Fitch Ratings, a global credit rating agency, has revised the outlook on OYO long-term foreign- and local-currency issuer default ratings from ‘stable’ to ‘positive’. The ratings agency also affirmed the ratings at ‘B-‘ and maintained the rating on OYO’s $660-million senior secured term loan facility due 2026 at ‘B-‘.
According to Fitch Ratings, the outlook revision is based on their assessment that the company is making significant progress towards generating sustainable positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash flow from operations (CFO). The company achieved positive EBITDA in every quarter of the financial year ended March 2023, marking its first year of profits since its inception in 2012.
“We expect OYO to experience substantial EBITDA growth in FY24, driven by the ongoing recovery in the travel and tourism industry, the company’s stable gross margins, and a reduction in operating costs,” stated Fitch Ratings in a statement. The agency also highlighted OYO’s asset-light business model, which benefits from minimal capital expenditure requirements, exclusive distribution rights, pricing control over inventory, fixed revenue share, and strong long-term growth potential.
While acknowledging the strengths of the company’s business profile, Fitch Ratings noted that the sector’s high competitive intensity and demand cyclicality pose challenges. The agency also recognized the company’s adequate liquidity position.
Fitch Ratings expects the ongoing recovery in the travel and tourism industry to fuel the company’s revenue growth, projecting an increase of over 20 percent. Additionally, the agency anticipates that the company’s operating leverage will benefit from sustained cost reductions, resulting in high single-digit EBITDA margins in FY24.
Commenting on the company’s cost structure, Fitch Ratings stated, “We believe the cost-reduction measures implemented by the company in recent years will support its improving profitability in FY24. We expect these reductions to have minimal impact on growth, as the company has increased its business development staff to prioritize storefront additions.”
In terms of liquidity, Fitch Ratings estimates that the company’s unrestricted cash at the end of FY23 is sufficient to fund the agency’s projected free cash flow deficit of approximately USD 7 million and annual debt repayment of around USD 6 million in FY24. However, the agency cautioned that a higher-than-expected cash burn could weaken OYO’s liquidity. Fitch Ratings also highlighted the reputational risk and potential impact on operations in the event of a default by one of the shareholding entities owned by the founder.
While the outlook is positive, Fitch Ratings does highlight potential risks that OYO needs to address. The highly competitive nature of the industry and its inherent demand cyclicality pose ongoing challenges. OYO will need to stay agile and adapt to changing market dynamics to maintain its growth trajectory.
Additionally, the agency points out the importance of OYO’s liquidity position. While the company’s current liquidity is deemed sufficient, any significant increase in cash burn or a default by one of OYO’s shareholding entities could negatively impact its liquidity and overall financial stability.
Nevertheless, the revised outlook signifies growing confidence in OYO’s ability to navigate these challenges successfully. By focusing on sustainable growth, operational efficiency, and customer satisfaction, OYO aims to solidify its position as a leading player in the hospitality industry.
The positive rating outlook from Fitch Ratings is expected to enhance OYO’s reputation among investors and stakeholders, boosting confidence in its long-term prospects. It also provides OYO with a favorable position for accessing capital markets and attracting potential partnerships and collaborations.
As OYO continues to execute its growth strategy and drive operational excellence, stakeholders will closely monitor its financial performance and market position. The company’s ability to sustain positive earnings, maintain liquidity, and navigate industry challenges will be crucial in determining its long-term success.
The positive outlook from Fitch Ratings indicates growing confidence in OYO’s financial performance and its ability to navigate the competitive landscape in the travel and tourism industry.
