IPO-bound OYO defies pandemic, set to meet investors' expectations
As the pandemic ravaged several industries, especially the tourism and travel sector, a few enterprises used the situation to rebuild from scratch, at the cost of making certain painful short-term decisions. IPO-bound Oravel Stays Ltd, or OYO, is one such example that revamped its operations and business strategies to not only stay afloat but also emerge stronger.
New Delhi, Dec 20 As the pandemic ravaged several industries, especially the tourism and travel sector, a few enterprises used the situation to rebuild from scratch, at the cost of making certain painful short-term decisions. IPO-bound Oravel Stays Ltd, or OYO, is one such example that revamped its operations and business strategies to not only stay afloat but also emerge stronger.
OYO's exponential growth nearly came to a halt due to the pandemic. However, it used the downtime to rebuild itself, or 'fix nets like fishermen do, while waiting for storm to pass' as described by its founder and Group CEO, Ritesh Agarwal.
The company changed its cash-burning business model, fixed its unit economies, doubled down on technology while focusing on becoming lean and agile.
As OYO gets prepared to hit the bourses, a deeper analysis of its Draft Red Herring Prospectus (DRHP) reveals interesting business metrics.
Among all the moves, OYO decided to shift focus to its core markets including India, South East Asia and Europe Vacation Homes and rationalised non-core geographies, leading to improving EBITDA (earnings before interest, taxes, depreciation, and amortisation) by an impressive 79 per cent from FY20 to FY21.
It revamped patron (hotel and home operators) policies and engagement, leading to 77 per cent rise in patron satisfaction levels (on-quarter) in the fourth quarter (Q4) of 2021, by query resolution through technology, quicker and simpler account reconciliation and twice a week payouts.
The seven-year-old startup added more that 25,000 hotels in 2019 (as per its DRHP) and the gross booking value per hotel is likely to improve from Rs 25 lakh in FY2021 to the pre-Covid level of Rs 50 lakh per hotel per annum.
The pandemic also helped the company streamline strategic and shared services functions -- such as revenue management, supply, human resources, legal and finance -- to create efficiencies and reduce costs, moving away from providing minimum guarantees to its hotel partners.
As a result, OYO's adjusted gross profit margin improved from 9.7 per cent in FY2020 to 33.2 per cent in FY2021. Contribution Margin, as a percentage of its Gross Booking Value, also improved from 5.1 per cent in FY2020 to 18.4 per cent in FY2021.
Till 2019-end, OYO's business model included fixed payout commitments or minimum guarantees to about 15 per cent of its patrons. Essentially, it was required to provide fixed payouts to such property owners even if there wasn't any commensurate business activity.
This model, although successful at the time of entry into new micro-markets, geographies and segments, led to structural issues such as cash burn even during a slump season.
It also resulted in misalignment of interest in the growing revenue of the hotel, further leading to disputes with patrons.
This eventually led to abolition of the minimum guarantee model.
Additionally, any investment, capital expenditure, employee costs, or other expenses relating to the operation of hotels and homes are now largely borne by the patrons.
This has drastically reduced the cash burn at OYO and made it more capital efficient.
OYO utilised the peak pandemic time to introduce equal patron policy, organise surveys and virtual town hall events to improve trust with its patrons.
This resulted in significant improvement in satisfaction levels and helped in conserving cash with trade payable days, reducing to becoming 105 days in FY2021.
As per the DRHP, patrons who joined the OYO platform, has seen a revenue jump of 1.5-2.4 times by a period of three months.
OYO also utilised its core value proposition and customer-centric model to assuage customers reeling from the impact of the pandemic.
For instance, the timely creation of the Covid-19 specific feature -- 'VaccineAid' -- was adopted by nearly a third of its hotels and homes. Another feature, 'OYO Discover', witnessed a strong interest from the value hunter customers.
Under 'OYO Care', it offered several properties to hospitals and the general public as quarantine centres while hospitals ran out of space.
The hospitality major has also doubled down on technology. What started out as a single app has now grown into an entire platform, empowering the fragmented global hospitality ecosystem.
Technology now powers all ends of its business -- from clients' booking of hotel rooms, onboarding of patrons, daily business and revenue management to resolving customer queries, etc.
However, OYO's reduced EBITDA losses did come at a cost.
In 2020, the company laid off hundreds of employees during its restructuring exercises, as roles became redundant due to the company's focus on driving tech-enabled synergy, enhanced efficiency and removing duplication of efforts.
In an internal email to employees,OYO Founder Agarwal had said: "The strategic objectives of the company are: sustainable growth, operational and customer excellence, profitability, and training and governance."
However, it didn't slow down efforts in hiring tech talent across the country.
The use of innovative technology solutions has helped decrease the costs and drive operating leverage, resulting in a reduction of other expenses from Rs 48,277.32 million in FY20 to Rs 14,695.00 million in FY2021.
With the pandemic bringing travel to a halt, OYO's leadership shifted focus to core growth markets.
While the company retained its total storefront number to over 157,000 across 35 countries on its platform, it chose to focus on operations in India, Indonesia, Malaysia and Europe which now have more than 90 per cent of these storefronts.
OYO has clearly defined the US and China as its 'Future Growth Markets' and will continue to keep a birds' eye view on these regions, given their huge total addressable market (TAM) opportunity.
A comparison between the first lot of Indian IPO-bound tech startups (including Zomato) showed that OYO had the highest revenues among its peers during FY20, while Paytm came in a distant second.
A closer look at revenues for FY20 showed that OYO's revenue was greater than that earned by Nykaa, Paytm, Zomato, PolicyBazaar and MobiKwik combined.
With around 100 million downloads (as of March 2021), OYO is currently the third most downloaded travel mobile app globally. It also has a sticky user base with 77.8 per cent and new organic demand across hotels globally.
In 2022, the rising Omicron variant in India and globally may pose another challenge for the travel and hospitality players like OYO.
If Omicron does not result in mass lockdowns, OYO may be in a position to achieve the startups' holy grail of profitability by the next financial year and satisfy the demanding expectations of the public market investors.
OYO also needs to be watchful that the growth doesn't come at the expense of margin contraction.
Overall, in a world where loss-making startups are getting listed while opting for scale over profit in the short-term, OYO's focus on strengthening its strong unit economics can definitely feature on the pro-list of potential investors.