Based on overseas expansion Oyo’s valuation jumps 5X: How far will it travel?

Oyo

Oyo has proved that it’s an outlier and its backers SoftBank, Sequoia Capital, Lightspeed and others truly believe in the global ambition of the five years old company. This could be testified from its ability to raise a billion USD with a 5X jump in valuation.

While the company was valued $900 million when it raised $250 million in September last year, as per media reports – it valued little less than $5 billion during recent financing round.

The $1 billion round also made Oyo the second most valuable startup in India after Paytm. All other unicorns in the country including Ola now stands at a lesser value than the hotel brand. To put this in context, India’s largest OTAs- MakeMyTrip and goibibo are collectively valued about $2.67 billion.

The sharp rise in valuation also surprised several analysts and entrepreneurs closely tracking the hospitality segment. “Justifying such valuation on Indian operations wasn’t possible. Investors seem very bullish on its international expansion (especially China),” says one of the co-founders of a budget hotel brand on condition of anonymity.

The above observation seems apt as Oyo has committed over $600 million for Chinese operations. Since budget hotel space isn’t standardised and is largely unorganised on a global scale, investors see in Oyo the ability to grow and become a large player in several geographies.

Quick expansion in overseas market has worked well in achieving towering Oyo’s valuation.

“There is an absolute merit in Oyo’s back to back entry into foreign countries. The size of opportunity seems to have driven investors to value Oyo that much,” explains Satish Meena, Senior Forecast analyst, Forrester India.

On the other hand, “Oyo is a leader in the Indian budget hotel segment. Its potential to grow in India is immense but it won’t come that fast. It may take at least three to five years to build complete dominance,” outlines Meena.

Looking at an alternate segment, he points out the sluggish growth of ride-hailing majors Ola and Uber. Their growth this year has been declined in 2018 as much as 20-25 per cent.

How Oyo’s valuation impacts competition in India?

With over 125,000 rooms per night and about 10,000 hotels in India, Oyo has made a formidable clout in Indian budget hotel segment. The staggering fund infusion would enable Oyo to pound hard on competitors such as Treebo and Fabhotels.

“Apart from being able to dish out discount to users, Oyo would impact the supply side for these players badly. Since the company will devise lucrative offerings to onboard hotels, small sized hoteliers are expected to go with Oyo,” adds Meena.

Along with impacting competition in budget hotel accommodation space, Oyo would also double down focus, resources, and capital on new products such as Oyo Living, and Auto Party.

Through Oyo Living, the company competes with the likes of NestAway, Stanza Living. It’s likely to repeat aggressive customer as well as property acquisition spree in co-living vertical.

Oyo’s founder & CEO Ritesh Agarwal also emphasised that the company will continue to explore newer businesses while retaining focus on both organic and inorganic growth. The statement hints a larger picture – Oyo won’t mind triggering consolidation in the domestic market via acquisitions.

Aggressive on overseas market: Won’t it dilute focus on India?

With rapid expansion into overseas market and a sharp focus on the Chinese market, Oyo’s focus on Indian market will dilute.

International expansion requires allocation of bright resources from core team to set up operations and drive growth. Hence, it creates a distraction from the core market.

For context, foodtech firm Zomato had entered many international markets during the 2015-16 period. However, aggressive expansion didn’t work well for the Alibaba-backed company. It had to wind up operations to cut down losses and focus on core markets like India and UAE.

In fact, several Indian companies including Practo, CarDekho, and Droom have gone live internationally in the past. But, they have yet to make a dent in the overseas market. Another SoftBank-funded company, Ola, has also been on international expansion spree. We’re yet to hear about its performance in outlandish markets.

Unlike others, Oyo’s international ambition appears lofty and its latest valuation is majorly evaluated on overseas potential. It would be exciting to watch how international markets fare up for the five years old company.

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