How will IPO-bound Oyo balance the bad news against the good one?

Last week, Oravel Stays Ltd, the company that runs the Oyo hotel chain via a mix of franchised budget properties as well as a set of premium hotels and vacation rentals internationally, surprised its naysayers by claiming it is not burning investors’ money anymore.

The company said in an addendum to its documents previously submitted for the proposed initial public offering that it posted its first operating profit. The company claimed that it recorded adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 7.26 crore for the quarter ended June 30, 2022.

This compared with an adjusted EBITDA loss of Rs 471.72 crore for the year ended March 31, 2022, and a long way from FY20 when it recorded a loss of a staggering Rs 8,277.2 crore. Though this EBITDA loss had declined to Rs 1,744.7 crore in FY21, pundits have always been apprehensive about the company’s ability to stop burning cash.

To be sure, Oyo is far from a point where it is actually making money. Last quarter, it made a net loss of Rs 413.8 crore.

Still, the company has been improving the complexion of its bottom-line from FY20, when it clocked a net loss of over Rs 13,000 crore, one of the highest losses ever recorded by an Indian startup.

Revenue, on the other hand, has fluctuated. The first year under the pandemic, which had hit the hospitality industry globally and in India, shaved off more than two-thirds of Oyo’s topline. It recovered partly last year and revenue of Rs 1,459 crore in Q1 FY23 shows it is on the right path, but far too short from the pre-pandemic highs.

Oyo has been trying to move up the value chain. It decreased the total number of properties that it terms storefronts from 168,639 as at March 31, 2022 to 168,012 as at June 30, 2022. This was due to a decline in the number of hotels, which it attributed to a strategy to improve its gross booking value (GBV) per storefront per month, including temporarily pausing operations for storefronts that were operating at subpar GBV levels and delivering poor customer experience.

The number of ‘hotels’ has declined almost a third last quarter to 12,688.

The company did try to make up for it with an increase in the number of vacation rental homes as it has been doing consistently in the recent past.

This does have implications for its future revenue picture as the average GBV per month for hotels is five to six times that for rental homes. In fact, the GBV for hotels in the first quarter after the properties rejig has shot up around 50% over that of FY22.

The bad news

The hospitality startup began as an aggregator of budget hotels and later expanded its business to foreign shores. It acquired a few premium star properties and also expanded into co-working, co-living and vacation rentals.

A year ago, when Oyo filed its documents for its IPO, it was seeking a valuation of $10 billion or more. The firm was valued around $9 billion in the last funding round in which Microsoft backed the company. That was more than the combined value of all publicly listed hotel chains in the country, including the likes of Tata Group’s India Hotels Company that runs Taj Hotels, Oberoi Hotels operator EIH, Chalet Hotels, Mahindra Holidays and Lemon Tree.

As tourists returned to holiday planning and started packing their bags, the fortunes started turning for the hotel chains. The listed hotel companies all recorded major jumps in their share prices.

But experts are now raising question marks on whether Oyo can be rerated, too.

In June, before it declared its first-quarter financials, rating firm Fitch downgraded the company’s outstanding debt. Fitch said the downgrade reflects significant uncertainty about whether Oyo can achieve material EBITDA profit in the financial year ending March 2023 (FY23).

“The company faces execution challenges given the lacklustre recovery in travel demand in the price-sensitive markets where Oyo operates. We believe that Oyo will likely achieve meaningful EBITDA profit only in FY24, relative to our previous expectations of FY23,” according to Fitch.

It added, however that its ‘Stable’ outlook for Oyo reflects comfortable liquidity as available cash is sufficient to fund the expected free cash flow deficit in the next two years, with limited refinancing risk on its long-dated debt.

But another bad news was in store.

Last week, Oyo was in the headlines for another reason. News agency Bloomberg said citing sources that SoftBank, one of the key backers of Oyo, slashed the valuation of the hotel company on its books by more than a fifth to just $2.7 billion. This could become public information over the next few weeks when the Japanese company shares its results for the current quarter.

SoftBank had previously marked down the value of Oyo to $3.4 billion, just about a third of the peak valuation it commanded a year back.

This is a big shocker for the company that is awaiting a green signal from market regulator SEBI soon that could see it going public in a few months after the key year-end holiday season.

The way tech stocks have been rerated globally over the last one year and how it impacted valuation of newly listed internet ventures on the Indian bourses doesn’t bode well for late-stage investors of Oyo even if it does keep its date with the public market.

On the other hand, prospective public market investors may see it as a good omen and would hope the company tempers its valuation expectation when it floats the IPO in the next few months.