Four reasons why global brokerage Bernstein is bullish on IPO-bound Oyo

Oravel Stays (Oyo) has filed its offer document with market regulator Sebi for a Rs 8,430-crore IPO. Oyo is a platform connecting hotels and homes with the end consumer. The New Delhi-based firm joins the new-age firms like Zomato, Paytm, PolicyBazaar and Nykaa who are listed or looking to list in India. Global brokerage Bernstein this week issued a pre-IPO note in the firm, which has backing of firms like Softbank, Microsoft and AirBnB. Oyo’s IPO pricing will be announced closer to its IPO dates. In the note Bernstein highlights structural drivers for the company. Excerpts from the report:

Large addressable opportunity
 

OYO’s total addressable opportunity in the short-stay accommodation market is expected to increase from $1.3 billion in 2019 to $1.9 billion by 2030. That’s a significantly large market. SAM (serviceable opportunity) in current markets (India, SEA, Europe, US, China) is more reasonable at $772 Bn. The company considers three markets as core growth- India ($26 billion), South East Asia ($56 billion) and Europe Homes ($400 billion).

Consolidation in hotel space
 

OYO's core growth markets are highly fragmented. Organized share is less than 12%. Most hotels/homes are run by individuals (no brands), making perfect hunting grounds for aggregator platforms which can consolidate supply. Online penetration has been a major growth boost, expanding to ~30% in India (~60% globally). Online short-stay accommodation GBV continues to gain share growing at CAGRs of 34.3% &17.9% for India/ SEA between 2015 and 2019.

Competitive moat
 

OYO has demonstrated a strong business model - 70% of traffic from direct/unpaid channels. Repeat & new organic customers generate 78% of demand. Exclusive storefronts of 157K+ (70x of closest competitor) across hotels/homes. Strong tech DNA with ~15% of the employee base in tech roles. 40+ integrated tech solutions for end customers/hotels/homes. Strong ROI for hotel/homeowners helping them increase revenue by 1.5x-1.9x compared to revenue at independent hotels.

Cost discipline amid Covid
 

Unit economics has improved with Contribution Profit, increasing from 5.1% in FY20 to 18.4% in FY21, driven by stable take rates (34%), lower discounts and no minimum guarantee. OYO GBV grew 170% in FY20 led by increase in storefronts but declined 67% in FY21 due to storefronts ceasing operations due to Covid. Gross margins stable at 33%, Strong cost management -Employee expenses reduced by 63% & marketing /advertising by 71% in FY21.