Oyo Hotels angles for an IPO upgrade

An employee sits next to the logo of OYO, India’s largest and most dynamic hotel chain, at the front desk of a hotel in New Delhi, India on September 25, 2018. REUTERS / Anushree Fadnavis

MUMBAI, October 4 (Reuters Breakingviews) – A budget accommodation group is targeting high-end accommodation in the public market. Income of hotels and houses in Oyo in India collapsed 69% last year, forcing the company to scale back its dizzying global expansion plans and restructure its business model. An initial public knowledge offering of $ 11 billion would be a small improvement over its peak valuation before the pandemic and would imply great confidence in young founder Ritesh Agarwal and a rebound in travel.

Oyo, backed by the SoftBank Vision Fund, has exclusive relationships with hoteliers in more than 35 countries, but focuses on India, Indonesia, Malaysia and Europe. Reservations are mainly for last minute overnight stays in urban centers. Clients range from long distance business travelers to young couples. They rely on Oyo to find decent rooms at a rate rarely offered by big brands.

Hotel owners are using Oyo technology to manage properties more efficiently and deploy tools that go beyond search and discovery, reservation and payment, and dynamic pricing. The company allows customers to order a burger in its app without calling the front desk, provides a single window to aggregate multiple booking channels, and enough data to track individual cleaning staff performance.

The asset light business no longer promises costly minimum guarantees to owners, thus saving money. As a result, Oyo’s own gross margin calculation suggests an improvement in the path to profitability. It is not known, however, how quickly or easily it will develop from here. The outlook is especially clouded by the fact that only a quarter of eligible Indians are fully vaccinated.

At 19 times sales in the year through March, Oyo’s implied valuation would be lower than the 31 times Airbnb ordered over a similar period. Its American counterpart, however, has a simpler activity and generated liquidity before the pandemic struck. The multiple also looks solid next to Vacasa, backed by TPG, a property manager who goes public in New York with just 8x sales.

Oyo will be online for a boost when foreign tourists return to Asia and again price locals at the high end of the market. Until then, it can be difficult for new investors to have peace of mind.

To follow @ugalani on Twitter

NEWS CONTEXT

– Oravel Stays in India, better known as Oyo Hotels and Homes, filed on October 1 an initial public offering to sell shares worth up to Rs 84.3 billion (1.1 billion of dollars).

– The company is approximately 33% owned by entities related to founder and chairman Ritesh Agarwal and 47% by SoftBank’s Vision Fund.

– Kotak, JPMorgan and Citi are the global coordinators and leaders of the transaction.

Editing by Jeffrey Golfarb and Katrina Hamlin

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