The OYO’s struggle to lead the market

For another, OYO is India’s second-largest startup in terms of valuation. If OYO flames out, the seismic repercussions on startup funding in India will reverberate for years.

So why are we discussing this now?

Because OYO is currently facing the unenviable position of having to fight the “Battle of the Bulge”.

History aficionados will recognise the Battle of the Bulge as an iconic “last-stand” battle during World War 2—one last desperate offensive campaign that Germany launched to avert what seemed like inevitable defeat. OYO’s current predicament is something similar. The last year has been annus horribilis for OYO.

It saw widely-publicised problems around dissatisfied hotel partners and disgruntled customers culminating in a purge where nearly 20% of the company’s 12,000-strong workforce in India was laid off. There were similar layoffs across its other group entities around the world. OYO now needs to win a last-ditch battle to prevent these eddies from cascading into a deluge that takes the company under.

But OYO has another “bulge” problem—the bulge of the wallet kind. A large part of OYO’s mercurial growth can be attributed to the enormous sums of money raised from its financial backers, most notably SoftBank (which owns nearly 50% of the company). Post the chastening that SoftBank received during the WeWork IPO imbroglio, the halcyon days of bottomless pits of capital were given a quiet burial. Like other SoftBank portfolio firms throughout the world, OYO has discovered that even a seemingly infinite $100 billion fund has limits.

Instead, it has been forced to abandon its “grow-at-all-costs” mantra to build a “sustainable path towards profitability”.

The stakes are high. Can OYO conceivably progress towards this holy grail of profitability?

OYO’s recently released audited financials for the year ended March 2019 is a good starting point to help answer this question.

The sum of its parts

The headline numbers make for dire reading.

According to OYO’s latest results, its consolidated revenue stood at $951 million in the year ended March 2019, compared to $211 million in the previous year. While this 4.5X increase in revenue might seem impressive, it pales in comparison with the net loss—a whopping 7X increase to $335 million in the same period, compared to $44 million the prior year.

These numbers tell us that not only are losses growing much faster than revenue, the net loss as a percentage of revenue is also widening—growing from 25% to 35% over the same period. In an accompanying annual report card, the company further stated that total gross margin fell from 10.7% to 7.1% over this time. Hardly signs of a company on its way to profitability.

The company’s management, though, sees it differently.

OYO’s executives, led by CEO and founder Ritesh Agarwal, see the company’s business as one that can be broken up into markets in three different phases.

On top of the pile is India, which is both OYO’s largest as well as most mature market. In India, the company claims it is “driving the best gross margins and chasing a path to profitability”.

Then, there are markets like China and Southeast Asia, where the company has already established operations and made substantial investments. These investments have dragged the bottomline down for the year ended March 2019, but are now primed to deliver returns, both in terms of revenue as well as gross margins.

Home improvement

Finally, there is the rest of the world—markets such as the US and Latin America. OYO has been present in these markets for less than a year and is still in the process of setting up operations.

The table below provides a summary of the company’s numbers for the year ended March 2019 across these three markets.

OYO segment-wise numbers for FY19 (Source: Company blog post)

Let us put these numbers to the test.

Starting with India.

According to the company, India’s revenues for the year ended March 2019 totalled $604 million (64% of the total). This is up from $211 million the previous year. So, while India revenues grew nearly 3X year-on-year, losses, on the other hand, went up only marginally—from $50 million to $84 million. To boot, as a percentage of revenue, losses in India was only 14% in the same period, an improvement from the 24% registered the previous year.