Fitch upgrades IPO-bound Oyo's long-term issuer rating to 'positive'

Agency sees major growth in Oyo's Ebitda in FY24, led by ongoing demand recovery in travel and tourism, the company's stable gross margins, and reduction in operating costs

Ratings agency Fitch has revised its outlook on hospitality major OYO, upgrading its long-term foreign and local currency issuer default ratings (IDRs) to ‘positive’ from ‘stable’, while affirming its ratings at ‘B-’.

Fitch 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, at 'B-'.

The agency expects significant growth in Oyo’s 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.

“We expect Oyo to deliver positive Ebitda and cashflow from operations in FY24, ahead of Fitch’s earlier forecast, led by a greater reduction in operating costs than we expected. This is notwithstanding weaker-than-expected growth in gross booking values (GBV) in FY23, as rising GBV per storefront amid improving occupancy levels and an increased number of homes storefronts was offset by a fall in the number of OYO's hotel storefront partners,” Fitch said.

This follows Oyo’s positive Ebitda in every quarter of FY23, the first year of profits since the firm’s incorporation in 2012. The rating also reflects the company’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.

Conditions in the travel and tourism industry are expected to continue improving 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.

The rating agency estimates that OYO's unrestricted cash in FYE23 is sufficient to fund its 'Fitch-estimated' free cash flow deficit of around $7 million and annual debt repayment of around $6 million in FY24.

Fitch rates OYO on a standalone basis. There is no parent-subsidiary linkage between OYO and Softbank Group Corp, which owns 45% of the company through its subsidiary, SVF India Holdings (Cayman) Ltd, on a fully diluted basis.

Recently, global ratings agency Moody’s Investors Service announced that it expects OYO to remain Ebitda positive for FY24 and its overall outlook to remain stable. Moody’s, in its report, said that Oyo will generate around $50 million-$55 million EBITDA, after shared based payment expenses in fiscal 2024.

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 Oyo 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.”