Before we jump into the story, a full disclaimer - The information stated below is to spread financial literacy. We are not SEBI registered financial advisors, kindly consult your financial advisor before making any investment decision.
With that being said, you can completely trust the authenticity of this article as we have dug out the entire 642 pages of Draft Redd Herring Prospectus (DRHP) filed by Oravel Stays Private Limited (OYO). Also as this is a Weekend Pill edition, it's going to be a bit more detailed but also we will try to make you read the whole article. Without any further ado, let's get started..!!
OYO on 1st October 2021 filed its DRHP with market regulator SEBI to raise about $1.2 billion through an Initial Public Offering (IPO). It aims for a lofty valuation of $10-12 billion. But before, OYO asks for money let's look at its business model, the risk associated with the business, the Zostel-OYO case, the financials of OYO, and much more.
The Business Model
As OYO states in its DRHP,
We are a leading, new-age technology platform empowering the large yet highly fragmented global hospitality ecosystem. We have been focused on reshaping the short-stay accommodation space since our incorporation in 2012. Our unique business model helps our Patrons (being the owners, lessors, and/or operators of storefronts listed on our platform) transform fragmented, unbranded, and underutilized hospitality assets into branded, digitally-enabled storefronts with higher revenue generation potential and provides our Customers (being travelers and guests who book storefronts on our platform) with access to a broad range of high-quality storefronts at a compelling price point.
Which in short translates, that OYO is an amazon of Hotels. Because just as amazon doesn't own the products they sell, OYO doesn't own the properties it gives on rent. Also on the Patrons part, OYO retains only about 20-35% of the booking amount collected by them, as services & maintenance, and everything else is managed by the Patrons. However, this was not the case in the pre-pandemic world, previously OYO used to pay a fixed amount to its Patrons, a minimum guaranteed amount irrespective of the footfall. This was a win-win situation for both parties, as Patrons were encouraged to list themselves and OYO was able to scale its business. But as the Pandemic hit, and footfall decreased, OYO realized it was bleeding money, and soon adopted this new revenue-sharing model, which led to cases filed against the company by the patrons.
The Risk Associated with Its Business Model
As it is evident from above, the business model is yet to be tested in various situations which makes it vulnerable to sudden changes in the industry. Also, we can't ignore the fact that only a quarter of its revenue comes from its India Operations. As of 31st March 2021, the company had 157,344 properties across 35 countries listed on its platform. This further elaborates on risks associated with the business, as it can be affected by any change in rules and regulations of any country that it operates.
If you have been following the company of late, you might have come across this news that "Zostel moves to Delhi Court against OYO" OR "Zostel set to approach SEBI against OYO, claiming 'gross misrepresentations made in the (DRHP)'". Here is the story, in a nutshell, On November 26, 2015, OYO signed a non-binding term sheet with Zostel. the non-binding term sheet is ultimately an offer to buy another business, but with the condition that they are not obliged to complete the transaction, but however, the parties can negotiate in good faith. Subsequently, the transaction was never completed and Zostel raised some disputes and filed a petition before the Supreme
Court of India, who appointed an arbitrator. Zostel among other reliefs claimed 7% of the company shares, which was granted by the arbitrator. These are yet to be allotted by OYO since they have challenged the order. Now Zostel claims that OYO has altered its shareholding pattern through IPO and has violated Section 5(2) of the companies act 2013.
Even OYO states in its DRHP that
Any adverse outcome in legal proceedings involving Zostel may materially and adversely affect our business, reputation, prospects, results of operation, and financial condition.
The Positives of the Company
While the above section looks at the risks and cons of the company, there are quite a few pros, three to be exact, on why OYO can be reasonable at seeking a $10-12 billion valuation. Firstly, the market that it caters to is highly fragmented with only 12% being organized and the rest run by individuals, which can be a big positive for OYO. Also, these markets are significantly huge. It considers these three markets as core growth- India ($26 billion), South East Asia ($56 billion), and Europe Homes ($400 billion). Secondly, word of mouth. 70% of traffic is from direct/unpaid channels & repeat and new organic customers generate 78% of the demand which means the company doesn't have to spend big bucks on advertisements. As stated above, the company has more than 157k+ properties which are 70x of its closest competitor. Strong ROI for hotel/homeowners helping them increase revenue by 1.5x-1.9x compared to revenue at independent hotels. Third, the companies ability to dodge or manage itself amid uncertain events. Again as the company's business model is not yet tested it is a high chance that it may be put to test every now and then, as it was during the COVID-19 pandemic during which the company made some pretty big changes such as abolishing the Fixed revenue model to stop bleeding money, cutting down on marketing & employee expense by 63% & 71% respectively in FY21, lowering the discounts. While these may seem pretty minor, they did help the company tide through the most difficult part of the pandemic.
The fuss around the company seeking a valuation of $10-12 billion was partly due to the fact that the company hasn't been profitable since date. However same was the case with other new-age tech-focused companies who went public in recent times, and we may see more of such in the coming days as many others like Nykaa, Policybazaar & Paytm are lined up for IPO this year, all seeking some bold valuations. In OYO's case, its a bit different as we saw above it has a huge hunting ground for themselves especially in India, where consolidation is yet to take place in the short-stay market, what is left to see that how will OYO take up this opportunity and stand true to its lofty valuation?
Will you apply for the IPO, when it hits the market?
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