SoftBank reduces Oyo's valuation to $2.7 billion

Over the last 3 years, Oyo Hotels has seen a sharp downsizing of its valuations. Back in 2019, Oyo Hotels was valued at around $10 billion. However, over the years, as the pandemic hit contact sensitive industries like hotels, valuations of Oyo Hotels took a deep cut. One of its largest investors, Softbank of Japan, had already downsized the valuations from $10 billion to $3.4 billion. In the latest round of value downsizing, Softbank has cut the valuations of Oyo Hotels  by another 20% to $2.7 billion. Effectively, since 2019, the valuation of Oyo Hotels stands downsized by a full 73%. How much it can recover remains to be seen.

For now, this cut in valuation could come as an embarrassment for Oyo Hotels which is looking at an IPO in the near future. In fact, Oyo Hotels was targeting an IPO valuation of closer to $5 billion, but with the latest valuation cut by Softbank of Japan, the valuation of $5 billion in the IPO almost looks impractical. Oyo has refused to accept this valuation cut and feels that this move does not consider the fact that there has been a recovery in valuations of hotel stocks. However, that is not likely to cut much ice with Masayoshi Son of Softbank, after the private equity investor wrote off billion in start-up investments.

For now, Oyo Hotels, formerly known as Oravel Stays Ltd, has refused to accept this valuation cut. Softbank has not confirmed the news of the valuation cut and has called such reports purely speculative. It may be recollected that Oyo Hotels had filed a fresh round of financial documents with SEBI last week for its proposed IPO, incorporating the latest financial updates. It remains to be seen how and whether the latest valuation downgrade by Softbank would in any ways impact the timing and valuation of Oyo Hotels.

The original plan was quite aggressive for Oyo Hotels. It had originally targeted valuations of $9 billion for Oyo Hotels which was later cut to $5 billion. Now, even that looks fairly impractical. Oyo Hotels had plans to raise up to $1 billion or Rs8,100 crore through the IPO. The IPO was supposed to be entirely by way of new shares. Oyo remains confident that its valuation should not have been marked down considering that its business performance was recovering and the conditions were getting ripe for hotel stocks. However, Oyo Hotels may have some reasons to be optimistic about a better valuation in the IPO. Here is why!

If one were to look at the latest filings of Oyo Hotels, it shows two positive trends for the fiscal year ended March 2022. For instance, For FY22, the net loss at Rs1,890 crore was almost half of the loss reported in the previous financial year FY21. Sales have also seen a rebound as more people are now travelling confidently and even checking into hotels without demanding huge discounts. Masayoshi Son has long been a supporter of Ritesh Agarwal’s business venture as he tried to create the Indian equivalent of AIRBNB. While Oyo Hotels did meet with success in India, the pandemic did huge damage to its trajectory.

In a sense, Ritesh Agarwal is right that every Softbank downgrade need not concern the Indian company too. For instance, SoftBank estimates the value of its holdings each quarter since it is invested in hundreds of start-ups across the world. Like Berkshire Hathaway, even Softbank books the changes as a profit or loss on its income statement. In the recent quarter it had written off $23.4 billion due to plunging valuations and currency losses. The real challenge for Oyo Hotels would be explaining why it can ignore Softbank action.