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New Delhi: Budget hotel aggregator Zo Rooms, which is in merger talks with larger rival Oyo Rooms, posted a seven-fold jump in revenue while swinging into a loss of 2 crore because expenses soared for the two-year-old start-up that also runs a chain of hostels for backpackers called Zostel.

Zostel Hospitality Pvt. Ltd posted revenue of 2.7 crore for the year ended March compared with 27.3 lakh in the previous year. It posted a profit of 2.3 lakh in the year ended 31 March 2014, according to data available with the Registrar of Companies.

According to a December report by Mint, Oyo Rooms is close to acquiring Tiger Global backed Zo, which has been struggling to raise fresh capital and is in under heavy pressure to cut costs (http://mintne.ws/1SxeWPG).

Employee benefits and managerial remuneration accounted for close to 35% of overall expenses for the year.

Zostel Hospitality started off by launching backpackers hotel chain Zostel which operates in Vietnam apart from India. Zo Rooms was launched by the parent firm in December 2014.

Zo Rooms last raised $30 million from existing investors, Tiger Global Management and Orios Venture Partners, on the heels of its rival Oyo Rooms raising $100 million from Japan’s SoftBank.

Apart from Oyo Rooms, the company competes with asset-heavy startups such as Treebo that operates in the same domain.

Budget hotel aggregators, which were touted as the next big thing on the block till early this year, suddenly seem to have turned into yet another unproven business where investors are skeptical to pump in more money.

The space last month also saw online travel agencies such as MakeMyTrip, Yatra and Goibibo, which earlier listed these companies, launching their own budget hotel businesses and delisting these startups. The online agents in turn became their direct competitors, potentially triggering consolidation among the start-ups.

Investors have pumped money into at least 10 such start-ups, some of which have different models. Now, as a slowdown in start-up funding takes hold, investors are unwilling to fund too many nascent, unproven business models and start-ups which aren’t market leaders are most at risk of being left in the lurch.

While the market potential may be large and analysts have frequently said the supply of hotel rooms in India is way below demand, building a viable business in budget hotels is challenging.

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