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How OYO's biz strategy helped it improve its gross profit margin despite Pandemic

Over the past year, OYO has implemented a number of measures as a part of its Covid-19 response strategy, including accelerated development and adoption of technology and products to reduce operating costs

Oyo Hotels and Homes targets valuation of $9 billion IPO
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Oyo Hotels and Homes targets valuation of $9 billion IPO

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Hyderabad Global travel technology company, OYO (Oravel Stays Limited) filed its draft red herring prospectus (DRHP) for its initial public offering (IPO) of RS 8,430 cr ($1.2bn) with the Securities and Exchange Board of India (SEBI) in September this year.

Over the past year, OYO has implemented a number of measures as a part of its Covid-19 response strategy, including accelerated development and adoption of technology and products to reduce operating costs. The Company also streamlined strategic and shared services functions, such as revenue management, supply, human resources, legal and finance, from country teams to regional teams to create more efficiencies and reduce costs. As a result of various initiatives that the Company took, its Adjusted Gross Profit Margin improved from 9.7 per cent in Fiscal 2020 to 33.2 per cent in Fiscal 2021 along with 79 per cent reduction in EBITDA losses from FY20 to FY21 despite the pandemic.

OYO was the third most downloaded travel app globally in 2020. With over 9.2 million subscribers just in India, OYO Wizard, is the largest loyalty program among online hotel or food brands in India.

OYO is also able to ensure higher repeat rates of its customers at around 68 per cent, in comparison to various other travel direct-to-consumer D2C players in India as well as globally. This is driven by OYO's wide choice of storefronts, affordability, strength in D2C channel offering and the trust it has been able to generate in the customers' mind over time, amongst other factors.

OYO aims to increase its Patrons' revenue generation potential by providing them with access to a large Customer base through its D2C direct channels, coupled with its suite of innovative products. In India, Indonesia and Malaysia, as per Redseer study, OYO storefronts that joined the platform in 2018 and 2019, performed better than independent hotels of similar sizes in 2019 on average. After 12 weeks of joining the OYO platform, OYO hotel storefronts generated 1.5 to 1.9 times more revenue on average compared with the average revenue estimated at an independent hotel of a similar size. In Europe, OYO home storefronts earned an average of 2.4 times more revenue compared with the average revenue estimated at an independently managed home in 2019.

In an attempt to mend relationships and build new ones, OYO utilized the peak pandemic time to introduce equal patron policy, organize surveys and virtual town hall events to improve trust with its patrons. This helped in conserving cash with trade payable days reducing to becoming 105 days in FY2021. It also led to ~77 per cent rise in patron satisfaction levels q-on-q in Q4 '21, by query resolution thru technology, quicker and simpler account reconciliation, and twice a week payouts.

The company now has an asset light business model and a lean cost structure. As of March 31, 2021, 99.9 per cent of the company's storefronts did not have contracts with minimum guarantees or fixed payout commitments from the company, with any investments, capital expenditure, storefront employee costs borne largely by Patrons. This enables the company to be capital-efficient and scale its business with minimal marginal costs.

With over 70 per cent of OYOpreneurs and most of the core engineering team based out of India, OYO is building its best in class technologies and products from India for the world.

OYO has proposed/plans to use the net proceeds from the fresh shares Issue towards funding the prepayment or repayment, in part, of certain borrowings availed by certain Subsidiaries; (ii) Funding organic and inorganic growth initiatives; and (iii) General corporate purposes.

Investors including Ritesh Agarwal, Lightspeed Venture Partners, Sequoia Capital, Star Virtue Investment Limited (Didi), Greenoaks Capital, AirBnB, HT Media and Microsoft are not diluting their shareholding. The offer for sale comprises of aggregate shares from a small part of SVF India (Softbank), A1 Holdings Inc. (Grab), China Lodging, and Global IVY Ventures LLP.

The Global Co-ordinators and Book Running Lead Managers to the offer are Kotak Mahindra Capital Company Limited, J.P. Morgan India Private Limited and Citigroup Global Markets India Private Limited. The Book Running Lead Managers to the offer are ICICI Securities Limited, Nomura Financial Advisory and Securities (India) Private Limited, JM Financial Limited and Deutsche Equities India Private Limited.

Badal Kumar
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