 "Moody's")
Moody’s Investors Service on Monday said that it expects hospitality major OYO to generate positive Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of around $50-55 million, around Rs 400-450 crore, in the current financial year (FY) 2024.
This comes on the back of a strong recovery in travel, an increase in OYO’s storefronts, as well as various cost optimisation measures recently undertaken by the company, which, according to Moody’s, “has improved its operating performance over the past 12-18 months.”
Excluding share-based payments, OYO has been generating positive EBITDA since April 2022.
Its founder and CEO Ritesh Agarwal, in an internal town hall recently, told employees that OYO’s adjusted EBITDA is expected to be around Rs 800 crore in FY24.
The firm had also – through an addendum to its DRHP – reported its maiden positive adjusted Ebitda of Rs 63 crore in the first six months of FY2023. For the second half of the year, Agarwal – during the townhall – shared that OYO’s adjusted EBITDA is expected to rise three-fold to Rs 185 crore, marking the company’s first financial year of adjusted EBITDA profitability.
"The rating affirmation reflects Moody's expectation that OYO remains on track to turn EBITDA positive (after share based payment expenses), on a full-year basis, for the fiscal year ending 31 March 2024, supported by a strong demand recovery and its various cost reductions," says Sweta Patodia, Moody's Assistant Vice President and Analyst.
"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," adds Patodia, who is Moody's Lead Analyst for OYO.
More From This Section
The forecast accounts for OYO’s share-based payment expenses. Agarwal – during the townhall – also revealed that the company’s current cash balance was Rs 2,700 crore.
“OYO has good liquidity. The company's existing cash and cash equivalents will remain sufficient to support its operations until it starts generating positive cash flow from operations over the next 12-18 months,” the report said.
Agarwal – during the townhall – revealed that the company’s current cash balance was Rs 2,700 crore.
Moody's also expects OYO's operating costs to reduce further as the company shifts some of its roles to India, which is a lower cost location compared to Europe, and reduces its share-based payment expenses.
“Nonetheless, OYO's fiscal 2024 EBITDA will fall short of covering its interest expenses of around $85 million, resulting in negative cash flow from operations in the absence of any material working capital movements,” the report added.
However, sustained earnings growth beyond FY 2024 will allow the company to cover its interest expenses and generate positive cash flow from operations in FY 2025.
Moody's said it could downgrade the ratings if OYO's cash burn does not “reduce significantly” over the next 12-18 months. Or if the company has insufficient liquidity to fund its operations and investments over at least the next 2-3 years.
External factors like competition from new entrants or changes in regulations, taxation or government policy may also elicit a downgrade if the company's market position, cash flow or earnings weaken relative to current expectations.
Oravel Stays, the parent firm of OYO, recently refiled its Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) under the confidential pre-filing route.
The issue size for the company’s public listing was reduced by almost half to between $400-600 billion, all of which will be raised through a primary issuance, in a bid to repay most of the firm’s debt, Business Standard had reported earlier. The company expects an issue timing of November this year, following approvals from Sebi.
