Oyo Townhouse in Bengaluru. (Photographer: Nishant Sharma/BloombergQuint)

Breakneck Expansion Poses Challenge As Oyo’s First Bet Pays Off 

As Indians travel more for business and leisure, Oyo Hotels and Homes’ pivot from an aggregator to an operator of a hotels franchise is paying off as its sales soared. But its frenetic expansion overseas means profit will have to wait as expenses rise.

Revenue from operations for India’s largest hospitality chain jumped threefold to Rs 415 crore for the year ended March 2018, according to the last available data with the Registrar of Companies. Losses remained stable at Rs 360 crore.

That comes as India’s hotels industry continues to recover as demand outpaced supply for the sixth straight year, according to an HSBC note. Occupancy rose to its highest in a decade in 2018 to 67 percent as hoteliers focus on reducing empty rooms more. While growth in average daily rates disappointed, HSBC remains optimistic because of higher foreign tourist arrivals, double-digit air traffic growth and domestic demand. Oyo aims to capture that.

Still, there’s is lot that can go wrong given that more than half of Oyo’s inventory is international, said Satish Meena, a New Delhi-based analyst at Forrester Research. “Besides issues such as quality checks and how to upgrade customers, the bigger concern is how to make money in the international markets that are more mature than India.”

No. 1 Target

Ritesh Agarwal, founder and chief executive officer of Oravel Stays Ltd., doing business as Oyo Rooms. (Photographer: Samyukta Lakshmi/Bloomberg)
Ritesh Agarwal, founder and chief executive officer of Oravel Stays Ltd., doing business as Oyo Rooms. (Photographer: Samyukta Lakshmi/Bloomberg)

Founded in 2013 by college dropout Ritesh Agarwal, the Softbank-backed company began branding hotels a year-and-a-half ago instead of just offering reservations. It ensures basic quality at its properties and charges a franchise fee or a share in revenue. And frenetic expansion has taken it into the league of world’s largest hotel chains like Wyndham Group, Choice Group, Marriott Hotels and InterContinental and Hilton by properties though it’s still way short by rooms. Agarwal’s target is the No. 1 crown globally

From one hotel in Gurugram, Oyo now has over 13,000 properties with a total of 458,000 keys in India, Indonesia, the U.K., the U.A.E, Malaysia, Nepal, the Philippines, and China. It now eyes the U.S.

The startup launched leased mid-budget hotels brand Townhouse and Palette resorts. Oyo Living offers rental housing while Weddingz is a marketplace for marriage venues and vendors. Co-working is next on the list.

All that, the company expects, would help its India revenue grow fivefold to Rs 1,400 crore the ongoing financial year ending March. Not unlikely going by its performance last calendar year.

It reported $1.8 billion (more than Rs 12,500 crore) in gross or hotel-level sales—equivalent to the gross merchandise value in e-commerce—across regions with about 75 million room nights in 2018, according to an Oyo spokesperson. About two-thirds of that (about $1.2 billion) came from India—a monthly run rate of about $100 million (about Rs 700 crore). And Oyo could be making around 15-25 percent of its gross sales as revenue from the franchise fee that hotel owners pay, according to Arvind Singhal of Technopak Advisors.

Overseas Challenge

While India accounts for two-thirds of its revenue, the region contributes less than a third of total rooms. It prices them between $20 and $50 a night, with an average of about $24 or Rs 1,695.

What that means is the company needs massive volumes and higher occupancy rates to increase its revenue to offset expenses as it expands in international markets, according to Meena. And it will have to spend more on cashbacks to draw customers overseas.

That’s already evident as Oyo’s spending rose. Expenses jumped about 65 percent in the year ended March 2018. Meena expects that to increase in the next two to three years as it looks to strengthen the international market.

Investors Pour Funds

Oyo has enough firepower though. It received $100 million from China’s ride-hailing giant Didi Chuxing to complete its $1-billion fundraise, the company said. The billion-dollar funding, led by SoftBank Group, had also seen $100-million investment by Singapore-based ride-hailing platform Grab. Close to $600 million of the total amount will be ploughed in China, which already has about 5,000 Oyo-branded hotels and more than 271,000 rooms.

Oyo also joined the ranks of a few Indian startups where founders have made way for professional chief executive officers as it roped in former IndiGo President Aditya Ghosh. That, according to Harminder Sahni, founder and managing director at management consultant Wazir Advisors, is a sign of a maturing company, and infuses confidence in its model.