Oyo IPO: Ritesh Agarwal-Led Company Looking To Raise Rs 7,000 Crore To Shed Debt, Fuel Growth

Oyo’s parent company Oravel Stays Limited filed for an initial public offering (IPO) on Friday. The company plans to raise Rs 7,000 crore through a fresh issue and existing shareholders would also be exiting partially through an offer for sale worth Rs 1,430 crore.

The company plans to use Rs 2,440 crore of the funds raised to pay back debt, while using the remaining to fund growth initiatives and other purposes. The company’s overseas subsidiaries have taken term loans to fund their operation, and the company plans to pay back up to 50 per cent of the principal through the proceeds. Growth initiatives could be either organic or inorganic as the company has used both routes in the past.

Chequered Past

But a look into Oyo’s past paints the picture of a company with shaky financials and an even shakier history. Oyo initially began operations as Oravel Stays. According to Kunal Pandya, the chief executive officer of Ncyrpted, Oravel’s founder Ritesh Agarwal had approached him to build an AirBnB clone. Ironically, a few years later, Agarwal would accuse other companies of copying his business model while also making claims about being a coder.

According to Pandya, Agarwal was 21 (19 according to Agarwal’s version) back then, and had asked for several customisations to differentiate his product from others on the market. The platform would function as an aggregator/online travel agent for hotels, similar to Booking.com, Expedia or MakeMyTrip.

On completing the project, Pandya learnt that Agarwal had no money to pay him and instead kept asking for more time, and even offered him an equity stake. The plan was simple, once the product went live, Agarwal could raise funding and pay Pandya back. Having no other recourse to raise funds, Pandya went ahead and set up Oravel’s website. Agarwal did go ahead and raise funds from Venture Nursery but not enough to pay back the entire due and kept delaying the payments until he secured a new team to handle the software. Agarwal also got into the Thiel Schorlarship, which pays young people to dropout of college and work on a venture that could potentially change the world. Following this, the promises of equity and repayments to Pandya were soon forgotten.

Despite not having on-boarded any hotels, the venture continued receiving funding. An investigative piece by Mint brought forward a similar pattern, where multiple promises for equity stakes, partnerships, and payments were broken.

For instance, Manish Sinha, who was inducted as a co-founder, would later see his stake being bought out at a much lower price through questionable means. Several early employees would not receive the equity stakes they had been informally promised and early investors were supplied with optimistic numbers. Despite the rebranding from Oravel to Oyo Rooms, similar accusations have followed Oyo.

Angry Stakeholders

Oyo Rooms’ value proposition is simple — it offers a strong brand name and a distribution channel to small hotels operating in a large and fragmented industry with many competitors. In return, it takes control of the entire distribution (sales channels), the pricing of the hotels and standardisation of operations across all hotels.

Initially, it operated through two models — self-operated hotels and owner-operated hotels. The self-operated hotels were taken on lease from owners and completely by Oyo while the owners received commissions and lease revenues. On the other hand, the owner-operated hotels were managed entirely by the owners with Oyo just playing the role of an aggregator. But now, with low revenues and high costs, Oyo has slowly been winding down the self-operated business.

Oyo’s power over the hotels’ prices and the high revenue cut (20-35 per cent), have been a major point of contention between hotel owners and Oyo. According to Oyo’s draft red herring prospectus (DRHP), 94 per cent of its business comes from direct channels, which allows it to collect the gross booking value from customers. The hotel owners receive the payments later.

But, several hotel owners have alleged that Oyo has taken advantage of its position and has been refusing to pay out money through various penalties and other charges. It has also been accused of walking out from lease agreements, despite lock-in periods. In a classic principal-agent tussle, hotel owners have also accused Oyo of misusing its power and under-pricing hotel rooms to generate more volumes, while turning a blind eye to the hotel’s costs. The Federation of Hotels and restaurant Associations of India (FHRAI) has already filed cases against Zomato on behalf of its members.

Several properties that have moved away from the platform, have accused Oyo of continuing to list them and controlling their room inventory and prices. Often, this results in guests with Oyo bookings arriving at the hotel and asking for rooms. While the company says that the churn rate among the hotels is less than 1 per cent, several industry sources say that it is much higher than the company’s claims.

Ex-employees have also accused the company of modifying information as a means to present a positive image for investors. Apart from such operational issues, its image as a budget and couple-friendly property might also adversely affect its demand from families and other customer segments.

The company recently got into a spat with Zostel Hospitality after Zostel accused it of not fulfilling its side of the contractual agreements. Oyo has listed the spat with Zostel as a key risk factor in its DRHP.

Deteriorating Financials

The Covid-19 pandemic has hit the hotel business quite hard. The company has seen its revenues decline from Rs 13,168 crore in FY20 (financial year 2020) to Rs 3,961 crore in FY21. The company had not generated a profit since incorporation and has continually burnt cash, with its funding.

The company has now resorted to borrowing from institutional investors with the latest being a term loan of $660 million. As of 31 March 2021, the consolidated debt had stood at Rs 3,160 crore. The company’s attempts to diversify into cloud kitchens and other ancillary businesses have not worked out as expected.

High Stakes

The company, its promoters and its investors might have a lot to lose if the IPO does not come to fruition.

For its largest investor Softbank, a healthy response to the IPO could help enhance the returns for its Vision Fund investors. Until recently, the fund had been struggling to generate results, especially after the WeWork crisis. The crisis saw WeWork’s valuation collapse from $47 billion to $10 billion within a short period.

Coincidentally, just around the same time, banks close to Softbank funded a stock buyback by Oyo’s founder Ritesh Agarwal from investors. The $1.5 billion buyback helped Softbank stabilise its fund’s performance and was backed with the shares as collateral. If the value of these shares decreases, Agarwal might be required to put up more collateral.

The company, which has been making operational losses since inception, needs capital to continue its operations. Though the company has been attempting to cut costs and operational expenditures, it has been unable to turn profitable, especially with the advent of the pandemic.

It might have to decide between profitability and growth in coming times, while trying to sort out operational and image issues.