Fitch upgrades OYO’s rating to ‘positive’ from ‘stable’

Ratings agency Fitch has upgraded outlook on global travel tech company OYO’s long-term foreign and local currency issuer default ratings (IDRs) to positive from stable, while affirming the ratings at ‘B-’. 

Fitch has also affirmed the rating on the $660-million senior secured term loan facility due 2026, issued by OYO’s fully owned subsidiary, Oravel Stays Singapore Pte Ltd, at ‘B-’. The Recovery Rating is ‘RR4’. The Fitch report further states that the term loan facility is unconditionally and irrevocably guaranteed by OYO and certain subsidiaries within the group and the guarantee covers 121 per cent of the outstanding principal or up to $800 million, and Fitch considers this guarantee full and worthy. 

Explaining the rating change, Fitch said,“We expect OYO to deliver positive EBITDA and CFO in FY24, ahead of Fitch’s earlier forecast, led by a greater reduction in operating costs than we expected. We expect significant growth in its EBITDA in FY24, led by an ongoing demand recovery in the travel and tourism industry, the company’s stable gross margins, and reduction in operating costs. This follows positive EBITDA in every quarter of FY23, which is the first year of profits since OYO’s incorporation in 2012. The rating also reflects OYO’s adequate liquidity.”

Fitch expects the cost-reduction measures that OYO undertook in recent years to support its improving profitability in FY24. The report states that such reductions will not affect growth, as OYO has increased its business development staff to prioritise storefront additions.

Travel and tourism

Fitch also expects travel and tourism industry conditions to continue to improve in OYO’s key markets in FY24, following a strong recovery in FY23 from pent-up demand for leisure travel after the easing of Covid-19 restrictions. “OYO increased the number of storefronts and GBV per storefront in its European homes business in FY23 as leisure travel recovered, despite the cost-of-living crisis and reduced disposable incomes in the region. We expect this recovery to continue over the upcoming summer holiday and be further supported by a recovery in business travel, which initially picked up at a slower pace,” Fitch added.

The rating agency estimates that OYO’s unrestricted cash at end of FY23 is sufficient to fund it’s Fitch-estimated free cash flow deficit of around $7 million and annual debt repayment of around $6 million in FY24. 

Moody’s view

Recently, global ratings agency Moody’s (Moody’s Investors Service) announced that it expects OYO to remain EBITDA positive for FY24 and its overall outlook to remain stable. Moody’s said OYO will generate around $50-$55 million EBITDA, after shared based payment expenses in fiscal 2024, supported by a strong demand recovery in the hospitality business, increase in the number of storefronts on OYO’s platform, and cost optimisations.

In March, OYO refiled its Draft Red Herring Prospectus (DRHP) with the stock market regulator SEBI under the recently introduced Confidential pre-filing route. A source close to the company said that the company will be “fine-tuning the issue size, basis the market conditions, to between $400-600 million, all of which will now be a primary issuance, to repay most of its debt.” 

The confidential pre-filing route option was allowed by SEBI in November 2022. The company recently announced that it plans to double the number of premium hotels such as Townhouse, Collection O and Capital O in India in 2023 by adding approximately 1800 high street, upmarket hotels.  Further, OYO’s UK business plans to add more than 50 properties to its UK portfolio in 2023 with a focus on cities such as London and Birmingham. OYO already has more than 150 hotels across the UK. The company is also planning to add over 100 hotels in the US in 2023.

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