as a percentage of nights booked through D2C) was 90.9% in FY20 and 94.4% in FY21

As of March 31, 2021, 99.9% of OYO showcases did not have a minimum guarantee or fixed payment commitment from the company

Weaknesses

OYO has suffered net losses every year since its incorporation, and its “ability to achieve profitability may be delayed”. The company said its “profitability depends on our ability to maintain a profitable platform, primarily driven by effective management of benefits and other expenses.”

It may not continue to grow at the rate of historical rates and may face difficulties in executing its expansion plans and implementing growth strategies, according to the DRHP.

The business has debt that requires interest and principal payments. As of July 31, 2021, its total consolidated outstanding amount was Rs 4,890 crore.

The Company’s limited operating history makes it difficult to assess its future prospects and the risks it may encounter in an uncertain global economic environment.

OYO relies on third party distributors, travel management companies and distribution systems, which can affect its margins and profitability. “We can also lose access to certain distribution channels if these third-party distributors see us as a competitor and choose to remove us from their platform,” he said.

OYO’s activity may be affected by:

Failure to retain existing customers or acquire new customers profitably

Damage to reputation due to customer or third party action that is criminal, violent, inappropriate or dangerous in nature, or fraudulent activity

Adverse outcome of legal litigation (OYO is in litigation with Zostel after their merger talks failed; it also has ongoing litigation against itself, some of its units and a developer)

Regulation in business or activity, or sanction by OYO fair trade regulator CCI

Travel industry challenges such as extreme weather conditions, natural disasters, pandemics, changes in trade or immigration policies and downturns

OYO’s spending slashed 68.6% year-on-year to Rs 6,936 crore in FY21 as many of its employees switched to a work-from-home mode due to the pandemic . This has allowed OYO to streamline various expenses such as office rental, utilities and travel costs.

According to the DRHP, it also saved money by negotiating rate reductions between supplier contracts to optimize its technology costs, insurance spending and other variable costs.

Threats

OYO expects the coronavirus crisis and associated restrictions to continue to hurt its business financially and operationally in the long term. The extent to which COVID will further harm its business is “uncertain and cannot be predicted,” he said.

Negative publicity could damage the company’s brand and hinder its ability to compete effectively. Maintaining and improving its brand and reputation are essential to its growth, according to the DRHP.

Here is an overview of the main factors affecting the activities of OYO, as mentioned in the draft documents:

GBV is the gross value of the reservation

Here is an overview of OYO Rooms finances:

EF	Loss	Total income
2021	3 944	4,157
2020	13 123	13,413
2019	2 365	6,519

Figures in crore rupees

OYO’s total income in FY21 fell 69% to Rs 4,157 crore due to the fallout from the pandemic.

(Edited by : Sandeep Singh)

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