PremiumBENGALURU : One year ago, Oyo (Oravel Stays Pvt. Ltd), was not just India’s second-most valuable internet startup, it was one of the biggest employers among internet companies in the country. At the end of last year, Oyo’s staff count touched 30,000 globally and about 10,000 in India.
Today, Oyo employs less than 10,000 people across all its markets, including India. Though the shrinkage seems stunning, the company is likely to shed even more staff in the coming months as demand continues to remain feeble, people familiar with the matter said.
Premium 
Premium In an interview with Mint, Oyo founder and chief executive Ritesh Agarwal said that the company will continue to invest heavily in technology (which may affect a few jobs) but doesn’t anticipate any “substantial restructuring".
The ongoing covid-19 pandemic has ravaged the travel and hospitality business globally but it has hit Oyo particularly hard. In India, apart from the occasional spikes during long weekends, demand is nowhere near pre-covid levels.
Though China has been successful in curbing the pandemic, the ongoing tensions between India and China casts doubt about Oyo’s long-term prospects in the world’s second-largest economy. The US and Europe are experiencing a second, larger wave of covid-19, which may partly reverse the fledgling recovery in the hospitality business in those areas.
To be sure, the news of vaccine breakthroughs by Pfizer and Moderna has raised hopes that the beginning of the end of the pandemic is near, especially in the West. Also, stocks of hospitality companies like Marriott International have more than doubled from their April lows. Airbnb, which agreed to a down round in April at a valuation of $18 billion, has since made a strong recovery and is now expected to file for an initial public offering that could value the firm at $30 billion.
These events have provided cause for optimism at Oyo, which has used the crisis to build a leaner firm with fat margins, a structure it hopes to retain even after the pandemic ends. Though demand remains low, it has set an ambitious target of achieving earnings before interest, taxes, depreciation and amortization (Ebitda) profitability in India by the end of December 2020.
Still, with the company facing a drop in overall revenues in this financial year for the first time since its launch in 2013, its $10-billion valuation looks pricey. If a steep drop in valuation comes to pass, analysts have speculated that Agarwal could face calls from investors to make way for a professional CEO.
Premium Premium 
Premium Premium 
Premium Premium Agarwal denied that such a plan has ever been considered by Oyo investors. “There has never been a discussion about this (among our shareholders). We’ve been very focused on building the business and getting through the pandemic," he said.
Focus on India
Egged on by its largest shareholder SoftBank, Oyo had embarked on a wild expansion spree that lasted from 2017 to the end of 2019 and saw its valuation soar from $400 million to $10 billion in that period. The expansion spree had to be halted only after SoftBank asked its portfolio firms across the world at the end of last year to focus on cutting costs and improving margins.
At the end of 2019, Oyo promptly put the brakes on its expansion plans and began cutting thousands of jobs. Still, Agarwal and his team were certain that the difficult period would pass soon. The company enjoyed a near-monopoly position in India, its largest market, and they believed that the China business, its second largest, could be salvaged through a restructuring. The hope was markets like the US, Europe and south-east Asia would provide steady growth.
The pandemic, which began in China and spread across the world in the first half of the year, dented their confidence but even as late as June, the company’s executives were hopeful that demand would largely bounce back by the end of 2020, especially in India.
In an interview with The Ken in May, Agarwal had estimated that though the company’s overall growth would decline this year, it would still expand by 60% to 80% (After this story was published, Oyo told Mint that Agarwal was giving an estimate about the company's growth in the coming years, not specifically for the current financial year). It is now clear that this estimate was optimistic. In India, especially, the combination of a months-long, ineffective lockdown and the rapid spread of the pandemic has depressed the travel and hospitality industry.
After the pandemic began in March, Oyo tried to drum up business in its home market by offering rooms to health workers and others providing essential services, hoping that travel would bounce back after the end of the nationwide lockdown. It ran marketing campaigns touting the hygiene and sanitization protocols the company had put in place to keep guests safe.
But in most months starting June, when the lockdown ended, Oyo has generated less than 25% of its pre-covid monthly revenues in India, three people familiar with the matter said. Demand inched up in October partly as new covid-19 cases abated across much of the country, but even in that month, revenues were less than a third of pre-covid levels, the people said.
Oyo declined to comment on specific revenue numbers in India, but Rohit Kapoor, CEO of Oyo India and South Asia, pointed to the sharp recovery in gross profit, which has recovered to more than 85% of pre-covid levels. Since August, revenues have increased about 30% month-on-month while occupancies have returned to 40% of pre-covid levels, he said.
“Hotels were allowed to operate starting June, but even till August-end, there were many restrictions across states that discouraged people from traveling. So we’re only about 11 weeks into the recovery for the hotel industry. But at 40% of occupancies, we are generating more than 85% of our gross margin dollars. That gives an indicator of how profitability is moving," Kapoor added.
Still, some hotels on Oyo’s platform are struggling to survive. More than 40% of its hotel base comprises leased hotels, which are operated by local entrepreneurs who do not own the properties. Some lessors have left Oyo’s platform since June as the pandemic has made this model unviable for them, the people cited above said. Some of the loss could be permanent, as these entrepreneurs would have moved away from the hospitality business altogether.
Agarwal, however, said while some lessors have left the platform, a majority of the leased properties have remained in business. Oyo has added more than 45,000 rooms since August, and gained market share, he added.
In India, demand has collapsed not only at Oyo but at all hotel and travel platforms. In the six months to 30 September, MakeMyTrip, India’s largest travel platform, saw its hotel revenues plunge to just 5% of the revenues in the year-ago period, according to its published results.
A senior hotel industry executive, requesting anonymity, said that demand may return to pre-covid levels only after the pandemic ends, which could take until early 2022. This person estimated that demand, on average, presently is about a fourth of pre-covid levels for the industry.
“Corporate sector demand in metros is quite bad—many offices are still shut, and employees are avoiding official travel as much as possible. The leisure market is doing better, especially on the premium end. For the most part, high-income people haven’t suffered job losses, so they have money to spend. People are fed up of being locked up at home for so many months. But, overall, there is no doubt that hospitality is still in bad shape," the person said.
With little hope of a significant resurgence in demand in the coming months, Oyo has redoubled its efforts to boost margins. The company has cut much of its sales and operations staff, banking instead on deploying technology to increase collections from hotels and serve customers through a chatbot.
It has been trying to plug revenue leakages and reduce fraudulent behaviour from its suppliers by more stringently auditing booking claims by them and introducing steep penalties for offenders.
The firm is also attempting to raise per-room revenues by increasing sales of food items. To meet its target of breaking even at the Ebitda level by the end of the year, Oyo may reduce staff further.
“There are very aggressive profitability targets," a former Oyo executive said. “It’s a complete reversal of previous years when it was all about growth, growth, growth. We’re trying a lot of different things, but it looks like we’ll have to cut more jobs. There’s a problem though. There have been so many cuts in sales that there’s only a skeletal staff left. Now we’ll have to cut jobs at the HQ, and probably at the senior levels, too."
Agarwal declined to comment on the company’s Ebitda targets in India, but said that the company has a “clear line of sight on profitability."
International troubles
In the year ended March 2019, Oyo reported revenues of $951 million, of which, about 64% came from India and about 32% from China. Oyo diversified further in FY20 with higher revenues expected from US, Europe and south-east Asia (the company is yet to file results). But the aggressive international expansion, especially in China, may come to haunt the company.
Succeeding in China is crucial to the company’s efforts to prop up its valuation, but Oyo’s business there has been dogged by rampant fraud (in 2018-19), management changes and disputes with hotel suppliers.
The company had reduced its China staff to less than 3,000 early this year from a peak of 8,000-9,000 last year. Mint has learnt that Oyo now employs less than 2,000 people there.
The firm also faces a supplier base that is sceptical of working with an Indian platform after the border clashes between Indian and Chinese troops in June. India moved to ban dozens of Chinese apps, adding to restrictions on Chinese capital introduced in April.
The threat of retaliatory action against the few Indian companies like Oyo operating in China is ever-present.
For now, Oyo said it continues to invest in China. Agarwal said that RevPAR (revenue per available room), an indicator of demand, in China have rebounded to about 75% of pre-covid levels, with a full recovery likely by early 2021. Mint learns that Oyo’s overall monthly revenues in China, though, are less than half of their pre covid levels.
Oyo is struggling in some other major international markets, too. In Japan, SoftBank’s home market, its business has shrunk after Oyo was forced to exit many cities because of low demand.
There are some bright spots though.
In the US, the worst-hit country in the world by the pandemic, Oyo was forced to cut a majority of its staff earlier this year. But the company’s monthly revenues in the US are now exceeding pre-covid levels, Agarwal said. He added that Oyo remains a market leader in south-east Asia and Europe, where its business had seen a strong recovery before the second wave in October.
For the company as a whole, gross profit will recover to pre covid levels by early next year, from about 85% presently, Agarwal estimates.
“(But) revenue is hard to predict because different countries are at different stages of the pandemic," he said.
Pressure on Agarwal
A year ago, Agarwal tripled his stake in Oyo to about 27% by buying shares from some existing investors and putting fresh capital into the company. The $2-billion transaction was funded through loans from Japanese banks that were guaranteed by SoftBank founder Masayoshi Son.
The terms of the loan are unclear, but given that the collateral was Oyo shares, a decline in the company’s valuation could spell trouble for Agarwal. Two of Oyo’s four largest investors, Lightspeed Venture Partners and Sequoia Capital India, have already generated attractive returns by selling part of their stakes to Agarwal last year.
Oyo has more than a dozen other shareholders but SoftBank, which owns about 48% in the firm, and Agarwal, who is now the second-largest shareholder in Oyo, are at the highest risk.
However, Agarwal said that even if the company’s valuation was to decline, he wouldn’t face margin calls on the loan. “Last year, the capital I had raised was from a combination of financial institutions, family offices, etc. It doesn’t have a margin call structure," Agarwal said
Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.
