OYO's IPO
Business
Oravel Stays Limited (OYO), one of the most famous startups of India, has filed for an IPO to raise INR 8,430 Cr at a whopping $12-14 Bn valuation.
While most of us have heard the name Mr. Ritesh Agarwal and his story of being a college drop-out, a Thiel fellow and founding OYO at the age of 19, let us today take a deep dive into how the company has grown since its incorporation in 2012 and more.
OYO: A behemoth in making
OYO first started with the AirBnB like model and has since found its Northstar and focused upon transforming our neighbourhood unbranded and underutilized hotels into branded and digital-enabled storefronts as well as providing customers access to such a broad range of storefronts at a compelling price point.
OYO currently operates in 35 countries via its 80 subsidiaries and 40 JVs and has rapidly increased its number of storefronts through organic as well as inorganic means (as seen in the figure below).
The pandemic effect
OYO takes a revenue share of anywhere between 20-35% from the storefront owners forming its primary source of revenue. During the pandemic, the company has improved its unit economics (refer image below) by eliminating minimum guarantee contracts (Down to 0.1% in FY21 from 14.7% in FY19) and rationalising of various costs.
*GBV - Gross Booking Value
Decoding success mantra of this industry
OYO is catering to a class of customers who are extremely price sensitive but at the same time wants a branded hotel experience. Due to low GBV, the company primarily depends upon high volumes to fuel growth which it has achieved by adding storefronts at such a rapid pace.
This creates a network effect as customers want to visit a platform that has more and more choices and patrons want to onboard platforms which have maximum customers. This also acts as an entry barrier and provides a deep competitive advantage to OYO.
However, the biggest challenge of such a business model is to maintain quality standards. OYO will have to incur huge amounts of costs to implement its SOPs among patrons and conduct regular audits to keep it in check. This is crucial to safeguard its brand name.
The success of such a business model is entirely dependent upon the customers repeat ratio as it is also the testament of the quality standard that company is able to maintain.
A higher repeat ratio means a higher lifetime value of a guest with minimal acquisition cost therefore higher margins.
And if we go by the images below, OYO has an impressive repeat ratio making it a robust business model but will have to see how sustainable it is as the company continues to aggressively expand its footprint.
Huge addressable market
OYO operates under the short-stay accommodation industry (stay up to one month) which is expected to be a $1.9 trillion market by 2030 Globally. It is expected to grow at 6.6% CAGR from 2021 to 2025. There were around 54 million storefronts as of Dec-19 globally as per RedSeer.
Based on this, the market share of OYO is minuscule in the overall total addressable market and has a long way to go. However, it is important to note that the company has already burnt close to INR 17,000 Cr to reach this stage.
Let’s dig into numbers
Revenues from Customers* took a hit due to Covid as it came down by ~70% from ~INR 13,000 Cr in FY20 to ~INR 4,000 Cr in FY21 but at the same time losses narrowed down to the same extent remaining at (~100%) of the revenue.
Revenue from outside India formed ~75% in FY21 revenue as compared to 57% in FY20.
~INR 100 Cr was earned as cancellation income alone in both FY20 and FY21.
In FY21, ~INR 150 Cr was paid as severance pay to employees and ~INR 800 Cr worth of investment was written off.
*Not a correct representation as revenue is booked at a gross level however OYO actually earns only 20-35% as revenue share on the same.
The IPO
Primary infusion accounts for INR 7,000 Cr out of the total fundraise. Secondary round is primarily being done by Softbank while Ritesh and other major investors like Lightspeed, Sequoia are staying put.
Pre-Offer shareholding of Ritesh is ~33% and ~47% for Softbank.
Funds will be primarily used for repayment of loans, organic and inorganic growth and for general corporate purposes. The company is also planning a Pre-IPO round of INR 1,400 Cr.
However, it is important to note that multiple cases by Aggrieved Hotel Owners as well as Zostel are pending against the company which can also delay the IPO.
The verdict
The company is presenting a strong case for itself if one considers the current business model after doing away with a minimum guarantee and improved unit metrics. The company also enjoys a strong moat and has a huge market to address.
However, it remains to be seen if the same will be sustainable given the requirement to keep generating huge volumes in order to grow.
It will be a humongous task to maintain a demanding quality experience of the hospitality industry at higher levels with such a diverse set of patrons and a single adverse incident can completely ruin the brand name of the company.
Risk-averse set of people can stay away from the same and others can take a small allocation and increase as and when the company proves its mettle.
Kashmir killings
Current Affairs
Marking a disquieting new pattern of violence, militants are now targeting ‘civilians’ in the Jammu & Kashmir (J&K) valley. In the last 8 days, militants have killed a total of 7 civilians, 4 out of which belonged to minority communities of the state.
These targeted killings of civilians have created a climate of fear amidst the minority communities. Several families have even temporarily moved out to safer locations for security.
Timeline of the killings
October 2: 2 civilians were shot in 2 separate incidents in Srinagar - a civilian and a power department employee.
October 5: The militants shot a prominent pharmacist from the Kashmiri Pandit community, a non-local ‘gol-gappa’ vendor, and the president of a local taxi stand in an area in North Kashmir.
October 7: Militants shot 2 targeted civilians - a Sikh school principal and a Hindu teacher - at a Government school in the Eidgah neighbourhood of Srinagar.
Who is behind all this?
The Resistance Front (TRF), which the police believe is a front for the Pakistan-based Lashkar-e-Taiba, has claimed responsibility for all these attacks.
The group said that the pharmacy owner was killed as he worked for the Rashtriya Swayamsevak Sangh (RSS) and the taxi stand head was killed because he was a police informer.
After the October 7 killings, the group stated in a released letter that it killed the teachers for allegedly asking the parents to send their children for India's Independence Day celebrations at the school.
Civilian killings on the rise
This year, more civilians have been killed so far in various terrorist-related incidents than the security forces in J&K.
Till October 5, 2021, as many as 22 civilians were killed in the Valley as compared to 20 security personnel over the same period. This is the opposite of what has happened in the valley till date.
Why have the police not been able to stop the killing?
According to the J&K DGP, most civilian killings this year were carried out using pistols and “were brought in using drones from across the border”, making the job of security forces tough to identify the militants.
The Srinagar Special Operations Group (SOG) that focuses on counter-terrorism operations hasn’t had an executive head since May 14, 2021.
The city’s extensive closed-circuit camera system has been defeated by an unexpected enemy - the widespread use of masks during the COVID-19 pandemic.
Fear among targeted communities
Sanjay Tickoo, president of the Kashmiri Pandit Sangharsh Samiti, called these killings the “return of 1990”. It is contemplated that almost 75 Kashmiri Pandit families have made a temporary move out of Kashmir to safer locations.
After the targeted killing of the school principal, the Gurudawara Prabandhak Committee (GPC) said on October 9 2021, that, minority community members won’t join work unless the government assures their protection.
What are the government and security forces doing?
The central government has deployed a top official of the Intelligence Bureau to Srinagar to coordinate operations against terrorists.
On Friday evening, the Srinagar police team neutralized a terrorist while another one escaped. The terrorists were said to be out for one more targeted killing when they were intercepted by Srinagar police, leading to open fire.
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