Moody’s Expects OYO to Achieve EBITDA Profitability by End of FY24
- ByStartupStory | May 9, 2023
According to credit rating agency Moody’s, OYO, a leading player in the hospitality industry, is expected to maintain a favorable earnings before interest, taxes, depreciation and amortization (EBITDA) path for the rest of fiscal year 2023-24 (FY24). Moody’s predicts that the startup’s general outlook will remain steady.
Moody’s assistant vice-president and analyst, Sweta Patodia, stated that “the affirmation of OYO’s rating is based on Moody’s anticipation that the company will achieve positive earnings before interest, taxes, depreciation and amortization (EBITDA) (excluding ESOP expenses) for the full fiscal year ending on March 31, 2024”. This is expected to be driven by the firm’s successful implementation of cost-cutting measures and a robust demand recovery.
Moody’s predicts that OYO will achieve an earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately $50 Mn-$55 Mn in FY24, after accounting for share-based payment (ESOP) expenses. The credit rating agency also confirmed that OYO will maintain sufficient liquidity buffers to sustain its operations until it becomes cash-flow positive in the next 12-18 months. Moody’s has reiterated its B3 corporate family rating (CFR) for OYO and B3 rating for the startup’s senior secured term loan, which was issued by its Singaporean subsidiary.
Moody’s has justified its outlook by stating that OYO’s operational performance has improved due to the rebound in travel demand following the pandemic and the cost-cutting measures implemented by the company over the last 12-18 months. The credit rating agency also anticipates that OYO’s operating costs will continue to decrease as it relocates some roles to India and reduces its share-based payment (ESOP) expenses.
Moody’s has cautioned that OYO’s rating may be downgraded due to regulatory challenges or the company’s inability to substantially reduce its cash burn in the next 12-18 months. The credit rating agency has also expressed concern about OYO’s ‘inadequate’ liquidity to support its operations and investments for the next two to three years.
Moody’s has observed that OYO’s earnings before interest, taxes, depreciation, and amortization (EBITDA) in FY24 may not be sufficient to cover its interest expenses of nearly $85 Mn. This could eventually result in negative cash flow, given the absence of any significant working capital movements. However, Moody’s has also indicated that if OYO continues to achieve steady earnings growth beyond FY24, it should be able to cover its interest expenses and generate positive cash flow from operations in FY25.
OYO has recently received a relatively optimistic outlook from Moody’s, following a series of positive developments for the company. Despite being hit hard by pandemic-induced lockdowns, the hospitality major has made a strong recovery in recent months, with increased bookings across all major regions. OYO turned cash flow positive in the quarter ending March 2023, marking a significant rebound after a challenging couple of years due to the pandemic.
Despite re-submitting its draft red herring prospectus (DRHP) to SEBI in March 2023, OYO continues to face challenges in its initial public offering (IPO) plans. Earlier this month, SEBI raised some concerns and requested updated financials from OYO. The market regulator is now awaiting a response from OYO’s ‘Lead Manager’ regarding the DRHP.
Despite facing challenges such as adverse market conditions and regulatory hurdles, OYO remains focused on its plans for an initial public offering (IPO). While it initially aimed to raise INR 8,430 Cr ($1.2 Bn) through the public listing in September 2021, the company has since reduced the size of the offering to $400 Mn-$600 Mn. Although market headwinds have made matters difficult for OYO, it is well-positioned to capture a significant share of the Indian hotel booking market, which is expected to reach a market size of $7.6 Bn by the end of 2023.
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