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Is OYO's IPO Hollow?

Updated: Feb 20

In this month’s Look another Growing Tech Startup filed for an IPO!, we have Oyo Rooms, the online aggregator of Hotel Rooms, floating its prospectus to raise ₹ 8,430 Crore ($1.1 Bil) from the public -- thanks to ATH (all time high) capital markets, strong conviction among investors for startup funding and a COVID struck year which has helped such tech companies deploy their resources better (more on it later).

Here are some of the yellow (beware) flags that we see in Oyo’s IPO Run-


1. COVID's Curse

While COVID-19 passed on the baton to new age technology companies to serve customers better through digital solutions, the main business of Oyo- travel and tourism, was hit to the core. Not only did it shrink the size of its business, but it also led to a massive downsizing by the company. Revenue dropped by 70% from 13,168 Cr to 3,961 Cr. Although it led to reduction of yearly net losses from 13,122 Cr to Rs 3,944 Cr, we see it's clearly because of reduction in business.

Did you notice? For every Rs 100 earned as revenue, it is making a loss of Rs 99.5! Read that again.

The only silver lining to its business is that it has improved its adjusted gross profit margin from 10% in FY20 to 33% in FY21. How, you ask? By rationalizing its global portfolio for better margins and by executing contracts with hotel partners requiring minimum guarantee commitment a.k.a. fixed payouts.


2. BUSINESS DOWNSIZING

Even before the pandemic had wreaked havoc on the travel and tourism industry, Oyo had started trimming its manpower and churning out its unprofitable ventures. Covid-19 further induced a wave of massive employee layoffs and downsizing of business- leading to loss of expertise, customer relationship, employee morale, and business reputation. To portray the impact better, we considered 3 important metrics of the company: Number of hotel partners, number of employees and the valuation of the company.

Assuming that all of these 3 factors were at the same level in July-2018, we can see the Number of hotel partners skyrocket over time vis-a-vis the number of employees and the company's valuation. Oyo hit its peak during the last quarter of 2019 when it recorded 44,000 hotel partners, 12 Lakh rooms inventory and penetration to 80 countries. The company boasted of a total staff strength of 30,000 people and a decacorn valuation of $10 Bil. At this point, Oyo was considered as world's 2nd largest hotel chain by rooms inventory.

As per Oyo's prospectus, now Oyo has a staff strength of only 5,130 people globally and close to 18,000 hotel partners. It's valuation also dropped from $10 Bil to $9 Bil with its latest fund infusion from Microsoft in Aug'21.

Food for thought: The last time the company's operations were at this level, its valuation ranged between $5-$7 Bil.


3. DEBT CLAWS

Even though the company claims that it has an asset-light business model, it has a Rs 4,891 Cr sized debt-chip on its shoulder. The company has a history of losses funded by burning cash. While investors were busy picking pre-IPO equity in startups, OYO on the other hand had to raise $660m (approx. Rs 4800 Cr) in debt in Jul’21. We believe that investor sentiment was risk-averse for Oyo, and it had to grab whatever was on the table to keep their ship from sinking. That is some major yellow flag.

Not only that. Oyo has earmarked Rs. 2,440 Cr from IPO proceeds to repay its Debt. Whereas existing investors are taking partial exit and Rs. 1,400 Cr will go to them! Which means almost half of the Rs. 9,000 Cr of the IPO proceeds will not be invested in operations at all. Another yellow flag.

EIH Ltd.

Oberoi Hotels

IHC Ltd.

Taj Hotels

Oravel Stay Ltd.

Oyo Rooms

Debt to Equity Ratio

0.1

0.73

0.31


4. MANAGEMENT ISSUES

The company, its subsidiaries and its directors are involved in 60+ litigations which can have a potential outflow of ₹ 350+ Cr, along with penalties under unfortunate circumstances. Approximately 14-16 litigations are against CEO Ritesh Agarwal himself! That’s some controversial method of doing business we’d say!

Not only that, but there are also a few parties trying to block Oyo’s IPO plan. Zostel has sought to block it on account of a failed promise of merger by Oyo, which also entailed it receiving a 7% equity stake in Oyo. While an arbitral tribunal has ruled in favour of Zostel, Oyo has sought a stay order from Delhi High Court.

Even the Federation of Hotel & Restaurant Associations of India (FHRAI) has written to SEBI seeking suspension of the IPO on account of anti-competitive measures used. Earlier, Oyo has attempted to avoid a large number of contractual payment obligations towards the members of the FHRAI by claiming force majeure on account of Covid-19.


5. peer analysis

We have crunched some numbers for you to find the Market Capitalization/Revenue multiple for Oyo. Since the post IPO valuation rumor at Dalal street is of $12 - $15 Bn for Oyo, at $13.5 Bn (average of the two), we found the ratio to be slightly higher than its Indian peers, yet lower than AirBnB (international peer):


Market Cap by Revenue Multiple of OYO and its peers:

Median

Slightly High

Extremely Ambitious

EIH Ltd.

Oberoi Hotels

20

IHC Ltd.

Taj Hotels

21

Chalet Hotels

17

Oravel Stay Ltd.

Oyo Rooms (at $13.5 Billion valuation)

26

Air BnB

(International Peer)

32

We are often amazed by the frequency of changing business circumstances and tech deployments to serve businesses and customers better. Sure, we are proud of our home-grown entrepreneur, leveraging technology at the age of 21 to achieve a massive international presence and reputation - but we are also mindful of a business beaten down by poor margins, high levels of debt and aggrieved customer service. 2021 saw many unicorns and startup IPOs, most of them still making losses, some barely achieving positive unit economics, while only a few achieving profitability. Yet, we are still bullish on them as we see a light coming from the end of the tunnel. For Oyo, this tunnel might be much longer and the light even farther away. We are not sure whether the public would have the appetite to wait that long but hey, it's another tech company going public and we're super excited anyway. Godspeed Oyo!

With all the yellow flags it comes with, do you think it is listing at a reasonable price? Let us know in the comments below.

 

This article is a part of October'21 edition of our Startup Newsletter. Here's the complete publication:


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