The financial crisis in 2019

Aditya Ghosh, previously the CEO of OYO India and currently a board member, echoed this claim in a press interview. He stated that gross margins in India increased from 10.6% in the year ended March 2018 to 14.7% the following year, “indicating the strength of our business model and a positive correlation between market share and economics”.

All kosher?

Not quite.

First, there is the issue of expense allocations across segments/markets. Burnishing the economics of one segment by shovelling expenses into other segments is almost trivial from an accounting perspective. Several large companies do this routinely to build a narrative that is palatable to their shareholders and the public at large at a particular point in time.

OYO has a mind-boggling array of no less than 40 subsidiaries across India and the world. It is simple to take, say, ten million dollars from the marketing section and similar sums from other departments such as human resources and move it out from the main Indian entity and account for it in another subsidiary.

But let’s give OYO the benefit of the doubt for now. Instead, let’s assume we can take these segment-wise numbers at face value.

The topline operating revenue number of $581 million seems mighty impressive. The gross margin of 14.7% (translating to $88 million) is equally so.

Both these numbers are misleading.

Shifting goalposts

Effective 1 April, 2018, OYO changed its accounting methods to recognise what was earlier known as “net realised value” (representing the total flowthrough or gross merchandise value) as revenue. In its filings, the company says that, “Revenue from sale of accommodation services is recognized on gross basis as we gain ‘control’ on stay services before providing it to the customer. We consider ourselves as the ‘Principal’ in arrangement as we assume obligations towards performance of stay services to end customers”.

This shifting of goal posts means what was earlier considered revenue is now considered as “gross margin”.

If you strip away these cosmetic changes, the numbers are underwhelming. Even this $88 million figure is inflated. It doesn’t provision for commissions paid to selling agents such as online travel agent MakeMyTrip, which amounts to $26 million and needs to be netted out to get an accurate picture of the company’s true topline.

But optics aside, is this just a matter of semantics? After all, you can call it “net operating revenue” or “gross margin” or even “take rate” (which is what this number actually represents for a marketplace like OYO) but the fact is that this number has gone up from 10% of GMV to nearly 15%.

For a company like OYO that has historically had even negative take rates, a 15% figure definitely counts for laudable progress.

But there are three questions that need to be asked about this number.

A tale of three questions

First, what was the cost of getting to this figure?

As of March 2019, OYO had approximately 180,000 rooms in India, adding 10,000 rooms every month at that point in time. Over the course of that year, OYO’s employee base in India went from 2,000 to more than 8,000 people. This scale of staff growth was required to onboard new hotels and manage operations at this scale.

It is not a coincidence that this 4X growth in staffing mirrors the 4X growth in revenue. It shows that despite wanting to be perceived as a tech startup, OYO is closer to a traditional hospitality company, where there is a linear dependency on staff and infrastructure.

Second, is this number sustainable?

To combat the natural limits of a hospitality business, by its own admission, OYO cut corners galore. Salespeople oversold OYO to hotel partners and once the hotels were on-boarded, hidden charges and opaque fees became commonplace.

On top of that, the monthly fees guaranteed to hotels were not paid in time or at all, in many cases. The plethora of complaints from disgruntled hotel partners, both in the press as well as in courts of law, bear adequate testimony to these practices. Purely from a revenue perspective though, all of this helped grow OYO’s margins. So, rather than hurt the company’s book, at least temporarily, this helped OYO report better numbers.

The problem, however, is that disgruntled hotel partners fought back, refusing to honor room bookings and flouting OYO’s standards when it came to hotel amenities and maintenance. This vicious circle breaks OYO’s fundamental brand promise of predictable and standardised budget hotel rooms. The recent round of mass layoffs has led to further uncertainty among both hotel partners and potential customers.