OYO Seeks $9 Billion Valuation for its Proposed IPO

If you have ever looked for budget accommodation during your recent trips, chances are quite high that you would have used OYO Rooms. Founded in 2013 by Ritesh Agarwal as Oravel Stays Private Limited, it soon emerged as the Indianized version of Airbnb of the US. Just to draw a parallel, Airbnb stands for bed and breakfast and is intended to tap the business and leisure travellers looking for economical accommodation.

What companies like OYO have done is to leverage extensively on technology by bringing potential room offerings and room demand under a single agnostic platform. This business is largely based on the network effect. That means as the network expands on the sell side, it automatically expands on the buy side also and ends up becoming a virtuous cycle. It is this virtuous cycle that makes this business valuable over time.

OYO had turned a unicorn long back and in the year 2019 it was already valued at $10 billion. Ideally, after a gap of 2 years, the stock should have targeted a higher valuation but is now reportedly seeking just $9 billion. The reasons are not far to seek. OYO is in the room syndication business and the entire tourism and travel industry has been hit badly by the lag effect of the pandemic.

It is not just the government imposed restrictions that have led to lower revenues for OYO in this year. The business has also been hit by the inherent risks of highly contact intensive businesses like travel, aviation, leisure, tourism etc. All these segments are closely interlinked and a slowdown in any of these sectors spills over to the other related sectors too. That has pressured OYO revenues and widened losses.

Apparently, the investment bankers had pegged the valuation of OYO Rooms at $10 billion but it looks like a discount of 10 to 15% would be offered on this valuation to really attract investors. Most investors and investment bankers are wary after the experience of Paytm last year. The company had raised Rs.18,300 crore from the IPO market last year only to find the issue just about sailing through and then losing 50% value post listing.

Based on that experience and the pressure that the tourism sector has been under, the valuation is more likely to be at a discount to the 2019 valuation. As of now, the company is still awaiting SEBI clearance for the DRHP filed by OYO. That is expected shortly after which the road shows will commence. OYO IPO will be the biggest IPO since Paytm. Its subscription, valuations and listing will be closely watched by investors and investment bankers alike.

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