Navigating Potential Pitfalls: Uncovering Key Risks of Oravel Stay Limited Prior to Investing in its IPO

Key Highlights

• Oyo has been making losses since its inception
• Oyo may not be able to achieve its target growth rates
• Oyo is subject to risks in the travel industry

Investing in an initial public offering (IPO) is a great way to participate in a company's growth story. One such company whose IPO has been the talk of the town is Oravel Stays Limited, better known as Oyo. However, every IPO has its share of risk you need to know as an investor, and Oyo is no different. Given below are the potential risks of investing in Oyo through its IPO.

Risks you need to be mindful of

The associated risks are as follows:

• History of perpetual losses

While Oyo has emerged as one of the most popular platforms for booking hotels, note that the company has experienced annual net losses since its inception. The recurrent financial setback raises concerns about its ability to attain profitability and introduces an element of uncertainty in its future prospects.

The historical pattern of continuous net losses poses a potential obstacle, casting doubt on its ability to achieve financial sustainability. As per the company's draft red herring prospectus, it has incurred losses worth ₹23,645.32 million, ₹131,227.77 million and ₹39,438.44 million for FY 2019, 2020 and 2021, respectively.

• Inability to match historical growth rates

The company acknowledges its inability to achieve growth rates consistent with historical trends poses a significant risk. Further, challenges in effectively executing expansion plans and implementing strategic growth initiatives are additional concerns.

Though the company recognises the importance of addressing these issues, if not done, it can negatively impact its overall performance and long-term sustainability. Further, there is no assurance that the company will be able to grow and achieve the desired profitability.

• Business dependent on existing patrons and customers

Should Oyo face challenges in retaining its current patrons and existing customers and cost-effectively acquiring new ones, the same could potentially hinder its operations. Due to this, the company may experience a decline in revenues, adversely affecting its overall business and operational outcomes. Also, the inability to effectively manage customer retention and acquisition could pose a significant threat to its success in the market.

• Negative publicity and technological challenges

One of the key catalysts for Oyo's success over the years is its strong brand presence due to positive publicity. However, any adverse publicity may compromise the integrity of the brand. The company operates in a space where negative publicity is always around the corner.

Also, if it fails to foster innovation or stay up-to-date with technological advancements, it risks losing its competitiveness. Its repercussions would be evident in the overall performance and sustainability of the business. Maintaining a proactive approach to innovation is imperative for continued success, and failure to do so can result in diminished market shares, decreased customer satisfaction and an overall decline in the company's standing within the industry.

• Operations in a highly competitive industry

Oyo operates in a highly competitive industry. If it fails to cater to the changing needs of customers, it could impact the company's bottom line. Therefore, the company needs constant adaptation and strategic positioning to maintain its position.

• Reliance on third-party distributors

The company has strategic partnerships with several leading third-party distributors. This includes online travel agencies (OTAs), travel management companies and global distribution systems. An increase in the proportion of storefronts booked through third-party distributors may affect its margins and profitability.

In addition, if these third-party distributors can negotiate higher commissions, reduced rates for patrons and customers or other significant concessions, it could adversely affect its revenues, margins and profitability.

Wrapping it up

As an investor, carefully assess these risks, conduct due diligence and weigh the potential rewards before investing in the IPO. A large part of the success of the company’s IPO will depend on how well it navigates these challenges and delivers sustainable value to its investors.