More room at the top

At first glance, it seems like any other bungalow in uptown Gurugram. Trees line the street leading to the grey double-storey house. Through the white Victorian-style front gate, you can see a small well-maintained lawn, and flower pots that line the porch—telltale signs of a residence of an upper middle class family. But this is no family home. While there is no signboard outside, no fluttering flags, just a small nameplate with a caricature of a doorman, this is actually a hotel for business travellers.

The plaque outside says ‘Townhouse 001’. This is the latest offering from OYO, which in its five years of existence has become the go-to place to find budget hotels in India. But Townhouse 001 isn’t a budget hotel, it marks the beginning of a new journey for OYO and its 24-year-old founder CEO Ritesh Agarwal. Agarwal wants to ride the success of OYO as a hotel aggregator—the largest Indian budget hotel chain in terms of number of rooms—to create an asset management solutions provider.

In other words, OYO will not just aggregate or brand hotels any more, it will operate properties. In these properties, OYO’s imprint wouldn’t be restricted to ensuring the standard Wi-Fi, clean linen, and free breakfast that one finds in OYO Rooms. Rather, it will go deeper—from day-to-day running of the property to re-doing the interiors if needed. All of it without actually owning the real estate.

Agarwal says this model lets OYO use unoccupied properties across the country, and the revenue so made is shared between the property owner and OYO. He, however, does not give details of the arrangement.

“India and every developing economy have this issue that they have more real estate than they need. Hence creating good yields on them is a real challenge,” says Agarwal.

The property in Gurugram is the first under this model, hence 001.

OYO Asset Management (OAM)—which Agarwal announced on Facebook last year— isn’t limited to homes such as 001. There would be small 10-to-40-room hotels, and guesthouses too; all branded separately as OYO Townhouse, OYO Homes, and OYO Rooms. To be clear, OYO isn’t exiting the budget hotel business; in fact, that would still continue to be its cash cow. But by operating the hotel, OYO gets greater control, and thereby, in theory, improving customer experience. All the while enabling OYO to continue its policy of not owning any property.

The cost-effectiveness of operating a hotel without owning the property is proven. Evenhospitality giants such as Hilton have an asset-light model these days, restricting their involvement to hotel operations, branding, and booking and loyalties.

But OYO’s approach is distinct. In many ways, it is building upon the technological capabilities of the company—one which brought around 70,000 rooms in 8,500 hotels across more than 230 towns of India, Malaysia, and Nepal on to a single platform, allowing customers the freedom to book rooms on the app or website.

Also, through OAM, OYO is looking beyond hotel owners. The company is pitching it as an attractive monetisation strategy for real estate owners with vacant properties. Thus, to OYO, OAM is not a new division but a mode of expanding its hospitality footprint.

“We believe OYO has the opportunity to be the world’s largest hospitality company, which is built uniquely on the back of a very new age technology, processes, and systems that enable us to do things not done earlier, like operating small hotels profitably,” says Agarwal.

Is Agarwal being a bit too ambitious? Perhaps. But OYO’s ability to keep costs in control is appreciated by its investors and independent analysts. “OYO has an asset-light model with insignificant capex (capital expenditure) except for some branding/signage for its exclusive/non-exclusive hotel properties,” say UBS analysts Shaleen Kumar, Gautam Chhaochharia, and Chris Grundberg in an October 2017 research report. “The payback period for capex from hotel owners in the standardisation and improvement of amenities for OYO branding is three-six months (weighted average)”. To note, since the new OAM goes beyond branding and standardisation, OYO’s capex is bound to increase, but not significantly as it would still be asset light.

OYO’S capital expenditure might be low, but like many startups, it still remains in the red. But the company managed to pare its losses to Rs 363.7 crore in 2016-17 from Rs 496.8 crore in 2015-16. The good news is that its revenue is increasing. OYO’s revenue in 2016-17 (Rs 125 crore) was a seven-time improvement from the Rs 17 crore in 2015-16. OYO says its realised revenue, or the money customers paid for room nights used, has grown 12 times in the last two years. Bejul Somaia, partner, Lightspeed Venture Partners, an investor in OYO, says OYO’s losses don’t reflect an inability to keep costs under control and instead are a result of expansion.

“If losses are a result of unsustainable activities like selling below cost or excessive marketing, then that would concern me deeply. If losses are a function of investing in capability-building with a strong foundation and attractive unit model, then that is what our capital is here to support,” he says.

Lightspeed isn’t the only investor who feels so. Last September, OYO raised $250 million (Rs 1,600 crore)—at a valuation of around $850 million—in a Series D financing round led by Japanese conglomerate SoftBank through its SoftBank Vision Fund. Existing investors Sequoia India, Lightspeed, and Greenoaks Capital took part in the round, while Hero Enterprise joined as a new investor. The investment would help OYO expand its existing budget hotel business and add more Townhouse properties.

“What makes the team so special is their ability to do so [expand] while maintaining operational discipline and staying close to the nuts and bolts of the business. We have lots of faith in their ability to execute and build a global business,” says Justin Wilson, operating partner at SoftBank. “OYO is focussed on making strategic investments to build a lasting global accommodation brand. They’ve grown rapidly, yet are still able to deliver strong unit economics.”

Industry observers say investors will continue to line up investments for businesses such as OYO despite the losses and cash burn as the hunt is to back a market leader in the category. An industry leader is often most strongly placed to offer lucrative exits either through bigger rounds of funding, consolidation, or a public offering in the long term. “Investors are investing (in a company like OYO) to ensure that no one takes away the leadership position, and establishing that is the most important thing right now,” says Anil Joshi, founder and managing partner, Unicorn India Ventures, an investment firm.

To be sure, OYO is hoping to bump up revenue by catering to different price points. Townhouse marks a shift from the budget $20-anight segment to the premium economy segment priced at around $60 a night. All the segments, however, are aimed at business travellers. OYO’s hotels are concentrated in areas around railway stations and bus stops because 87% of the Indian travel market still consists of train travellers followed by bus travellers, according to estimates by data analytics startup KalaGato.

Eventually, OYO hopes to tap a potentially massive $30 billion market by repairing the fragmented and unorganised unbranded hotel supply in India. India has around 4 million rooms and 96-97% are essentially small hotels, says OYO. “Our goal is to reach a 20-25% share of the total market in India, including the unorganised and fragmented supply, enabling greater choice in the form of betterquality living spaces,” says Agarwal.

Agarwal knows a thing or two about unorganised markets. He once sold mobile SIM cards to sustain himself after he dropped out of college, fearing that if asked for money his family would force him to return home. He says he started coding at the age of eight and later went to Kota in 2009 to prepare for the IIT entrance exam. But his heart was not in it and he wrote a book, The Encyclopaedia of Indian Engineering Colleges, at the age of 17. The idea of starting a hotel aggregator came to him as a teenager when he visited Delhi frequently, often staying in paying guest accommodation and small hotels.

That’s when he dropped out of college and put his software and coding skills to work. He created a platform called Oravel Stays for aggregating bed and breakfast places in 2012. And the following year, he closed down Oravel and launched OYO as an online marketplace for budget hotels and guest houses with seed funding in two rounds from Lightspeed Venture Partners and DSG Consumer Partners. “My mantra is: do a few things and do them right,” he tells Fortune India.

He must be doing something right. Today, OYO says it signs around 10,000 rooms a month compared with a handful when it began. And it says it can transform rooms in just up to two weeks. The breakneck pace at which the brand has grown is largely because of the focus on its core operational capabilities, which includes initiatives such as an OYO skills institute, a property manager programme, and guest experience and post transformation audits.

Of course, everything rests on its customerfriendly technology for consumers, partners, and operations as mobile devices drive 86% of its traffic. “When we think about growth that we see after six months, we start asking questions on what capabilities we need for that. So we invest in those capabilities today. What that means is that our views on usage of capital are to invest in capability rather than discounting, invest it on creating value, rather than short-term tactical bets,” says Agarwal. OYO’s tech capabilities are helping it save manpower and costs. Generally, budget hotels have one revenue manager for every 1,500- 2,000 rooms while other hotels have one for 300-500 rooms.

OYO says that it has a leaner 10-member team that does the job for its 7,500 hotels. All this is possible because of the data science, algorithms, and products the company has built that allow revenue management without human intervention. The company hopes that the rate at which it is growing it will achieve EBITDA break-even in the next 12-15 months. “Ritesh is very cost conscious. Even 2% costs matter to him,” says Rohit Chanana, president, strategy and finance at Hero Corporate Service, who is also responsible for Hero Enterprise’s family office.

But there is a flip side. For all its growth, the OYO brand still isn’t always associated with high quality because of the budget hotel tag. Moreover, OYO rooms aren’t spread out and are concentrated in certain parts of cities. In Delhi’s Mahipalpur area near the airport, for example, there are around five OYO hotels within just a couple of kilometres.

“It’s a brand with a perception based on its value offering. It’s a roadblock that needs to be addressed if the company is looking at offerings at different price points. They may want to create a sub-brand powered by OYO but with a different name,” says Ankur Bisen, senior vice president, Technopak Advisors, a consulting firm. It’s a point OYO might want to consider given the competition in the sector. Although it doesn’t compete with any one player because of its unique franchise model, customers also turn to players such as MakeMyTrip, Airbnb, Treebo, and Yatra. According to the UBS Global Research report, OYO is getting aggressive in the domestic hotels space and this could be a worry for MakeMyTrip, one of the biggest online travel firms in the world.

“Competition helps bring along new supply or new customers from offline to online and it generally has a bleeding effect for the market leader. MakeMyTrip’s distribution platforms are leveraged by most neo-chain operators like FabHotels, Treebo etc,” says Mohit Kabra, chief operating officer-online, MakeMyTrip. “With increased focus and investments from OYO in the budget category to grow the supply, this segment is opening up well for all the players.” But Agarwal is unfazed by the competition. Neither are investors.

“Some entrepreneurs have a junoon, an obsession. They set out to succeed in what they want to achieve and will not stop before that,” says Chanana.

( The article was originally published in the February 2018 issue of the magazine. )