OYO IPO: A lucrative bet after a significant cut in valuation?

OYO IPO is not dead yet as the company is reassessing its valuation to make it more lucrative for investors. The company may cut the IPO issue size significantly besides lowering its valuation to $7 billion - a nearly 33% lower than the earlier estimated valuation. Paytm IPO debacle has forced many IPO-bound companies to revisit their valuation as well as issue size.

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The far-reaching impact of Paytm IPO debacle has started appearing as the Indian startup unicorns, who were in celebration mode after SEBI relaxed the norms for startups to go public, are now facing the brunt of the market. OYO Hotels, the hospitality startup unicorn is among the few ones which are struggling the most.

If Covid was not enough to crush OYO’s dream of scaling and expansion plans, The launch plan of OYO IPO at the head-turning valuation of anywhere between $9 billion and $12 billion has come crashing down. Now, it appears that OYO Hotels is again going back to its drawing board to chart out a new strategy to appease retail investors.

Multiple people familiar with the matter said that OYO Hotels & Homes plans to evaluate the strategy of making a sizeable reduction to its initial public offering (IPO). This is in response to adverse secondary market conditions, and a crash of stock prices for new-age tech startups, especially Paytm.

Sources of ET have confirmed the OYO IPO issue size will likely be significantly lower than $1.2 billion that OYO planned initially.

And, if they decided to do so, the hospitality startup might also consider refiling the draft red herring prospectus (DRHP), with SEBI.

Generally, if any company, aiming to go public, decides to trim down the issue size by more than 20% and the OFS (Offer of Sale) by 50% after filing DHRP, it needs to refile DRHP once again for SEBI to vet all revised claims and T&Cs. Under the OFS existing investors of the company get an opportunity to liquidate their holdings by selling their shares to new investors.

The unfavorable market conditions are making Indian startups – which were gung-ho about their IPO plans until a few weeks back – revisit their decisions to float their IPOs now. The Paytm IPO debacle followed by the crash in the share price of other recently listed startups to below listing price has turned odds against the OYO IPO. Hence, for struggling startups, like OYO, raising funds at an earlier estimated valuation became impossible.

According to ET, Oyo has to await the initial observation from SEBI on reducing IPO size. Other decisions such as changes to DRHP and launch dates will be decided only after SEBI’s response.

Oravel Stays Limited aka OYO is now evaluating the feasibility of floating IPO raising funds at a valuation of nearly $7 billion, claims a media report. This is nearly 33% down from the earlier estimated valuation OYO was aiming to attain through IPO.

In a debatable move, OYO’s valuation soared to $9.5 billion after Microsoft invested just $5 million in August last year.

So, what’s hampered the plan of OYO IPO?

It is retail investors who are fast losing confidence in startups, especially after the accumulation of huge losses in Paytm IPO. Paytm’s parent One97 Communications went public with a Rs 2,150 issue price. Since then, its shares have tanked more than 50% making its worst IPO debut in a decade. The overwhelming response received by Zomato and Nykaa towards their IPO convinced Paytm to increase its IPO size. In a process of doing that, the fintech company increased the OFS component to Rs 10,000 crore from its initial plan of Rs 8,300.

If OYO cuts down its OFS component it will have a direct impact on SoftBank, the lead investor & promotor. SoftBank was aiming at profit from offloading 90% of its holdings in OYO through the sale of OFS during IPO.

Oyo’s other investors Sequoia Capital, Lightspeed Venture Partners, and Airbnb decided to refrain from selling their stakes. The OYO IPO would bring much-needed financial relief to OYO founder, Ritesh Agarwal who increased his holding in the company to one-third by buying a large chunk of stakes from Sequoia Venture Partners and Lightspeed two years ago.

Nearly half of OYO is owned by Masayoshi Son’s SoftBank Group which holds over 46% shares.

Amidst the speculations of OYO going back to the drawing board for IPO, it has become clear that OYO IPO will only make a debut in the next financial year. Besides OYO, Delhivery, and PharmEasy are among the other startup unicorns that have filed DRHPs. They were all expected to launch their IPOs in this financial year, but in the light of changing market dynamics, many have slowed their process, waiting to have favorable conditions for a successful IPO. ET reported that SEBI had approved Delhivery IPO plans last week.

Mobikwik, another fintech startup that was all set to make its debut on the stock market after receiving SEBI’s approval in October last year, postponed its IPO plan for an indefinite period after the Paytm IPO debacle.

The expected change of plan in OYO IPO indicates that the market is no more buying the inflated valuation of startups. On a global level as well, many technology companies are going through valuation corrections, in both private and public markets.

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