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Exclusive interview | June, July saw very strong recovery trends in India for our business: OYO CEO Ritesh Agarwal

Online hotel aggregator giant OYO Hotels & Homes sees a strong recovery in the Indian travel and hospitality industry as the impact of the second wave of COVID seems to reduce due to unlocking, Founder & CEO Ritesh Agarwal tells Moneycontrol’s Nisha Poddar in an exclusive interview.

July 30, 2021 / 10:45 PM IST
Ritesh Agarwal.

Ritesh Agarwal.

Edited excerpts:

Q: From the recovery that you are seeing post the COVID uncertainties along with now $9 billion of valuation being clocked in, to a global giant eyeing an investment in you and also your aspirations to go public with your company. All these put you at a very important juncture in your entrepreneurial journey. Tell us what does this inflection point mean for you?

A: I think as the pandemic hit us and we’re in the travel industry, which is right in the middle of the impact that COVID would bring on a lot of businesses. I think our view was to respond to it with a very straightforward perspective of being able to use this as an opportunity to transform our company rather than making incremental steps. In the context of it, there were two-three things we did right. The first is using this as an opportunity to make the changes that we've been wanting to make for a long time. So in that context, we felt that on our consumer side, we wanted to make sure that we could inspire customers to move from just travelling to economy hotels, to upgrading one version further, and to be staying at holiday homes. We rapidly invested in creating much more supply in that specific area. On the other hand, we saw that there was an opportunity on the merchant side on the small hotel and homeowner side to be able to bring them newer technologies because earlier when they used to wait for service, for a local manager to come help them, they had to wait for hours before they could get service. We rapidly started investing in chatbots and chat-based services to be able to make a difference. A lot of such product and engineering-based differences really ensured that the company could recover from the pandemic.

This year in January, we shared that we had fully recovered our gross margin dollars from that of the fall that we had in the early time of the pandemic. The second was cash, you need to have the capital to make sure that you can make big investments if you have to. So for example, last year, we acquired TUI vacation homes, which is, you know, the holiday home company of TUI  in Europe. And that has done really well for us in Europe. So such a kind of potential M&As, we wanted to make sure we had the capital for it. So for which we went to the market a couple of months back and issued TLB, which was oversubscribed by almost 1.7 times and that sort of built in an additional buffer for us. And the third, frankly, is just you know, making consolidated long term bets. So for example, before the pandemic, as we were growing around the world, we realised that during the pandemic, it's time to reflect back and see what's going right and what's not. And the sort of markets such as India, Southeast Asia, Europe- those are the markets we’re leading in, so we said, instead of deploying capital around the world, you'd like to just keep doubling down in one geography. So I think that's sort of the big picture of how we thought about it in simple words, it was, you know: consolidate, make sure that you have the right capital and evolve- those are three things that we sort of thought about.

Q: How did digital transformation help in vendor support, the consumer experience, account conciliation on a regular basis, and efficiency by the use of technology?

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AYeah, I think this is something that I believe a lot of people listening to us today will relate to, because a lot of our listeners today are entrepreneurs, business leaders. I think, as we entered the pandemic era in some form, there were four to five things that I sort of looked at changing, and not just I mean, our broader company and our management. So OYO's business in simple format does two things: On one side, we have a service that we provide to our small hotel or the holiday home owner, to whom we provide typically two of our software's OYO OS and CO OYO. Upon receiving that software, our partners' revenue increases, and they can operate their premises better. And on the consumer side, consumers get trustworthy, easy to use experiences at the right price through our OYO mobile app. In both of those we've got in scale, on the hotel owner side, they're globally 170K small hotels and homes that use us; on the consumer side, we're the third most downloaded travel app in the world after Booking and Airbnb. So that's just sort of the, you know, stage of what we do. Within this, growth for us is highly driven by getting new hotels and homes to join our platform. Because the more supply we get, the more consumers choose us over a period of time.

Earlier, the cost of growth was higher because we had to have salespeople who’d go and sign up each one of the individual hotels and give them our software. In the time of the pandemic we transformed it. Now 40 percent of our new signups of merchants actually happen through reseller programmes, where another hotel or one of our current hotel owners will go and convince another hotel owner to join a platform. It has multiple benefits, you only pay when the other merchant joins and starts paying you fees.

And second, which is even more important is that your salesperson is trusted on the other side. A lot of our hotel owners had some rooms empty during the time of the pandemic. One data point we saw is if customers stayed with OYO once, even four years later, that dollar retention was 56 percent. If customers spend $100 or 100 rupees with OYO in one year, even four years later, customers were spending $56 to $58 a piece. In that context getting new customers became important because we had good retention. So we started a programme called Discover OYO. It's a very interesting programme, where we told our hotel owners that if you have empty rooms, why don't you give some of it to new customers because you'll keep getting the repeat benefit of it for a long period of time. We saw that now. Almost 25-30 percent of our new customer acquisition is coming from this segment and OYO, of course, in the spirit of partnership waived any commission on those reservations. So these were primarily growth-oriented drivers that we helped where technology was valuable.

Q: How did tech thrust help in improving the unit economics of the company?

A: I will break this down into two parts. The first is I think our underlying unit economics rapidly improved because we simplified our business model. So the company has moved to a place where, you know, ever since September 2019, we move to a place where we have simple contracts where once the hotel owner joins a platform will charge a fee of the overall revenue we send to the underlying premises, where we charge a base fee for the bookings that come across platforms almost as a software service, we charge a fee kicker on top for the bookings that come from the OYOs app and website and equivalent platform.

That simplicity in business improves our gross margin substantially, due to which I think even though our revenue has not fully recovered, our gross margins have fully recovered from that of the pre-pandemic levels. The second is a cost structure, right? I think in a lot of our businesses after-sales service is one of the highest cost structures that exist. OYO has moved to a place in the last year and a half, before the pandemic majority of our service on the merchant side of the hotel side were to local area managers. The customer side was to call centre after the pandemic, almost 85 percent of the services through chatbot and chat. So which truly has changed the margin quality for the business. And on the other hand improved service also, because earlier, people had to wait for five hours or six hours for the local manager to come. Now they can, you know, get the service much quicker, hopefully. And more importantly, look, I think it also is important for the leadership of the company to take the time to listen to the partners.

As we entered the time of the pandemic, we already had some areas of improvement that we could have made on the owner's side. And there was some noise that we had from hotel owners that existed for our ecosystem even beforehand. So I personally took it to make sure that every week, Friday or Saturday, I personally held an owner town hall for almost a year and a half, listening to thousands of hotel owners that had good, bad and all kinds of questions and challenges. And we learn and make sure that the next quarterly improvement, go back and share that this is what we heard last time. Here are the improvements we have made. And what better can we do in the upcoming times; it has built a sense of community among the owners as well. So taking feedback, and also working on it is very, very critical to your business.

Q: OYO app has been ranked third most downloaded app in the world after Airbnb as well as Booking.com with over 19 million downloads. How are you harvesting the data?

A: In the New World we live in, I think that a lot of people talk about how important technology and product is, I think the most important is data and data science. In my view, at least in my journey at OYO, I've seen its value to be the most important. The fundamental reason for that is let me give some real-life examples both on the customer as well as on the paternal side. So we are able to figure out which customer most probably will want to take a weekend trip or a holiday trip in the upcoming two weeks. And hence what kind of hotel to recommend to them what kind of offers to give them not just directly but also with third party banks and relative partners. And at the end ensure that once they are in the hotel, we also know which kind of customers typically like to extend the state by one more day, if they are, you know, nudged a little bit. This kind of data point, combined with the data science abilities of pricing, combined with the data science abilities on the hotel owner side where we can predict what kind of hotels should we go and capture next, which customers are really looking for, create substantial long term value. For example, in pricing itself, we used to change pricing over anywhere between 20 and 40 million times a day because of our 100 plus data science, data engineering team around the world. So I believe fundamentally the power of data science to make a difference in everybody's business is very, very substantial in the years to come. And we are investing at the forefront of it both organically as well as through external investments.

Q: There have been talks that Microsoft is looking at strategic investment in OYO. What kind of collaboration are you looking at there?

A: And I'm really sorry, I can't comment about any of this news out there. But what I can talk about is that fundamentally, from OYO’s perspective, we see that longer term, doubling down in creating technology-based products, which makes a difference in the lives of our hotel owners and customers is always going to create multifold impact, which is not just for OYO, right? Like all the business owners, business leaders listening to us right now, in each one of your businesses, I'm sure you're seeing that the gap between there used to be on one side technology companies and there used to be traditional companies in the next generation, I think that gap is going to not exist. And traditional companies will also use technology and become more successful. And technology companies will, of course, continue to use more and more technology and data science to make a bigger difference in defence.

Q: Now you do have a strategy or you are fearlessly expanding across the globe. And we saw that you did pull back in some of the geographies like China. How are you strategizing when it comes to your global footprint in the present times?

A: Absolutely; Nisha, I think one of the things you said, good management teams have the ability to, you know, I feel experience is valuable. But what's more important is the reflection of such experience to make better decisions in the future. Because a lot of the time what happens is you get all the experience. But if you do nothing about it, then you know, how, what value is it for. So we as a management get together as a leadership very often to reflect on our decisions for the last couple of years and say which ones are those decisions fared well, and which ones are the decisions can be learned from to make changes into the future? So with the impact of the pandemic, our management, again, got together to say how we should consolidate and prepare for the future. And we realise this was a time to consolidate and make sure that we doubled down wherever our business sizes were substantial. And we saw that in India, Southeast Asia and Europe, our business size was substantial. And this was the time to make a significant amount of difference. And it started paying for us, like India, even in the times of the pandemic since December through to March, December or 22, March 21 remain profitable. It, of course, had a little bit of losses during, you know, April, May, June due to the impact of wave two, but a very small dollar amount. Europe just in H1 between January and June, made around $27 million in EBITDA. So really focusing and focus is the name of the game was one big learning we took away. So focus, improved customer service and merchant service by using technology and really redesigning the company to bring growth, but growth with technology at the heart of it. Those are a few changes we made. And most of those, if not all, are starting to bear results. But like I said, it is just starting, there is a long way to go, we have to still keep working hard and respond to the market situation in times to come.

Q: So one important aspect that really changed was the recovery. In Europe, the holiday home concept really picked up and you benefited from that. Tell us about that a bit and how is that really impacting the company's financials?

A: Sure. So I think globally staycation has been a single big driver of consumer demand recovery in the travel segment. People want to try and take that weekend trip, or you know, even nowadays, we see that people finish their weekends on Mondays or on Tuesdays after the travel is done because they feel that they can still work from wherever they're travelling to. So globally, we're seeing the rise, the staycation and homes as a segment and small holiday homes that use our software services due to which we are seeing that there is a strong rise in demand. We have seen that vaccination in Europe is reaching around 60 to 65 percent levels on a single January. And that has a direct impact in terms of demand due to which our first half not only has our big bookings grown, our bottom line has also been improving. But again, we are also keeping a close eye on the uncertainties that also exist. For example, recently there were floods in Germany and Belgium. Those areas, which are also critical business areas, customers of ours are in that part of the world. But we're keeping an eye out for any disruptions like this. Right?

Q: How is the India recovery panning out for your business?

A: So I think the Indian recovery, I'll tell you, there's a second wave when it happened. I was in Delhi all of April. Back then I used to visit all kinds of smaller towns all around India because we are preparing for the summer season. Summer is a big one for our business in India, right? Lots of families take holidays after the examination of children. And then I got to know about this pandemic. And then suddenly, I'm back locked at home, you know, hoping to just see through the crisis. So it was quite a unique period. And I didn't expect that the market recovery would happen as quickly as it has been happening. I think the last two, three months, we are seeing that ever since I think June and was the turning point. Ever since June and July full month, we've seen very strong recovery trends in India, we are almost trending depending on the day between 70 percent and 200 percent plus and recovery of India transactions from the previous two levels.

Q: How sustainable is your path to profitability that you're seeing at the moment?

A: So I think, you know, that's a very important question, Nisha, I think, fundamentally COVID, as it really allowed a lot of companies to focus on their health, on their margins, on their quality on the fundamentals, especially a company like OYO, which, you know, was it was growing out quite significantly gave us sort of the time to really get a lot of these things, you know, in the right time, as we were able to see through that. Now, you're really again, preparing for the big growth coming up in the times to come. Specifically, in terms of bottom line, the good news is that the company's gotten to a place where our, you know, burn is at the four or five million range on a monthly basis whereas the company's overall capital is upwards of, you know, as I've mentioned, including our JV companies upwards of 800 million, so very significant. Capital availability exists, we believe that as the market recovers, we have a good path towards profitability. However, I will refrain from sharing a timeline. But I do believe that whenever we get there, it will be sustainable, just given. Today we are talking about relatively, you know, still not fully recovered revenues from the things that we’ve done. So let's talk about the financing aspect ratio, that is the core of any business, that is the lifeline. If you get liquidity, if you get investors to support them that gives a lot of comfort. And when you hit with the business, you'll see tough times in the past, in fact, one of the few internet companies which raise debt on the books, long term debt, which is more of a mainstay of traditional companies, right? So you have a good mix of that. And now you have a pretty big fundraising as well, where the valuation that is kicking in is on the high side and taking you to the pre-COVID levels as well. Right? I mean, step by step.

Q: So how do you see the debt-equity ratio of the company? OYO is one of the few digital companies which has raised long term debt.

A: Absolutely. In Asia, I think this is an area of a lot of interest for me, that I've been sharing my thoughts about the first bit is I think, I believe any good business should be able to manage a good balance of equity and debt.

And the reason I say this is because you know, the cost of equity is much higher, but the risk of it is relatively lower, the cost of debt is much lower. And it also in some form demonstrate the quality of the business because debt investors are always much more cautious than equity investors. So in that context at OYO, we've always also endeavoured to have a good balance of both.

These capital providers, typically equity investors, you know, have, of course, partnered OYO over the years. But on the debt side, there are typically two things that are very critical to get good quality world-class institutional debt partners to join. The first is you need to be, you know, very, very well accountable to the matrix you share. And in that context, we were among the earliest, you know, consumer tech companies in India, to get rated by Moody's, Fitch and our global rating agencies such as that.

That I think is a very critical expectation. But I think that really also prepares the company to stand as to an accountability that they're not used to, especially in the startup ecosystem. And the second after that is the investors who come along, they want the upside, they want to predict the upside of equity with this, expect the upside of equity, but they also want to prepare for a downside, which is very, very well thought of. So I think given that context, I believe that may start but we have seen this raised are these considering TLP and other kind of institutional capital, in order to build a good balance of equity and debt, while at the same time ensuring that they get a wide range of capital providers around themselves.

Q: Is there any refinancing of debt on the cards while there is enough liquidity chasing digital companies?

ASo look, I think, first off, you know, from a company perspective, we are well capitalised. And in terms of any future-looking offerings, I think it's still early to share. But as a company, we've always wanted, we've always, at least for the last year and a half or so since we've had a high-quality board around ourselves and so on, we try to operate as much as a public company as possible. So to be, you know, a well-run company. However, what is the right timeline of offering, something that our board finally decides. My job is to put my head down, execute, and build great outcomes for our customers and merchants in which there's a lot of work left for me to do.

Q: Ritesh you raised personal debt of $2 billion 2 years ago to re-purchase shares from investors. Where do you stand on that particular front now that the company is getting back to pre-COVID levels?

A: I have clarified this earlier is that there is no margin portion to it. So it doesn't have any impact on the valuation of the company. But at the same time, I think I personally have always been a believer that entrepreneurs should be long term believers in the company, regardless of good or tough times. I maintained this when COVID immediately hit in saying that my belief in OYO is not for one year or two year, it's for a very, very long term, there will be good times and tough times. I think, as things stand today, my conviction remains and hopefully, as the world becomes a better place and people start travelling a lot more than earlier, that conviction will remain in times.

Q: What are your plans for an IPO and is your personal debt reduction also intertwined with public issuance plan of the company?

A: So I think, first of all, our company raised its, you know, made an institutional debt offering just now so actually, literally, we announced in less than a month back since the capital has come in. So it's a five-year term loan with amortisation happening majority of it at a five-year bullet. So we have significant amount of time to repay the debt. We are keeping a very close eye on the potential public markets in India, you may have seen recently, you know, the consumer tech IPOs in India have been doing quite well, the market recognises the opportunity that tech companies bring in the marketplace for the future. So we're keeping an eye out.

But from our perspective, you know, you'd want to, you know, consider any of the opportunity from a growth perspective, primarily in times to come.

Q: What will be your plan for public issuance considering there is a flush of liquidity across the world? Will it be an India listing or overseas even SPAC?

A: Unfortunately, while all those are, you know, again, board-made decisions, I think what I can share is that clearly, you know, this is a new dawn of the Indian industry, where companies like Zomato, which you know, are really creating a new industry around themselves are able to list and the market appreciates the context that they are coming with. And as you can see, the stock has also performed well in the windows so far. So I do believe that this is an opportunity or a path for a lot of new ways, companies with not just growth, but also established market leadership to, you know, get to see opportunity into the future, specifically about OYO. I think a lot of those, I will still leave it to the board. But I think from our perspective, you know, we are operating like a well-governed company, which is, you know, already, operating like a public company, rather than, so it's so whenever our board makes a decision, it will not be a surprise for us, and we'll be able to, you know, execute on it.

Q: You spoke about the board as well as the talent pool you have attracted along with the simplification of your overall structure. How did these three aspects help you in tiding over the unprecedented challenges?

A:  So I think I can't stress enough for any business owner, is the opportunity of having a well functioning welcome board is unparalleled. So our board has Steve Albrecht who was a primary trustee of the American Accounting Association, Troy, who was with Starbucks, Betsy, and a lot of top-quality leaders from around the world. And they're to partner with me and share from their experiences over the last year and a half, I probably would believe that played one of the most prominent roles in helping OYO come out of the crisis in the manner it did. And it was, you know, it was those conversations that also give us some outside context, right. So for example, Troy was on the board of Levi's straws. You know, Steve was on the board of another airline company. So he also kept now of course, globally, we don't get any details, but just hearing context of saying what the world is looking like in the future is always valuable. Similarly, in leadership, I think, bringing in top quality talent allows the founder to be able to invest time in future problem solving, redesigning the company, rather than just managing daily affairs, which of course one needs to do anyway, but having a good leadership team, you know, reduces the complexity of it.

Q: SoftBank is the largest shareholder in your company. How has that investor backing really helped you in the last few years? And going forward, how is the relationship likely to develop?

A: So I think, first of all, I think SoftBank, Vision Fund, Sequoia, Lightspeed all our investors have been extremely supportive through the time of the pandemic. We, of course, added a few partners such as, you know, Martin, from Sweden and few high-quality investors over the last couple of years, all of whom have made a very important difference to our company. SoftBank vision fund has leaders who have and Sequoia and lightspeed have leaders who have seen through many crises in the past of them being around ourselves played a big role.

And quite patient we're in the period of the pandemic, with a bill saying that they're also partners with the company for a long term rather than, you know, a couple of quarters here and there. And that confidence in partnership has allowed all of us to not just see through majority of the pandemic, but of course, there is some time to go before you're fully out of it. And I think that partnership has been helpful.

So I think, you know, at the risk of sounding repetative, the one of the things that I continue to be very, very excited about is a lot of speed of consumer products and merchant products that we're bringing, we're launching some very exciting consumer products, where our consumers will find a broad range of experiences, broad range of loyalty programmes, a broad range of gamified experiences. So, I don't want to give up too much. But I think over the next few months, every couple of weeks some new release coming up.

And on the merchant side, we used to do payouts monthly, we made it bi-weekly. In a couple of weeks, we'll be announcing it to make it daily. So we are making substantial product improvements on both the consumer and merchant side. And that's, most of my time has been going, that is to make sure that our consumers and merchants get experiences and products that substantially are better than, you know, what we had earlier. And we hope that our consumers and merchants will continue to give us the positive response that they always have.
Nisha Poddar is an Editor-M&A, CNBC-TV18
first published: Jul 30, 2021 09:56 pm
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