Moody’s expects OYO to remain Ebitda positive for FY24

Moody's Investors Service on Monday said hospitality and travel tech startup Oyo is likely to see its Earnings Before Interest, Taxes, Depreciation and Amortization (Ebitda) to be positive for the remaining financial year (FY24) and overall outlook to remain stable.

"The rating affirmation reflects Moody’s expectation that Oyo remains on track to turn Ebitda positive, on a full-year basis, for the fiscal year ending 31 March 2024, supported by a strong demand recovery as well as its various cost reductions,” said Sweta Patodia, a Moody’s assistant vice president and analyst.

Moody's on Monday said that it has affirmed Oravel Stay Limited’s (Oyo’s) B3 corporate family rating (CFR) as well as the B3 rating of the backed senior secured term loan issued by its wholly owned subsidiary - Oravel Stays Singapore Pte Ltd.

"The stable outlook reflects our view that the company will maintain adequate liquidity buffers to support its operations until it turns cash flow positive overthe next 12-18 months," adds Patodia, Moody's LeadAnalyst for OYO.

Moody's forecast is based on a further demand recovery in the hospitality business, a higher number of storefronts on Oyo’s platform and more cost reductions.

A recovery in travel demand, combined with cost optimisation measures has improved Oyo's operating performance over the past 12-18 months. Excluding share-based payments, Oyo is generating positive Ebitda since April 2022, it said.

"Under Moody's base-case assumptions, the agency expectsOYOto generate around $50 million-$55 million EBITDA(after shared based payment expenses)in fiscal 2024," said Moody's.

Moody's also expectsOYO's operating costs to reduce further as the company shifts some of its roles to India, which is a lower cost location compared toEurope, and reduces its share-based payment expenses

Moody’s, however, cautioned that the company’s rating could be downgraded if Oyo did not 'significantly' reduce its cash burn over the coming 12-18 months or Oyo's liquidity was insufficient to fund its operations and investments over the next 2-3 years, at least.

Other external factors, like entry of new players or a change in government policies could lead to a downgrade.

Further, Oyo’s FY24 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, Moody’s said.

It however added that sustained earnings growth beyond FY24 will allow the company to cover its interest expenses and generate positive cash flow from operations in FY25.

Oyo refiled its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) under the recently introduced pre-filing route in March 2023.