Fitch downgrades OYO's ratings over uncertainty in making profit

Rating agency expects the company's FY23 revenue to increase by around 30%, lower than its forecast.

Fitch Ratings has downgraded Oravel Stays Ltd's (OYO) Long-Term Foreign- and Local-Currency Issuer Ratings (IDRs) from “B” to 'B-', citing uncertainty about the hospitality company achieving material EBITDA profit in Fy23.

"The company faces execution challenges given the lacklustre recovery in travel demand in the price-sensitive markets where OYO operates. OYO will likely achieve meaningful EBITDA profit only in the year ending March 2024 (FY24), relative to our previous expectations of FY23," said the rating agency in a statement.

The outlook on instruments is stable. It reflects comfortable liquidity as available cash is sufficient to fund the expected Free Cash Flow (FCF) deficit in the next two years, with limited refinancing risk on its long-dated debt.

Fitch downgraded the rating on the $660 million senior secured term loan facility due 2026, issued by OYO's subsidiary, Oravel Stays Singapore Pte Limited, to 'B-' from 'B'. The term loan facility is unconditionally and irrevocably guaranteed by OYO and certain subsidiaries within the group.  

Fitch said it expects OYO's FY23 revenue to increase by around 30 per cent, lower than the agency’s forecast. This is due to slower recovery in travel demand in its core markets and subdued growth in the number of partnered hotels and homes.

OYO's revenue growth in FY22 may have underperformed than its peers in the hotel industry, which grew by 50-100 per cent (YoY). OYO has a higher exposure to the mid-to-budget hotel segment, which has been slower to recover.

OYO’s management expects FY23 revenue to grow by around 80 per cent on stronger travel demand recovery and the addition of hotels and homes to the portfolio, the rating agency added.

The liquidity is satisfactory. OYO's unrestricted cash at FYE22 was sufficient to fund Fitch-estimated FCF deficits of $ 74 million in FY23 and annual debt repayments of $ six million, although greater cash burn will weaken liquidity.

Its business model is intact and its profile benefits from a diversified market presence in India, south-east Asia and Europe, and moderate entry barriers. These are offset by its exposure to price-sensitive travel markets.

OYO targets business and price-sensitive travellers. This market recovered much more slowly than the premium market in FY22, it said.