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Oyo Hotels angles for an IPO upgrade

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An employee sits next to the logo of OYO, India's largest and fastest-growing hotel chain, at the reception of a hotel in New Delhi, India, September 25, 2018. REUTERS/Anushree Fadnavis

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MUMBAI, Oct 4 (Reuters Breakingviews) - A budget lodging group is aiming for premium accommodation in the public market. Revenue at India’s Oyo Hotels and Homes collapsed 69% last year, forcing the company to curtail its dizzying global expansion plans and restructure the business model. An initial public offering read more at a mooted $11 billion would be a small upgrade from its peak pre-pandemic valuation and imply a lot of faith in young founder Ritesh Agarwal and in a travel rebound.

Oyo, backed by the SoftBank Vision Fund, has exclusive relationships with hoteliers in more than 35 countries, but is focusing on India, Indonesia, Malaysia and Europe. Bookings are predominantly for last-minute, one-night stays in urban centres. Guests range from intercity business travellers to young couples. They rely on Oyo to find decent rooms at a rate rarely provided by bigger brands.

Hotel owners use Oyo’s technology to manage properties more efficiently and deploy tools that go beyond search and discovery, booking and payment and dynamic pricing. The company allows guests to order a burger in its app without calling the front desk, provides a single window to aggregate multiple booking channels and enough data to track individual cleaning-staff performance.

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The asset-light business no longer promises costly minimum guarantees to proprietors, thus conserving cash. As a result, Oyo’s own calculation of gross margin suggests an improving path to profitability. It’s unclear, however, how quickly or easily it will grow from here. The outlook is especially clouded by only a quarter of eligible Indians being fully vaccinated.

At 19 times sales in the year to March, Oyo’s implied valuation would be less than the 31 times commanded by Airbnb over a similar period. Its U.S. peer has a simpler business, however, and was generating cash before the pandemic struck. The multiple also looks robust next to TPG-backed Vacasa, a property manager going public in New York at just 8 times sales.

Oyo will be in line for a boost when foreign tourists return to Asia and price locals out of the higher end of the market once more. Until then, it may be tough for new investors to rest easy.

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CONTEXT NEWS

- India’s Oravel Stays, better known as Oyo Hotels and Homes, on Oct. 1 filed for an initial public offering to sell shares worth up to 84.3 billion rupees ($1.1 billion).

- The company is about 33% owned by entities related to Founder and Chairman Ritesh Agarwal and 47%-owned by SoftBank’s Vision Fund.

- Kotak, JPMorgan and Citi are global coordinators and lead managers on the deal.

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Editing by Jeffrey Golfarb and Katrina Hamlin

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