Oyo’s Fitch Rating Gets an Upgrade: What Led to the Change

Global rating agency Fitch Ratings has upgraded Oyo-parent company Oravel Stays’ long-term rating to “B” from “B-” with a “stable” outlook.

The Fitch upgrade comes shortly after Oyo reported its first-ever profitable year. During a townhall with staff last week, Oyo founder and CEO Ritesh Agarwal said the company had net income of nearly $12 million and an EBITDA of $107 million for fiscal 2024.

Fitch also upgraded the rating on Oyo’s senior secured term loan facility of $660 million, of which $448 million is still outstanding, from “B-” to “B.” The $448 million in debt is maturing in June 2026.

In June 2022, Fitch had downgraded Oravel Stays’ ratings from ‘B’ to ‘B-‘citing significant uncertainty about Oyo’s ability to achieve EBITDA profit in fiscal 2023.

Skift reported last week that Oyo plans to pause its plans for an IPO as it completes a refinancing at an interest rate of 9% to 10% — significantly lower than the current effective rate of 14%. The move would save Oyo $8 million to $10 million in interest expenses in the first year, with savings increasing to $15 million to $17 million annually. Given its net profit of $12 million, the savings in interest expense is significant.

Why Did Fitch Upgrade Oyo’s Ratings?

Fitch said Oyo’s improving profitability and declining leverage should support its ability to refinance the debt.

But it warned that high interest rates and tight capital market conditions could present challenges: “However, refinancing risks remain with $448 million in debt maturing in June 2026,” the credit ratings agency noted.

Fitch’s Explanation: Fitch said the upgrade indicates its confidence in Oyo’s improved financial health, driven by: sustained EBITDA growth amid cost savings, a recovering short-term stay market, and Oyo’s buyback of $195 million in debt in November 2023.

Fitch’s Prediction: Fitch expects EBITDA to go up to $135 million in fiscal 2025, with free cash flow of $50 million.

In its earlier forecast, Fitch had estimated Oyo’s EBITDA to grow to around $100 million in fiscal 2024.

Oyo’s Key Strengths

Fitch cited Oyo’s asset-light business model, minimal capital expenditure needs, and exclusive distribution rights as key strengths.

However, the credit ratings agency said these are tempered by the high competitive intensity and demand cyclicality in the hospitality sector.

Fitch also expects travel and tourism industry conditions to continue to improve in Oyo’s key end-markets in fiscal 2025.

As demand recovered after the Covid-19 pandemic, the Indian hotel industry’s occupancy rates rose to around 70% in fiscal 2024, compared to 60% in fiscal 2023.

“We expect demand to continue to improve, supported by an increase in domestic leisure travel, recovery in business travel and a gradual rise in inbound tourism,” Fitch said.

Talking about Oyo’s European operations, Fitch noted that the hospitality company has expanded the number of home storefronts in Europe in fiscal 2024 as leisure travel recovered, despite the cost of-living crisis and reduced disposable incomes. “We expect the recovery to continue over the 2024 summer holidays,” it said.

Speaking at the Skift India Summit, Agarwal had said that Oyo’s vacation rental subsidiary in Europe has been doing well. “The business is up almost 40-50% from when we acquired it 3 years ago and the EBIDTA is multiple times higher than when we acquired it,” Agarwal said, without getting into specifics. 

Despite operating in a highly fragmented industry with a single-digit market share in some key markets, Oyo’s focus on cost efficiency and growth in core markets has improved its profitability, the credit ratings agency noted.