Oyo Goes For Full Stock Market Listing – in India Looking To Value The Business at US$10bn+

Main Photo: An Oyo branded hotel in China

Date: October 2021

Name: Oyo

Location: India HQ – global in it’s aspirations

Number of Keys:

Owner: Ritesh Agarwal (33%), backed by Softbank (47%)

Indian accommodation disruptor OYO is lining up to list on the Indian stock market, in a move that will value the business at USD10bn to USD12bn.  

The company, which has been battered by the pandemic, has spent recent months signing new big name partners, and launching additional funding offers, in a bid to present itself less as a disruptor, and more of a responsible, investible business.  

The IPO will aim to raise USD1.1bn – or INR8,430crore. Of this total, INR7,000crore will be raised by issuing new shares, while up to INR1,430crore of shares will be offered by existing investors. Existing investors selling down will include Softbank, A1 Holdings Inc, China Lodging Holdings (HK) Limited and Global IVY Ventures LLP.  

There may also be an additional placement of shares ahead of the listing, raising a further INR1,400crore. Funds are intended to be used to help reduce borrowings, which stood in July 2021 at a total of INR4,890crore. 

The prospectus reveals the business was launched in 2012, and as of March 2021 claims to have more than 157,000 listings in 35 country markets. Of these, the vast majority are in India, Malaysia, Indonesia and Europe. The company says it gets an average 20-35% of gross booking value, and also offers a fixed fee listing-only service. Its app has been downloaded 100m times, while a loyalty scheme has 9.2m subscribers.   

The company has moved away from earlier strategies of promising minimum revenue guarantees to hotels, or investing in property upgrades. Currently, backer Softbank holds 47% of the company, while founder Ritesh Agarwal and vehicles he controls have 33%.   

In common with other tech-led startups in the accommodation space, the listing is taking place while the company continues to lose month. In terms of financial performance, the prospectus does not give a clear view of when it might first make a profit. Losses for the year ending in 2020 were INR13,122crore and in the year to 2021 reduced to INR3,944crore. 

The group has spent the last year recovering its position after sustaining a substantial revenue drop during the pandemic. After dropping out of college, entrepreneur Ritesh Agarwal launched Oravel, a listing platform for budget accommodation. With the backing of a Thiel Fellowship to encourage entrepreneurs, he was able to relaunch the idea as OYO. With USD25m of additional funding, in 2015 the company launched its direct booking app.  

OYO started its business in India, promising to help unbranded, and unsophisticated hoteliers with an offering that included training in delivering basic levels of service, adding the OYO brand to their premises – and delivering greater occupancy and revenues. The model was rolled out with tactics that included promises and guarantees around those improved revenues.  

In 2016, the business opened in Malaysia, and the following year added Nepal. Further funding enabled it to launch in UK, UAE, Dubai, China, Singapore and Indonesia during 2018.  

Ahead of the pandemic, in May 2019 OYO completed the €360m acquisition of @Leisure Group in Europe, creating a base for OYO Vacation Homes, as the division was renamed subsequently. The deal brought OYO established holiday home rental businesses Belvilla, DanCenter, and Danland plus a subscription-based management service, Traum-Ferienwohnungen. The deal was followed by a more modest addition in early 2020, acquiring TUI’s home rental business. The vacation homes business claims to have listings of more than 140,000 homes, in 70 countries.  

In early 2021, the division announced a new investor and board member, Martin Soderstrom of DIG Investments. The alternative investor has had nothing to say publicly about his involvement, and there have been no updates about the business itself during 2021.  

The group has also been looking to tap mainstream funding routes, to raise cash, In May, OYO raised USD660m in a TLB capital raise which saw strong demand for the paper, the offer was 1.7 times oversubscribed. The fundraising was led by JP Morgan, Deutsche Bank, and Mizuho Securities, and was given a B and B3 ranking by Fitch and Moody’s – the first Indian startup to achieve such an assessment. The company said funds would be used to pay down past debts, strengthen the balance sheet, and invest in product technology. 

More recently, OYO has agreed a strategic alliance with Microsoft, which has also involved the software giant making an equity investment in OYO. The pair aim “to co-develop next-gen travel and hospitality products and technologies”, with Microsoft’s Azure platform being used at the core of OYO operations. OYO COO & Chief Product Officer Abhinav Sinha said OYO uses machine learning and AI to optimise pricing in real time, promising a significant uplift in revenues for newcomers to the network. He said guests will also benefit: “This alliance will mean more personalisation, better choices, differentiated experiences and an improved guest experience.” Developments could also include integrating self check-in, smart locks and virtual assistance. 

In September, OYO carried out a stock split to expand its share capital, a move regularly made ahead of IPOs. As a result, the stock price can now be set at a level more accessible for new investors.  

Hotel Analyst Perspective, by Chris Bown: So the pandemic has substantially clipped the wings of the mainstream OYO business, leading it to retreat from several international markets. Still loss making as a group, it could – if more focused – use funds from its IPO to expand once more, in a more orderly way.  

As a typical disruptor, OYO has moved fast and broken things along the way, and there are a number of legal disputes listed in the prospectus that are testament to this. But the big question is, has OYO really shown the world of hotels that it has something to offer markets around the globe? In India, it seems to have traction; and in some other developing markets, there may be a role. But anecdotally, in more mature markets such as the UK, repainting the exterior of tired guest houses wasn’t going to deliver a new experience for punters who can get that same experience from Booking.com (usually by focusing on price, and ignoring the reviews).  

So right now, OYO feels like two, relatively separate, businesses. A hotel branding and marketing division, based out of India; and a European vacation rental business.  

The one part of the business that must have been in profit, over the last year, is the European home rental business. Everyone in that sector has benefited from pandemic-led staycations. But we’ve heard nothing about this part of the business, since DIG Investment jumped onto the board in January.  

Additional comment by Andrew Sangster also of Hotel Analyst: One of the key strengths OYO lists in its IPO document is its “fully integrated toolkit”, in other words, it is a one-stop shop that does the job of a half dozen solution providers. 

OYO lists six areas: online travel aggregators (Booking or Expedia); revenue management systems (Duetto or IDeaS); channel managers (RateGain or SiteMinder); payment gateways (Stripe or Alipay); reputation management platforms (GuestRevu or ReviewPro); and hotel management systems (Oracle or Infor). 

The prospectus says: “OYO is a leading new-age, technology platform empowering the large yet highly fragmented hospitality eco-system”. It adds that it is “uniquely positioned, leading, full-stack player in high growth and large markets”. 

There is, however, a risk that OYO is a perceived as a Jack of all trades but master of none. It is absurd, for example, for it to suggest it is competitive with either Expedia or Booking as an aggregator. Indeed, there are plenty of OYO properties listed on both platforms. 

In addition to this delivery problem, OYO is also expensive. It brags in its prospectus about taking 20% to 35% of the gross booking value. Even when charge backs and similar are factored in, OYO would top the fees paid by owners to global brand majors under franchise deals and the fees exceed what OTAs charge. 

It is probably true that buying in separately all the offerings of OYO would cost more but the bundled pricing strategy presents a big initial sales hurdle. And if there are a significant number of the offers that an owner does not require, or believes they do not require, then the hurdle looks insurmountable. 

The main geographies being focused on are India, South East Asia and Europe. OYO claims to be number one in SEA and India and number two in Europe “among full stack short-stay accommodation players”.  

The terminology used throughout the prospectus is fascinating. Rather than owners, OYO refers to storefronts run by patrons. Guests are consumers. The pitch is that there are 54 million short-stay storefronts globally, including both hotels and homes.  

Most homes – furnished apartments, houses or professionally managed flats – are independent and unorganised. Among hotels, OYO reckons just 12% are what it describes as organised (presumably branded). 

It is the “unorganised” that OYO is focused on. Its offer is an easy way for them to get online and have access to other technology. As an example, in India, OYO says 92% of storefronts (properties) are unorganised. The overall online booking share is 30% but among unorganised storefronts it is just 11%. 

OYO plays in a market that most hotel franchisers are not interested in. Indeed, in Europe, the focus seems to be on homes more than hotels. The threat from OYO is geared more towards the likes of Airbnb and the private rental offers from Booking and Expedia’s VRBO. 

A cynic might observe that OYO’s vision is one of technological serfdom. Patrons work in their business, handing over a significant chunk of the topline, to their lord and master. It wants to extend its “full stack technology solution” into other industries, mentioning weddings and event management as examples. 

The fundamental challenge is for OYO’s tech to drive sufficient sales volume at each storefront. Most of the so-called unorganised properties are subscale and are being gradually squeezed from the market.  

It is conceivable that for some of these businesses, the OYO tech will enable them to generate a sufficiently high uplift in sales to enable them to be more profitable, paying OYO’s fees and generating sufficient profit to enable reinvestment to keep the businesses competitive with larger rivals. The critical question is: what proportion? 

If technology makes these smaller, usually under capitalised, businesses more efficient, then surely it will also enable the bigger, better capitalised businesses to enjoy the same benefits and continue to outpace the smaller players. The gap remains just as wide and the pressure to repurpose the real estate in smaller units to more profitable use remains just as strong. 

There are many lifestyle reasons for people continuing to run short-term accommodation long after it makes economic sense but sticking a big red OYO sign above the door negates quite a few of them. 

OYO needs to show it offers the same kind of money-making possibilities as the best fast-food franchises. But the Federation of Hotel and Restaurant Associations of India condemned the OYO prospectus claiming that it did not reveal the legal actions that many Indian hoteliers are involved with against the company. It called out OYO’s “belligerent business practices”. 

This might just be more smoke than fire but OYO needs to show it has a bedrock of happy owners – sorry, patrons – to succeed. 

Back in November 2019, India’s Economic Times reported: “More than 500 hotels in 100 cities are said to have snapped ties with SoftBank-backed hospitality chain Oyo since April as the relationship has soured after various disputes. Oyo has denied this and said the numbers cited were “incorrect” and “inflated”.

“Many state and city associations have reported instances of large-scale termination of contracts with Oyo as also protests held by small local hotels against non-payment and other problems faced by them,” said Pradeep Shetty, honorary secretary of the FHRAI – Federation of Hotel & Restaurant Associations of India. Click here for the full piece.

THPT Comment: We love Hotel Analyst’s in depth thought on many items that appear in the posts we make at THPT….once again no argument from us on the viewpoint…in fact we have been OYO detractors in that in such a short few years, Ritesh and his senior management team have attempted far too fast a growth record to make sense…Marriott, Hilton, Accor and the other major mainstream players didn’t get to the front row just like that…a fair few twists and turns along the way…and management weren’t just parachuted in.

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