Fitch revises outlook on OYO’s long-term issuer ratings to ‘positive’ from ‘stable’

Fitch has also affirmed the rating on the USD660 million senior secured term loan facility due 2026, issued by OYO’s fully owned subsidiary, Oravel Stays Singapore Pte Limited, at ‘B-‘. The Recovery Rating is ‘RR4’. The term loan facility is unconditionally and irrevocably guaranteed by OYO and certain subsidiaries within the group. The guarantee covers 121% of the outstanding principal or up to $800 million, and we consider the guarantee full and worthy.

The Outlook revision reflects our view that OYO is on track to generate positive EBITDA and cash flow from operations (CFO) sustainably. This follows positive EBITDA in every quarter of the financial year ended March 2023 (FY23), which is the first year of profits since OYO’s incorporation in 2012. We expect significant growth in its EBITDA in FY24, led by an ongoing demand recovery in the travel and tourism industry, the company’s stable gross margins, and a reduction in operating costs.

The business profile’s strengths are mitigated by the sector’s high competitive intensity and demand cyclicality. The rating also reflects OYO’s adequate liquidity.

KEY RATING DRIVERS

Sustained Positive EBITDA Likely: Fitch expect OYO to deliver positive EBITDA and CFO in FY24, ahead of Fitch’s earlier forecast, led by a greater reduction in operating costs than we expected. This is notwithstanding weaker-than-expected growth in gross booking values (GBV) in FY23, as rising GBV per storefront amid improving occupancy levels and an increased number of homes storefronts was offset by a fall in the number of OYO’s hotel storefront partners.

We expect the ongoing demand recovery in the industry to drive revenue growth of over 20%. We also expect OYO’s operating leverage to benefit from a sustained reduction in costs and drive high single-digit EBITDA margins in FY24.

Demand Recovery to Continue: Fitch expects travel and tourism industry conditions to continue to improve in OYO’s key end markets in FY24, following a strong recovery in FY23 from pent-up demand for leisure travel after the easing of Covid-19 restrictions. The Indian hotel industry saw improving occupancy rates with a 73% increase in the number of air-traffic passengers in FY23. Foreign tourist arrivals also increased to 6.2 million in 2022 from 1.5 million in 2021, albeit still well below pre-pandemic levels.

OYO increased the number of storefronts and GBV per storefront in its European homes business in FY23 as leisure travel recovered, despite the cost-of-living crisis and reduced disposable incomes in the region. We expect this recovery to continue over the upcoming summer holiday and be further supported by a recovery in business travel, which initially picked up at a slower pace.

Improved Cost Structure: Fitch expect the cost-reduction measures OYO undertook in recent years to support its improving profitability in FY24. We believe such reductions will not affect growth, as it has increased its business development staff to prioritise storefront additions. OYO significantly reduced its operating costs in recent years through exits from several countries, reducing or reshoring employees from global locations to lower-cost locations such as India, tech-led initiatives such as tech-enabled onboarding of new storefronts and provision of customer services, and other cost-optimisation efforts.

Adequate Liquidity: We estimate that OYO’s unrestricted cash at FYE23 is sufficient to fund its Fitch-estimated free cash flow deficit of around USD7 million and annual debt repayment of around USD6 million in FY24. However, greater cash burn than we expect could weaken OYO’s liquidity. Any potential default of the debt outstanding at one of OYO’s shareholding entities owned by the founder may be a reputational risk and affect OYO’s operations, and we treat this as an event risk.

IPO Delayed: OYO filed a draft prospectus in September 2021 for a stock listing in India, with plans to raise INR84.3 billion, of which USD330 million was planned for pre-payment of debt. OYO also filed two addendums to the prospectus in September and November 2022, updating investors about its improving business performance during 1HFY23. India’s stock market regulator, the Securities and Exchange Board of India, has since asked OYO to add more information to the prospectus, including on business risk factors. Fitch does not factor any equity issuance into its base case.

Intact Business Model: OYO operates in the low- to mid-tier market with price-sensitive travellers and property owners. The benefits to its business profile from geographical diversification are offset by its loss-making operations at many locations. Entry and competition barriers are moderate, despite OYO’s solid relationships with property owners and integration of services, due to competitive industry conditions. OYO has a single-digit market share in its core markets in terms of marketable rooms in the highly fragmented hospitality industry, giving it a large addressable market.

Rating on Standalone Basis: Fitch rates OYO on a standalone basis. There is no parent-subsidiary linkage between OYO and Softbank Group Corp, which owns 45% of the company through its subsidiary, SVF India Holdings (Cayman) Ltd, on a fully diluted basis. Softbank does not exercise control over the company. SoftBank supported OYO with equity injections and by extending a term loan in March 2021 (which has since been repaid), but we do not factor in future exceptional liquidity support from SoftBank in our ratings, given OYO’s small size compared with SoftBank’s overall investment portfolio.

Updated: 31 May 2023, 03:31 PM IST