Fundamental Analysis of Oyo Rooms

In this article, we will do a fundamental analysis of OYO Rooms, as usual, we will cover the company and the management of OYO Rooms, its competitors, its key risk, future growth prospects, and financials based on the analysis we will decide if the OYO Rooms is fundamentally strong or not then we will do the valuation analysis of OYO Rooms to decide if it is worth investing in the company at current levels or not.

Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.

We must have stayed in Oyo rooms once. If not then we must have seen its big red board. This Oyo room which is affordable, and found in every place, is coming up with its IPO.

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Introduction

Oyo rooms were started in 2012 by Ritesh Agrawal. In a year, by 2013, Ritesh Agarwal applied for a Third fellowship.
Getting this fellowship is very difficult. In a year hardly 20-25 people get it all over the world.
People who get this fellowship get mentored personally by billionaire Peter Thiel, founder of PayPal.
Ritesh Agarwal is mentored by him. After 10 years, Ritesh Agarwal is India’s 2nd young billionaire.
When Oyo rooms started in 2012, it was a platform for booking short-duration hotels.
Now we can book vacation homes, corporate travel, co-working space, premium luxury hotels, other segments.
Oyo rooms focus is not only on India but also on Indonesia, Malaysia, Europe, and China.
To know how popular this app is, globally in a mobile travel app, Oyo rooms stands 3rd as of 2020.

Fundamental Analysis of OYO Rooms are as follows:

How does Oyo room earn? To know this, we must know the business model.

Business Model

Fundamental Analysis of Oyo Rooms — OYO Rooms Business Model

Oyo Rooms is a technology platform where hotels and property owners meet customers.
In 1 platform, customers get all options, and hotels and properties get visibility.
Oyo rooms call the hotels and properties Storefronts.
Around 157,000 Storefronts are listed on Oyo rooms’ website. These Storefronts are not owned by Oyo rooms.
So there’s no capital expenditure on making it and does not have to spend on daily operating expenses.
So the company’s margin improves. Oyo’s service doesn’t end on the platform.
Oyo provides service to Storefronts for business and revenue management. For this, it has 2 apps- Co-Oyo and Oyo OS.
By machine learning and artificial intelligence, they tell the Storefronts what price to keep to maximize revenue.
Also to monitor company’s listing, performance, helps in payments. Also helps in photography of hotels and properties & image scoring.
To provide all these services and to list on the platform, Oyo charges 20-35% on gross booking value from hotels and properties.
If a company doesn’t want these additional services and gets listed on Oyo then Oyo charges a fixed fee.
Storefronts will list not only based on service or technology platform but ALSO when customers come.
Oyo has focused on marketing and branding for so many years.
Oyo has made a strong image on its affordability and availability. Therefore 70% of total bookings on Oyo happens on the same day.
A significant share of bookings happens from the same city for immediate and impromptu needs.
There’s a loyalty program as well, Oyo Wizards, which is India’s 2nd largest loyalty program.
In this loyalty program, customers get discounts and rewards. In total, 9.2 million people are in this program.
71% of bookings on Oyo rooms is via Oyo Wizards. So you can imagine the customer’s stickiness and strength of the reward/loyalty program.
Bookings via Oyo Wizards’ value is 1.6 times higher which non-members book and repeat bookings are 2 times.

Management

The Founder & Group CEO of OYO Rooms is Ritesh Agarwal.
OYO Board of Dirctors include Bejul Somaia, W Steve Albrecht and Troy Alstead.
OYO Appoints ANUJ TEJPAL as Global Chief Commercial Officer.

History of Ritesh Agarwal

Ritesh Agarwal was born in Bissam Cuttack, in Odisha state, India, and brought up in Titilagarh. At the age of 13, he started selling SIM cards. Agarwal graduated from St. Johns Senior Secondary School and moved to Delhi in 2011 for college. He dropped out of college and was selected for the Peter Thiel Fellowship in 2013.

Agarwal started a budget accommodation portal, Oravel Stays, for booking budget hotels. It was accepted into the accelerator program by Venture Nursery in September 2012, and later was one of the winners of the 2013 Thiel Fellowship program, receiving a grant of $100,000. The company was launched as OYO Rooms in May 2013.

By September 2018, the company raised $1 billion. In July 2019 it was reported that Agarwal purchased $2 billion in shares in the company, tripling his stake. His net worth in 2020 was estimated to be approximately $1.1 billion (INR 7253 crore) according to Hurun Rich List 2020. He is also the youngest self-made billionaire after Kylie Jenner, in the world.

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Revenue Breakup

The industry in which Oyo rooms operate, let’s understand it.
Oyo’s main revenue comes from short-duration bookings. As per estimates, this industry will grow to $1.9 trillion by 2030.
This industry grows at 6.6% per year. The main reasons are- Increase in our disposable income.
We watch people traveling on social media so we also want to travel. Tourism push is more by local government.
Flight accessibility has increased. So we are traveling more. If we are staying to travel then hotel’s demand will increase.
Maximum hotels are not listed. Almost 88% of hotels and 100% of homes are in the unorganized sector.
So there’s a scope of listing hotels and homes. So Oyo’s revenue and growth market are quite big.
In the last 2-3 years internet adoption has increased. If we book any hotel we check online prices.
Hence the organized sector’s hotels are 40% online. If the same no. replicates in an unorganized sector then imagine the growth.
Oyo rooms have not seen this opportunity alone.
Many players are operating in the same market with similar business models like MakeMyTrip, Trivago, Treebo, Lemontree, even IRCTC.
So competition is huge here for Oyo.

Revenue Stream of OYO Rooms

The Oyo top line grew by more than 350 percent for the financial year 2018-19 to Rs 6,642,85 crores, with transaction revenues increasing over the 12-month period by Rs 6,456,91 crore.

Commissions

Oyo charges around 22% of commissions every month from hotels owners. Commissions may vary as per the services and features offered.

Room Reservation Fee

Customers pay a room reservation fee according to the services chosen. The room fee is charged with a few percentage margins of the hotels’ prices. For example, if a room is priced at Rs. 1,000 per night, Oyo makes only 10-20% commission from it, and that is their actual revenue.

Membership fees

Users who subscribe to Oyo Wizard memberships are charged with premium fees ranging from Rs 500 to Rs 3000.

Advertising

Oyo also charges different companies to place their ads on Oyo’s app and website generating sizable revenue for Oyo.

Sponsors and Partnerships

Oyo also charges some amount from its sponsors and key partners by promoting their brand name through advertising on their app.

Consulting Services

Oyo charges for its business consulting and data analysis services, it provides to its clients, including hotels, clubs, organizations, etc. It provides these services as it owns an extensive database of locations, hotels, event organizations, users, and their preferences.

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Company Financials of OYO Rooms

Now let’s look at the financials of Oyo rooms.
Talking about pre -covid era or financial year 2020, the company generated 1300 crores revenue.
The gross profit margin is 10% and on the net level, the company was a loss. Due to covid, the revenue dropped by 70%.
But seeing the internal management strength, during the covid era when revenue dropped by 70%, then also company increased its gross profit margin.
Mainly it was because of the company’s focus on cost rationalization.
The major expense was minimum guarantee payout. The company reduced this expense to 0.1% from 14.7%.
Marketing, advertisement, and general admin expenses were also reduced a lot.
Due to all these measures, the company’s losses were reduced by 70% YoY.

Future Growth Prospects of OYO Rooms

OYO is growing rapidly and is often regarded as the budget hotel network of the highest order and quality.
OYO could be able to raise its prices, but since the new products have just been launched, it is likely that prices will stay as they now are.
OYO is a business model that is technologically oriented. It is now inaugurated at Hyderabad and Telangana with the first technology development center in Gurgaon and plans to build many more.
OYO has already created OYO Total Holidays and expects OYO Total Holidays to generate 10 percent of its overall sales.
OYO Rooms is also piloting OYO Café, a website that aggregates food to be sold under the brand name OYO Cafe in its hotels.
OYO Cafe can use a surplus stock of hotels and can also use a Zomato or Swiggy for food supplies.
It also offers pilot housekeeping services on request for cleaning services.

Strengths and Limitations of OYO Rooms

Strengths and Limitations of OYO Rooms are as follows:

Strengths

Let’s know about Oyo rooms’ strengths.
As it’s a technology platform, the network effect has a big role.
As many storefronts will list on Oyo, more customers. More the customers, growth will exponentially multiply.
1 benefit over its competitors is the additional services which others don’t provide to its customers.
So Oyo rooms have an upper hand here. Also, the brand name is strong and we heard about a loyalty program that is sticky and successful.
The business model of Oyo’s room is an asset. The company partially owns only 8 facilities.
So the boom in travel and tourism, the company can benefit from it without any significant financial burden.

Limitations

Let’s kmow about the limitations and negatives of Oyo rooms.
The biggest negative is that the company is not profitable.
As the company is in growth mode, it will take years to achieve profitability. Its industry is competitive.
The biggest stakeholder of Oyo rooms is SoftBank. Its stake is 46.6%. As SoftBank is a foreign entity, the regulatory issue may arise on Oyo.
Oyo rooms function in the hospitality industry where customer satisfaction is subjective and it’s very difficult to please customers.
Due to small mistakes, customers dissatisfaction and disputes arise which can impact the company’s branding.
Founder of Ritesh Agarwal is the driving force behind Oyo so the company has key man risk.
Just in case Ritesh Agarwal decides not to continue with Oyo rooms it will bring a negative effect on the company.
We have understood the company’s business model, financials, strengths, and weaknesses.

OYO IPO Details

Now let’s know the IPO details.
The company’s IPO has the fresh issue of 7000 crores and 1450 crores will be offer for sale.
The money left will b used for prepayment and repayment of loans.
Few funds will be used in organic and inorganic growth activities like expanding storefront base, technology platform, and possible acquisitions.
Money will be used for general corporate purposes.
The company hasn’t declared the IPO opening date, lot size, and price band. So we need to wait for some time.
We will let you know as we get the information.

Conclusion

Overall if we conclude OYO Rooms has an excellent business and its management, strong competitive advantage and solid financial, and a very bright growth prospect which makes it a fundamentally strong company.

What is your take on OYO Rooms have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.

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Fundamental Analysis of Oyo Rooms | OYO IPO Details | Future Growth Stock

Introduction