Fitch Ratings on Wednesday, May 31, revised the outlook on India-based Oravel Stays Ltd — which operates travel tech firm and brand OYO — for long-term foreign and local-currency issuer default ratings to positive from stable, while affirming the ratings at 'B-'.

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The rating agency also affirmed the rating on the $660-million senior secured term loan facility due 2026, issued by OYO's fully-owned subsidiary, Oravel Stays Singapore Pte Ltd, at 'B-'.

"The outlook revision reflects our view that OYO is on track to generate positive EBITDA and cash flow from operations (CFO) sustainably. This follows positive EBITDA in every quarter of the financial year ended March 2023 (FY23), which is the first year of profits since OYO's incorporation in 2012," according to a statement by the agency.

Further, Fitch expects significant growth in the company's EBITDA in FY24, led by an ongoing demand recovery in the travel and tourism industry, the company's stable gross margins, and a reduction in operating costs.

The rating reflects OYO's asset-light business model "that benefits from minimal capex needs, largely exclusive distribution rights, pricing control over storefront inventory, fixed revenue share and strong long-term growth potential," it added.

"The business profile's strengths are mitigated by the sector's high competitive intensity and demand cyclicality. The rating also reflects OYO's adequate liquidity," Fitch said.

The ongoing demand recovery in the industry is expected to drive revenue growth of over 20 percent, it said, adding, "We also expect OYO's operating leverage to benefit from a sustained reduction in costs and drive high single-digit EBITDA margins in FY24."

On improved cost structure, Fitch said, "We expect the cost reduction measures OYO undertook in recent years to support its improving profitability in FY24. We believe such reductions will not affect growth, as it has increased its business development staff to prioritise storefront additions."

The agency said it estimates that "OYO's unrestricted cash at FYE23 is sufficient to fund its Fitch-estimated free cash flow deficit of around $7 million and annual debt repayment of around $6 million in FY24".

However, it said, "A greater cash burn than we expect could weaken OYO's liquidity. Any potential default of the debt outstanding at one of OYO's shareholding entities owned by the founder may be a reputational risk and affect OYO's operations, and we treat this as an event risk."

(Edited by : Shoma Bhattacharjee)

First Published:May 31, 2023 5:20 PM IST