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OYO warns of delay in turning profitable; IPO-bound startup's key strengths & weaknesses

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OYO's filing of preliminary papers comes close on the heels of Zomato's public offer in July, which saw strong interest from investors.

OYO warns of delay in turning profitable; IPO-bound startup's key strengths & weaknesses
Oravel Stays -- the parent company of hotel aggregator OYO -- on Friday filed preliminary papers to float an initial public offer (IPO) to raise Rs 8,430 crore. OYO is the first hospitality company in India to seek a market listing since 2019. The proposed IPO will comprise fresh issuance of shares worth Rs 7,000 crore and an offer for sale (OFS) of shares worth Rs 1,430 crore. Its promoters include Founder and CEO Ritesh Agarwal and Japan-based conglomerate SoftBank.
OYO's move comes close on the heels of Zomato's public offer in July, which saw strong interest from investors.
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Here are some of OYO's key strengths and weaknesses as mentioned in its draft red herring prospectus (DRHP) filed with market regulator SEBI:
Strengths
  • Asset-light business model; storefronts listed on OYO platform are not owned by the company
  • Revenue streams: Accommodation, booking commission, value added services, rental income
  • Lean cost structure
  • Ability to be capital efficient
  • Constant improvement in patron- and customer-facing tech offerings keeps its platform cost-effective
  • Ability to scale business at minimal marginal cost
  • Strong growth in number of storefronts pre-COVID
  • Significant share of demand through D2C channels; share of direct demand in India (measured as a percentage of booked nights through D2C) stood at 90.9 percent in FY20 and 94.4 percent in FY21
  • As of March 31, 2021, 99.9 percent of OYO storefronts did not have minimum guarantee or fixed payout commitments from the company
  • Weaknesses
    OYO has incurred net losses every year since its incorporation, and its "ability to achieve profitability may be delayed". The company said its "profitability depends on our ability to maintain a cost-effective platform, primarily driven by effective management of employee benefits and other expenses".
    It may not continue to grow on pace with historical rates, and may face difficulties in executing its expansion plans and implementing growth strategies, according to the DRHP.
    The company has a debt that requires interest and principal payments. As of July 31, 2021, its total consolidated outstanding borrowing stood at Rs 4,890 crore.
    The company's limited operating history makes it difficult to evaluate its future prospects as well as the risks it may encounter amid the uncertain global economic environment.
    OYO relies on third-party distributors, travel management companies and distribution systems, which can affect its margins and profitability. "We may also lose access to certain distribution channels if such third-party distributors view us as a competitor and opt to remove us from their platform," it said.
    OYO's business may take a hit in case of:
    • Failure to retain existing customers or to acquire new customers in a cost-effective way
    • Damage to reputation on account of customer or third-party action that is criminal, violent, inappropriate or dangerous in nature, or fraudulent activity
    • Adverse outcome in legal disputes (OYO is in a legal dispute with Zostel after failure of their merger talks; it also has a pending litigation against itself, some of its units and a promoter)
    • Regulation in business or activity, or penalty by OYO fair trade regulator CCI
    • Travel industry challenges such as extreme weather, natural disasters, pandemics, changes to trade or immigration policies, and slowdowns
      Opportunities
      OYO's expenses reduced by 68.6 percent YoY to Rs 6,936 crore in FY21 as many of its employees switched to a work-from-home arrangement due to the pandemic. This has enabled OYO to rationalise various expenses such as office lease, utilities and travel costs.
      It also saved money by negotiating reductions in rates across vendor contracts to optimise its tech costs, insurance expense and other variable costs, according to the DRHP.
      Threats
      OYO expects the coronavirus crisis and related restrictions to continue to hurt its business financially and operationally in the long term. The extent to which COVID will further hurt its business is "uncertain and cannot be predicted", it said.
      Negative publicity could damage the company's brand and harm its ability to compete effectively. Maintaining and enhancing its brand and reputation is critical to its growth, according to the DRHP.
      Here's a look at the principal factors affecting OYO's business, as mentioned in the draft papers:
      GBV is gross booking value
      Here's a look at OYO's financials:
      FYLossTotal income
      20213,9444,157
      202013,12313,413
      20192,3656,519
      Figures in crore rupees
      OYO's total income in FY21 declined 69 percent to Rs 4,157 crore due to the fallout from the pandemic.
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