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Startup Corner | Oyo needs to find a path to profitability -- the sooner, the better

Mounting losses, fast-paced expansion in almost everything, retrenchments, governance issues and inflated valuation metrics may emerge as speed breakers for Oyo

February 19, 2020 / 10:22 AM IST
We’re using this period for technological improvements, so these are the kind of things we’ve done for a stock which is past hotels, Agarwal said

We’re using this period for technological improvements, so these are the kind of things we’ve done for a stock which is past hotels, Agarwal said

Oyo has reported a loss of $335 million in the year to March 2019, up from $53 million in the year before. Revenue stood at $951 million in FY2019, up from $211 million in the previous year. The loss margin shot up from 25 percent to 35 percent.

The increase in loss was expected. Oyo’s loss margin in India fell to 14 percent compared to 24 percent the previous year. Naturally, the blame goes to China.

Oyo expanded globally, including in China, which escalated its expenses. Thanks to this aggressive expansion, Oyo’s revenue from India in FY19 stood at 63.5 percent, compared with 99 percent a year ago.

The aggression clearly had a cost which showed up in the financial numbers. But then no one expects Oyo, founded by Ritesh Agarwal, whom Bloomberg termed “Amazingly Ambitious Hotelier”, to turn profitable so soon.

It’s a no brainer that higher expenses are the cost of customer acquisition, property costs associated with entry into new markets. If Oyo continues to expand like this, losses will not come down in the foreseeable future. That’s the nature of the business and common with startups. Naturally, Oyo will require more external funding.

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As long Oyo’s investors do not question its profitability and with SoftBank as its financial backer, Agarwal may not face that trouble soon.

But then, SoftBank itself has been under pressure, especially after the WeWork IPO debacle. Post that, SoftBank founder Masayoshi Son not only admitted that his bet on WeWork was a “mistake” but he has also sent a clear message to companies where SoftBank invested -- “Your dreams had better be profitable”. Son’s message to founders was to focus on profitability and governance, above everything else.

That was in November 2019. At the beginning of this year, it became public that Oyo had retrenched 15-20 percent of its workforce, and a restructuring was underway. During the past couple of months, there have been questions around Oyo’s culture and governance. Aditya Ghosh (former boss of Indigo) moved on from his role as India CEO to become a board member in the company.

That had to happen. According to a November 5 report in the Financial Times, each of SoftBank investments were being evaluated by a new team and a separate team head by SoftBank's chief legal officer Robert Townsend was forming fresh guidelines and standards for SoftBank portfolio companies.

Following the WeWork debacle, people have started terming Oyo as SoftBank’s new darling. But, a question arises -- is Oyo the new WeWork in the making?

In any case, the current year is likely to show an increased loss for Oyo, especially considering that fact that Agarwal has spread wings across 80 countries. To add to that, China -- Oyo’s biggest market in terms of room count – will see huge impact in business after the Coronavirus outbreak. That will be the deciding factor on how much loss Oyo reports for the year to March 2020.

Nonetheless, Oyo is a good bet for SoftBank. It has already emerged as the world’s third-largest hotel operator, and aims to become the world’s largest hotel chain by 2023. Softbank’s bet on Oyo is probably based on its fast-paced success so far, especially in China and India -- the world’s two most populous countries. But these are the markets where around 80 percent of hotels are unbranded, and operated by unorganised players or independent operators. Oyo is now eyeing developed markets, including the US and the UK, where majority of hotels are branded.

Besides, Oyo has also entered into the co-working space by acquiring Innov8 and it has expanded into apartment renting, hostels, homestays, among other things.

But as we have said earlier in these pages, there are multiple challenges and the going will be difficult.

In September last year, Oyo’s parent Oravel Stays reportedly formed two joint ventures (JVs) with SB Topaz, an entity of Softbank, to focus on acquiring real estate assets -- from land parcels to fully developed properties -- for its hotels business.

Oyo’s success now depends how much investors agree to pump in and for how long to support its fast-paced expansion into almost everything. Besides, Oyo’s valuation metrics are also under question as its value jumped three times last July after its founder Agarwal bought back shares. Interestingly, the share buyback was financially supported by Nomura and Mizuho whose top clients is SoftBank.

It may not be far before Oyo hits a wall while looking for funds. The only way it could avoid that is finding a path to profitability -- the sooner, the better.
Sounak Mitra is an Associate Editor, Moneycontrol. He has been writing on corporate issues and policy for more than 15 years, having previously worked with Mint, Business Standard, Mergermarket, The Telegraph and The Times of India.
first published: Feb 19, 2020 10:22 am

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