Fitch Upgrades OYO’s Ratings; Expects It To Report Positive EBITDA In FY24

Rating agency Fitch on Wednesday (May 31) revised its outlook on OYO parent Oravel Stays Limited’s long-term foreign- and local-currency issuer default ratings (IDRs) to ‘positive’ from ‘stable’ and said that the platform is on track to generate positive EBITDA and cash flow from operations sustainably.

“We expect OYO to deliver positive EBITDA and CFO (cash flow from operations) in FY24, ahead of Fitch’s earlier forecast, led by a greater reduction in operating costs than we expected,” said Fitch in its report while affirming the ratings at ‘B-’

The credit ratings and research firm expects the ongoing travel demand recovery to drive OYO’s revenue growth of over 20% and its operating leverage to benefit from a sustained reduction in costs.

It is pertinent to note that a source told Inc42 last month that the IPO-bound hospitality unicorn informed its employees about turning cash flow positive in Q4 FY23. OYO attributed it to increased bookings, particularly in Europe.

In fact, in FY23, OYO increased its storefronts and gross booking value (GBV) per storefront in its European home business. 

However, Fitch has a positive profitability outlook on OYO despite the fact that its GBV growth was weaker than expected in the fiscal year, as the rising GBV per storefront was offset by a fall in the number of its hotel storefront partners, said the rating agency.

Fitch is also positive about OYO’s cost reduction measures. “OYO significantly reduced its operating costs in recent years through exits from several countries, reducing or reshoring employees from global locations to lower-cost locations such as India, tech-led initiatives such as tech-enabled onboarding of new storefronts and provision of customer services, and other cost-optimisation efforts,” it said, adding that such cost reductions will not affect its growth.

It must be noted that amid the restructuring measures, OYO also undertook a reshuffle at the top management level in the recent past. 

Fitch also affirmed the rating on the $660 Mn senior secured term loan facility due 2026, issued by Oravel Stays Singapore Pte Limited, at ‘B-‘. The Recovery Rating is ‘RR4’. The term loan facility is unconditionally and irrevocably guaranteed by OYO and certain subsidiaries within the group. 

As per Fitch’s rating criteria, its ‘RR4’ rated securities have characteristics consistent with securities historically recovering 31%-50% of current principal and related interest.

It estimates that OYO’s unrestricted cash in FY23 is sufficient to fund its free cash flow deficit of around $7 Mn and annual debt repayment of about $6 Mn in FY24. However, a cash burn higher than the agency’s expectations could weaken OYO’s liquidity, Fitch said.

The development comes at a time when OYO is gearing up for its much-delayed initial public offering (IPO). After the Securities and Exchange Board of India (SEBI) asked the startup to refile its draft red herring prospectus (DRHP), it pre-filed the documents confidentially with a reduced IPO size of $400-$600 Mn. 

On a global competition level, Fitch said that the US-based Expedia Group has a significantly better business profile than OYO, China’s Meituan has a stronger business and financial profile than it, while OYO’s credit profile is weaker than Germany-based online classified information provider Speedster Bidco GmbH.