Skift Take

Not too concerned about the Fitch downgrade, Oyo would rather look at the silver lining — a projected 80 percent growth in financial year 2023. The rating revision is in line with more modest expectations for Oyo's IPO.

Fitch Ratings has downgraded the rating of Oravel Stays, the parent company of India-based Oyo Hotels and Homes, over profit uncertainty.

The ratings agency downgraded Oyo to B- from B.

Raising concerns over Oyo’s profitability prospects, Fitch said in a statement, “We believe that Oyo will likely achieve meaningful earnings before interest, taxes, depreciation, and amortization profit only in financial year 2024, relative to our previous expectations of financial year 2023.”

Owing to slow recovery in travel demand in Oyo’s main markets, wage inflation and spending on marketing, Fitch expects a small deficit in Oyo’s earnings before interest, taxes, depreciation, and amortization in financial year 2023.

“As a standard process, rating agencies review credit ratings of Oyo as an issuer annually — mainly for the Term Loan B instrument currently outstanding. Fitch’s half a notch revision in our ratings, but with stable credit outlook, brings it on a par with Moody’s, who have continued to maintain their B3 rating acknowledging the improving business environment and operational efficiency geared towards profitability,” an Oyo spokesperson said responding to Skift’s query on the downgraded rating.

Given Oyo’s higher exposure to the budget-to-mid hotel segment, which has been slower to recover, Fitch expects the company’s revenue for the financial year ending March 2023 to increase by only around 30 percent — much lower than Fitch’s previous forecast.

However, factors such as the addition of hotels and homes to the portfolio, and stronger travel demand recovery are likely to help the company recover and be on track to grow by around 80 percent in financial year 2023.

Slower recovery in travel demand in its core markets and subdued growth in the number of partnered hotels and homes have marred recovery for Oyo, which mainly targets business and price-sensitive travelers, noted Fitch. In financial year 2022, the mid-to-budget market recovered more slowly than the high-end market.

“We believe Oyo’s revenue growth in financial year 2022 may have underperformed that of its peers in the hotel industry, which grew by 50-100 percent year-on-year,” Fitch said.

Hinting at a rapid rebound in business travel in India, Oyo said this month that it has added more than 1,250 corporate accounts since March 2022. 

A Stable Outlook

However, even as Oyo’s long term foreign and local currency issuer ratings have been downgraded, the credit ratings agency said that the outlook for the company is stable.

The stable outlook reflects comfortable liquidity as available cash is sufficient to fund the expected free cash flow deficit in the next two years, with limited refinancing risk on its long-dated debt.

In August, Fitch had assigned a B rating to Oravel Stays with the outlook as negative.

“Fitch’s earlier rating had not factored in the subsequent Delta and Omicron waves which eventually impacted the industry and business performance in financial year 2022,” the Oyo spokesperson said.

Fitch has also downgraded the rating on the $660 million senior secured term loan facility due 2026, issued by Oyo’s fully owned subsidiary, Oravel Stays Singapore, to ‘B-‘ from ‘B’. The recovery rating remains at ‘RR4’.

Under Fitch’s country-specific treatment of recovery ratings criteria, India falls into Group D of creditor friendliness, and the recovery ratings of issuers with assets in this group are capped at ‘RR4’.

Fitch on Oyo IPO

Commenting on Oyo’s impending stock listing in India, Fitch noted that Oyo has sought to file a revised prospectus that contains updated financials with the Securities and Exchange Board of India and is awaiting regulatory approvals for the listing.

Oyo filed a draft prospectus in 2021 and planned to raise $1.1 billion, of which $920 million would be injected into the company. The company plans to use the proceeds to prepay $330 million of debt and the balance to invest in growth and for general corporate purposes.

In view of the current market conditions, the company now plans to cut its initial public offering size.

A stable outlook by rating agencies — Moody’s and Fitch — reiterates public confidence in the business and its cash flows, noted the Oyo spokesperson.

“Both rating agencies have expressed comfort with Oyo’s liquidity position, ability to turn profitable soon and a large, under-penetrated addressable market opportunity. Fitch has also mentioned a projected 80 percent growth in financial year 2023 top-line.”

Fitch noted that even as the Softbank group-subsidiary — SVF India Holdings (Cayman) owns 46.6 percent stake in Oyo — there is no parent-subsidiary linkage between the two companies and Oyo was being rated on a standalone basis.

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