SUMMARY
Moody’s estimates that OYO is well on its way to generate EBITDA, post share-based payment expenses, to settle around the $50 Mn-$55 Mn mark in FY24
The credit rating agency affirmed its B3 CFR for OYO and B3 rating for the startup-backed senior secured term loan issued by its Singaporean subsidiary
Moody’s also believes that the OYO’s rating could be downgraded if it fails to 'significantly' reduce its cash burn over the next 12-18 months
Credit rating agency Moody’s expects hospitality major oyo
to continue with a positive earnings before interest, taxes, depreciation and amortization (EBITDA) trajectory for the remainder of the fiscal year 2023-24 (FY24). Moody’s also projects the startup’s overall outlook to remain stable.
“The rating affirmation reflects Moody’s expectation that OYO remains on track to turn EBITDA positive (after ESOP expenses), on a full-year basis, for the fiscal year ending 31 March 2024, supported by a strong demand recovery and its various cost reductions,” said Moody’s assistant vice-president and analyst Sweta Patodia.
Moody’s estimates that OYO is well on its way to generate EBITDA, after share-based payment (ESOP) expenses, to settle around the $50 Mn-$55 Mn mark in FY24. It also affirmed that OYO will maintain adequate liquidity buffers to support its operations till it turns cash-flow positive over the next 12-18 months.
Overall, the credit rating agency affirmed its B3 corporate family rating (CFR) for OYO and B3 rating for the startup-backed senior secured term loan issued by its Singaporean subsidiary.
Describing its rationale behind the outlook, Moody’s said that the pandemic-induced recovery in travel demand and cost optimisation measures taken by OYO over the past 12-18 months had improved the company’s operating performance.
The agency also projects OYO’s operating costs to reduce further as it shifts some of its roles to India and slashes its ESOP expenses.
On the downside, Moody’s believes that the OYO’s rating could be downgraded owing to regulatory headwinds or if the hospitality player fails to ‘significantly’ reduce its cash burn over the next 12-18 months. The agency also flagged concerns that the unicorn had ‘insufficient’ liquidity to fuel its operations and investments over the next two to three years.
“…competition from new entrants or changes in regulations, taxation or government policy weaken the company’s market position, cash flow or earnings relative to current expectations,” added the report.
The agency also noted that OYO’s FY24 EBITDA was likely expected to fall short of covering its interest expenses of nearly $85 Mn, which could eventually lead to negative cash flow due to the absence of any ‘material working capital movements.’
In the same breath, Moody’s added that sustained earnings growth beyond FY24 would allow OYO to cover its interest expenses and generate positive cash flow from operations in FY25.
The somewhat positive backing comes close on the heels of a spate of good news for OYO which was pummelled by the pandemic-induced lockdown. After a gloomy couple of pandemic years, the hospitality major bounced back strongly on the back of increased booking across all key geographies, as it turned cash flow positive in the quarter ended March 2023.
The company is well set to be on its way to end Q4 FY23 with surplus cash flow of INR 90 Cr, a source recently told Inc42.
However, on the IPO front, troubles continue unabated. Despite refiling its draft red herring prospectus (DRHP) with the market regulator in March this year, SEBI once again, earlier this month, flagged certain issues and sought updated financials from OYO. The watchdog now awaits a response from the ‘Lead Manager’ of the hospitality major regarding the DRHP.
While, initially, it aimed to raise INR 8,430 Cr ($1.2 Bn) through the public listing back in September 2021, but has since recalibrated its IPO plans and slashed the size of the offering to $400 Mn-$600 Mn.
Despite hiccups such as adverse market conditions which have forced many of its peers to shelve IPO plans, OYO seems to be focused on its IPO. The market headwinds have made matters a little difficult for OYO, but it is well placed to grab a big pie of the Indian hotel booking market, which is expected to grow to a market size of $7.6 Bn by the end of 2023.
