A Slimmed-Down Oyo Looks Better Placed for an IPO

Oyo Hotels & Homes has shelved some of its grand overseas ambitions. But the slimmed down, SoftBank-backed Indian startup looks stronger, too. If the recovery in budget travel, which is Oyo’s bread and butter, can gain a bit of steam, the company would be relatively well placed for a public listing, even in a tough market.

Oyo, which is incorporated as Oravel Stays, on Monday disclosed data showing narrower losses and a rebound in sales for the year ended in March. For the first quarter of the current fiscal year, the company managed an operating profit—a pleasant surprise for a company with a long history of losses.

The success of its public listing would, however, depend heavily on the strength of the continued recovery in travel in price-sensitive markets such as India where Oyo operates—and on whether it gets distracted by ill-thought-out expansion plans again. High inflation and interest rates don’t help.

The total size of the initial public offering will also probably need to come down given the reality of a tough market environment and the lackluster performance of many recent Indian listings.

In its preliminary IPO filing with Indian market regulators last year, Oyo said it expected to seek $1.1 billion. On Thursday, Bloomberg reported that SoftBank, the largest shareholder in the hotel-booking company, cut its estimate of Oyo’s value to $2.7 billion from an earlier $3.4 billion after benchmarking it against peers. SoftBank declined to comment and Oyo called the report inaccurate.

According to Fitch Ratings, which downgraded Oravel Stays from ‘B’ to ‘B-‘ in June, Oyo’s postpandemic revenue rebound has lagged behind many peers, whose annualized sales now have fully recovered to prepandemic levels. Oyo’s annualized sales were only 44% of prepandemic levels based on June quarter figures.

Nonetheless, the company, which at one point had ambitions of becoming the world’s largest hotel chain and commanded a valuation of $11 billion, has had some success in refocusing its operations. Oyo fired thousands of employees before and during the pandemic and retreated from aggressive expansions in China and the U.S., focusing instead on India, Southeast Asia and Europe. It also phased out its practice of providing guaranteed revenue and capital if hotels joined Oyo’s chain.

Those are much needed changes, and the company’s improving financials show they are working. But the lodging company is still pursuing an IPO amid an increasingly hostile market and regulatory environment for startups. The Securities and Exchange Board of India has increased scrutiny over valuations sought by technology companies and over their operating metrics. And investors have lost big money on many recently listed Indian startups. SoftBank recently marked down its investment in Indian payments giant Paytm by over $400 million.

Oyo’s business is clearly on the mend after a challenging period. But the unforgiving mood in public markets and among regulators still means it has a lot to prove—particularly if the Indian economy weakens under the weight of higher interest rates in the months ahead.

Write to Megha Mandavia at megha.mandavia@wsj.com

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