How OYO's pivot to revenue share helped it survive the Covid-19 pandemic

In spite of suffering setbacks in some markets like China and Japan, OYO has been successful in growing its business to more than 157,000 hotels and homestays

Even as Oyo prepares for its initial public offering amid rising challenges, a look at its numbers show that the company has managed to survive the jolt of Covid-19 to the travel industry, and setbacks in key markets.

The company in its Draft Red Herring Prospectus (DRHP) filed with market regulator Securities and Exchange Board of India (Sebi), also mentions that it has had to pivot over the years as business dynamics changed.

“During Fiscal 2020, OYO (we) undertook the rationalisation of our global portfolio, which was further accelerated by Covid-19, to streamline our focus on profitable segments within our Core Growth Markets. OYO (We) focused on reducing the number of Patron contracts with minimum guarantees and fixed payout commitments from us and ensuring that new contracts do not require any capital expenditure on our part. The proportion of storefronts on our platform with minimum guarantees or fixed payout commitments from us has decreased from 14.7 per cent in Fiscal 2019 to 0.1 per cent in Fiscal 2021,” said the company in the DRHP.

When Oyo started its business, a significant chunk of its business model entailed fixed payout commitments to partners. Though that is what made it garner market share, the firm that several partners were not disciplined in growing their business due to fixed payouts. Today, its business model is on revenue sharing basis.

"OYO offers its integrated tech-stack on a simple revenue sharing basis. OYO’s integrated tech-stack for merchants enables it to earn a higher and more sustainable revenue share than other merchant solution providers. A hotel and home storefront that would take all services from different third parties through a patchwork approach may end up spending 25-35 per cent (in cumulative across different service providers), compared to OYO’s revenue share (net of discounts and loyalty points) of 20-35 per cent," OYO explains in its DRHP.

Since it was founded in 2012, the company has undergone many different phases--consolidation, contraction and expansion. In spite of undergoing setbacks in some markets like China and Japan, OYO has been successful in growing its business to more than 157,000 hotels and homestays.

Over the past year, OYO has implemented a number of measures as a part of its Covid-19 response strategy, including accelerated development and adoption of technology and products to reduce operating costs, and repositioning its offerings.

The company filed preliminary documents with the market regulator in October, intending to raise Rs 84,300 million which may likely value the startup north of $10 billion and mint many new millionaires.

Contrary to popular belief, a comparison with other IPO-bound startups on the basis of key metrics shows that founder Ritesh Agarwal successfully steered the company out of the double jolt of Covid-19 and setbacks in key markets.

Revenue from operations is the revenue generated by a company from its primary business activity. It helps investors understand the value of the business activity carried by a company during a reporting year.

A comparison between the first lots of Indian IPO-bound tech startups (including Zomato) shows that OYO had the highest revenues among its peers during FY20- the pandemic year while Paytm came in a distant second. In fact, OYO’s revenue for FY20 was greater than that earned by Nykaa, Paytm, Zomato, PolicyBazaar and Mobikwik combined. For FY21, OYO witnessed a substantial fall in revenue but still maintained the lead over its peers.

Gross profits

Gross profit is the difference between the total revenue earned by a company and the cost of goods sold by it. Such a comparison helps investors compare companies across different industries and gauge their strength and potential.

OYO leads its IPO-bound peers on this front as well, with a sustained growth in gross profits for FY20 and 21, earning gross profits of $176 million and $181 million respectively. The travel tech major managed this feat due to the adoption of technology and an asset-light model despite the recessionary trends in the economy and the downfall of the travel and hospitality sector in general.  

As per consulting firm RedSeer, as of 2019, it is estimated that there are on average 54 million short-stay storefronts globally. Furthermore, the report suggests that the total addressable market for short-stay accommodations is expected to increase to about $1.9 trillion by 2030. Globally, 88 per cent of hotels are unorganised, whereas in India, that number is 92 per cent. With the increased adoption of technology and digital platforms, India’s local or domestic travel sector is at its tipping point.

As domestic travel begins to increase with more people getting vaccinated, has begun bouncing back steadily. This leaves OYO with a considerable opportunity to organize the unorganized market across India and the world.

As an indication, India’s domestic passenger volume in September rose to 79.20 per cent to 7.07 million, compared to 3.94 million passengers in the same month of 2020.

Challenges ahead

A possible third wave of Covid-19 is a big risk factor for large companies that operate in the travel, tourism or hospitality sector.

As OYO continues to recover from the impact of the pandemic, an impending third wave could cast a shadow on OYO’s financial performance. The looming fear and uncertainty around the Delta variants, vaccination coverage, evolution of consumer sentiments, competitive environment across geographies where OYO operates, therefore become important factors in re-writing the OYO story.