“The rating affirmation reflects Moody’s expectation that Oyo remains on track to turn Ebitda positive, on a full-year basis, for the fiscal year ending 31 March 2024, supported by a strong demand recovery as well as its various cost reductions,” said Sweta Patodia, a Moody’s assistant vice president and analyst.
Moody’s also said on Monday it has affirmed Oravel Stay Limited’s (Oyo’s) B3 corporate family rating (CFR) as well as the B3 rating of the backed senior secured term loan issued by its wholly owned subsidiary – Oravel Stays Singapore Pte Ltd.
“The stable outlook reflects our view that the company will maintain adequate liquidity buffers to support its operations until it turns cash-flow positive over the next 12-18 months,” said Patodia, who is also Moody’s lead analyst for Oyo.
Moody’s forecast is based on a further demand recovery in the hospitality business, a higher number of storefronts on Oyo’s platform and more cost reductions.
A recovery in travel demand, combined with cost optimisation measures has improved Oyo’s operating performance over the past 12-18 months. Excluding share-based payments, Oyo is generating positive Ebitda since April 2022, the company said.
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Recently, Oyo told employees in a town hall meeting the company turned cash flow-positive in the fourth quarter of FY2023. In an internal presentation, Oyo told staffers it ended the quarter with Rs 90 crore of surplus cash flow.Moody’s B3 rating reflects its position as one of the largest providers of budget accommodation in its key operating markets, good long-term growth prospects for the domestic budget travel sector, and continued support from its key shareholders.
Moody’s stated that under its base-case assumptions, it expects Oyo to generate around $50-55 million Ebitda (after share-based payment expenses) in FY24.
As per Moody’s, in FY23, domestic passenger volumes at Indian airports had recovered to around 98.5% of the FY20 levels. Similarly, passenger volumes carried by Indian railways have rebounded to around 79%. Moody’s said India’s rising population and growing urbanisation will drive continued growth in its travel and tourism sector over the next few years, and in turn, support the demand for hospitality assets in the country.
Likewise, the European vacation home market is recovering well with demand and occupancy levels in 2022 already surpassing 2019 levels.
Oyo has good liquidity, Moody’s said and added that the cash balances of the company remain sufficient to support the company’s operations until it starts generating positive cash flow from operations over the next 12-18 months.
The company said in terms of environmental, social and governance (ESG) factors, Oyo is exposed to customer relations risk as there is potential for reputational harm and business disruption from adverse publicity. Oyo handles large volumes of customer data, which also exposes it to the risk of information security breaches.
However, Moody’s expects Oyo to benefit from changing demographic and societal trends as increasing smartphone usage and data consumption in its key operating markets will increase the demand for the company’s services.
Oyo’s privately owned status results in limited corporate transparency and the potential that the company would adopt financial strategies that largely favour shareholders over creditors.
The rating also incorporates Oyo’s aggressive financial policy, as demonstrated by the use of debt to fund its evolving business. While Oyo also has a history of pursuing aggressive expansion and business policies that have led to significant losses, its shareholders have provided substantial equity capital to cover its cash burn, Moody’s stated.
Moody’s could upgrade the ratings if the company generates positive Ebitda and cash flows over a multi-year period, while maintaining robust liquidity.
Moody’s could downgrade the ratings if the company’s cash burn does not reduce significantly over the next 12-18 months; or Oyo has insufficient liquidity to fund its operations and investments over at least the next 2-3 years; or due to competition from new entrants or changes in regulations, taxation or government policy that could weaken the company’s market position, or because of cash flow or earnings relative to current expectations.