Will Oyo Shut Down Unprofitable Businesses With SoftBank’s FY23 IPO Deadline?

Taking lessons from failed IPO of coworking space provider WeWork and valuation downturn, Japanese investment conglomerate SoftBank has now tightened its noose on its major Indian investment, hospitality unicorn Oyo.

Reports have now surfaced that SoftBank has given Oyo deadline of March 31, 2020, to phase out contracts/businesses, which are not EBITDA-profitable. This has been attributed to the plans of Oyo to list publicly in the US in 2022-2023. However, this is in contradiction to Oyo chief Ritesh Agarwal’s public statements of having no plans to go public.

But the ET report has said that Oyo is now working on meeting the deadline by SoftBank to turn its business profitable. The company reportedly has a deadline of March 2020 to post positive EBITDA for its self-operated hotels and July 2020 as the deadline for positive EBITDA of its ancillary businesses.

It is to be noted here that Oyo’s self-operated business includes Oyo Townhouse, Silverkey, Collection O, Oyo Flagship and Oyo Homes, etc. These are nearly over 800 properties, where it reportedly makes investments with leasing arrangements with the owners of the properties.

Ancillary businesses include Weddingz.in, which it acquired in 2018 etc. The idea here is to shut down ancillary businesses that do not report an operating profit before end-July

Further, it has been reported that about 8,000 hotels that Oyo runs under franchised arrangements are not a part of these targets. The report cited unnamed sources saying that Oyo wants to “make ‘steady changes’ this year and they want to show next year as a full year of turning profitable.”

The source further reportedly said that SoftBank doesn’t want to repeat the mistake of taking Uber public without reporting profits and WeWork’s failed IPO and value erosion.

An Oyo spokesperson told Inc42, “While the company has nothing specific to announce at the moment, it takes business decisions that are aligned with the best interests of the organisation. Our self-operated hotels business in India, present throughout the country, through the SilverKey, Collection O and Townhouse brands, has been winning hearts and are some of our most-loved offerings amongst millennials.”

The report comes days after a New York Times reported about “toxic” culture at Oyo and several other issues like unlicensed hotels and guesthouses. After the report surfaced, Oyo chief Ritesh Agarwal reportedly wrote an email to the senior leadership team saying that the company has a different view of reality against the view projected by the article.

“Without going into ‘why’ we would rather focus on ‘what’ has been said and take the opportunity to introspect and come out stronger … we are acutely aware of the responsibility we carry on our shoulders and know that the world is watching us and we have to rise up and prove over a period of time that a young company out of India can truly make a mark on a global platform as a well-run enterprise,” Agarwal reportedly wrote in his email.

But this is not the first time issues have cropped up regarding Oyo and its future in the industry. Since WeWork’s business model came under fire for being mostly about real estate, Oyo’s business model has also raised eyebrows.

Multiple experts have argued that Oyo’s business model resembles WeWork’s as a tech-inflected real estate business that has expanded far beyond its initial concept.

Beyond this, if we take into account the company’s performance, Agarwal had earlier said that the company has narrowed down losses for the last three years. Regarding profitability, Agarwal had earlier said it is “only a matter of time before getting there.” He said that the team remains fixated on growth, penetrating new markets while creating a strong brand name in the US.

But the company’s valuation report had showed that Oyo reported a loss of INR 2384.69 Cr in FY19, a 5.5X jump from its losses of INR 360.42 Cr of FY18. The valuation report shows that the company has increased its expenses by 3.9X in FY19 with a jump in revenues by 3.5X.

The valuation report projected Oyo to be profitable in 2022. The company is expecting $285.9 Mn in losses for 2020 but aims to turn a profit of $45.2 Mn in 2022. So it apparently aligns with SoftBank’s target for profitability. But is it possible? Especially with the increasing skepticism of investors, stakeholders and public alike?

Update: January 6, 2020 | 1: 50 PM
The story has been updated to include official statement from Oyo.