SoftBank Puts IPO-bound OYO in a tough spot: Slashes valuation to just $2.7 billion

The valuation of Oyo is cut to $2.7 billion by Softbank which happens to be its largest investor. It could have devastating effects on Oyo's IPO plan as the company has filed fresh documents to SEBI for apporval.

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The challenges for OYO, the hospitality startup unicorn of India, are far from over. As the company has started to come out from the grip of Covid-19, SoftBank Group Corp. has slashed the value of Oyo hotels on its books by over 20%. And, the move has taken place at the time when Oyo hotels is once again preparing to float its IPO in near future, according to people familiar with the matter.

According to Bloomberg, Softbank, the largest shareholder in OYO hotels, has further revised OYO valuation to $2.7 billion. This is $700 million less than the $3.4 billion valuation of Oyo that Softbank estimated earlier. The drop in OYO valuation is a result of benchmarking activity done by the Japanese investment bank with peers in the market that have similar operations.

Oyo has quickly responded to the situation. The company has rejected Softbank’s valuation markdown, claiming there is no rational basis for it.

“As per our latest audited results, we have clocked Rs 7 crore maiden adj EBITDA profit in the June quarter, at 41 percent gross profit margin and a 45 percent increase in gross booking value per hotel per month vs the last financial year. These are the dramatically improved results and the strong performance trajectory is expected to continue,” Oyo said.

OYO Valuation Dips: 2019-2022

The valuation of Oyo touched $10 billion in 2019 after the founder Ritesh Agarwal bought the company’s 20% shares for $2 billion. The move, however, was largely seen as an effort to bump up the valuation after receiving a lukewarm response from external investors.

After failing to debut on the stock market due to unfavourable conditions last year, Oyo has now filed a new round of financial documents with India’s market regulator on Monday. The company plans to make its stock-market debut following cost reductions and travel recovery which has helped the company reduce losses.

According to people, the hospitality startup expects approval from India’s Securities and Exchange Board for its public debut. It plans to tap the stock market in early next year eyeing a $5 billion valuation. However, Oyo’s plans for its IPO are still in flux and could change depending on market conditions.

Last year, the company was reportedly in talks with potential investors and was looking to attain $12 billion valuation. The company planned to raise $1 billion through its the IPO. The investors gave cold shoulders considering the hospitality industry was going through its worst phase due to lockdown and various other curbs imposed by many countries.

SoftBank did not immediately respond to the request for comment on the revised $2.7 billion valuation. Oyo stated that it expected that recovering business performance should have a positive impact on its valuation. It also added that the company is yet to decide when an IPO would take place.

Oyo’s latest filing shows narrowing losses and a rebound in sales for FY’22 ended on March 31, 2022. The company reported a loss of 18.9 billion rupees for FY’22, which is nearly 50% lesser than the loss incurred by the company during the previous financial year.

Investors around the world have reduced their stocks due to increasing macroeconomic risks, thereby taking a very conservative approach while valuing tech companies.

The investment in Oyo was considered one of the most controversial startup bets made by SoftBank founder Masayoshi Son. It was similar to Son’s support for WeWork and its eccentric founder Adam Neumann. Son supported Oyo founder Ritesh Agarwal over the years and encouraged him to expand rapidly in markets like Japan, the US and elsewhere. Little did he know there would be devastating consequences.

SoftBank is known as an aggressive investor. There are hundreds of startups in its portfolio and estimates their value each quarter. Then it books the changes in valuation on its income statement as a profit. In Q2 2022, it reported a record loss of $23.4 billion due to plunging values of its portfolio startups and foreign currency losses.

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