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Moody's assigns first-time B3 ratings to OYO, outlook stable

The rating incorporates Moody's expectation that OYO will continue to incur losses over the next 2-3 years and that its path to profitability remains uncertain in light of travel restrictions due to the pandemic.

May 20, 2021 / 08:48 PM IST
Representative image

Representative image


Moody's Investors Service has assigned a first-time B3 corporate family rating (CFR) to Oravel Stays Private Limited (OYO), the business rating agency said in a statement issued on May 20.

Moody's has simultaneously assigned a B3 rating to the "senior secured term loan" to be issued by Oravel Stays Singapore Pte. Ltd, OYO's wholly owned subsidiary. The proposed loan will be guaranteed by OYO and many of its subsidiaries, the agency said.

"The outlook is stable," it further stated, noting that "the company will use the loan proceeds to refinance its debt and for general corporate purposes."

Moody's Analyst Sweta Patodia said OYO's B3 corporate family rating "reflects its position as one of the largest providers of budget accommodation in its key operating markets".

It also shows "good long-term growth prospects for the domestic budget travel sector, adequate liquidity to cover its likely cash burn and continued financial support from its key shareholders," she added.

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OYO is well-positioned to benefit from increased demand for domestic travel given international tourism is likely to remain subdued over at least the next 2-3 years, according to Moody's.

OYO also stands to benefit from increasing access to internet in India over the past few years and faster adoption of digital services since the start of the pandemic, it claimed.

"Moreover, OYO has a strong market position, presence across hotels and holiday homes, high proportion of direct demand, reputable brand, exclusive access to all rooms of its hotel partners and an established

technology platform," the statement further added.

Moody's also noted that  OYO's rating is constrained by its "short operating track record" and "history of operating losses".

"Losses, however, have reduced significantly relative to that in the fiscal year ended 31 March 2020, as a result of a change in its business strategy and cost reduction measures," it pointed out.

Over the next few months, the company's operating performance could be weakened due to the "resurgence of coronavirus cases in India", Moody's said, adding that this may stall the recovery recorded since July last year.

Moody's expects OYO's operating performance to start recovering in the second half of 2021 once infections subside.

"However, if the number of daily infections fail to decline to more manageable levels, the risk of nationwide lockdowns cannot be ruled out, which will delay the company's recovery," it added.

The rating incorporates Moody's expectation that OYO will continue to incur losses over the next 2-3 years and that its path to profitability remains uncertain in light of travel restrictions due to the pandemic.

"The proposed loan will provide OYO with a liquidity buffer to sustain its cash burn over the next 2-3 years," Patodia added.

The ratings also benefit from OYO's track record of support from its founder and other shareholders such as Softbank Vision Fund, Lightspeed Venture Partners, Sequoia Capital, Airbnb Inc, A1 Holdings Inc (Grab), Star

Virtue Investments Limited (Didi), the agency said.

Equity injections of around $2.4 billion since the company's inception have helped it to fund its operating losses, Moody's added.

"OYO's rating incorporates Moody's expectation that the company will continue to receive such shareholder support, should the need arise," the statement further said.

Moody's also noted that "pro forma for the proposed loan proceeds, OYO has good liquidity."

"As of March 31, 2021, the cash balance of the restricted group entities, along with proceeds remaining from the proposed loan issuance after debt repayment, will be sufficient to support the company's operations over the next 2-3 years," it added.

The stable outlook considers Moody's expectation that OYO's operations can be funded, pro forma for the loan proceeds, for at least the next three years and the cash burn will significantly reduce over the next 12-18 months

as operating performance starts to recover following the roll-out of large-scale vaccination programs, the statement further said.

In the future, OYO's ratings could be upgraded if it turns profitable and starts generating positive cash flow over a multi-year period, while

maintaining robust liquidity, Moody's said.

The ratings could be downgraded if the company's cash burn does not reduce significantly over the next 12-18 months; or OYO has insufficient liquidity to fund its operations and investments over at least the next

2-3 years, the agency added.

The competition from new entrants or changes in regulations, taxation or administrative policy that ends up weakening the company's market position would also lead to the ratings being downgraded, it said.
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