Moody’s upgrades OYO’s credit rating on back of improved profitability
Moody’s estimates that OYO’s EBITDA will reach $200 million in FY25-26, which will be its first full year of earnings from the newly acquired businesses.
Global rating agency Moody’s has upgraded the credit rating of Oravel Stays Limited, the parent company of hospitality chain , from B3 to B2, with a stable outlook. This upgrade is attributed to OYO’s improved profitability.
Although both B2 and B3 ratings are considered speculative and high-risk, the B2 rating indicates a marginally higher level of creditworthiness compared to B3.
OYO posted its first-ever annual profit-after-tax of Rs 229 crore in FY24. It came on the back of eight consecutive quarters of positive-adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation).
OYO’s operating performance has continued to improve on the back of business growth and sustained cost optimisation efforts. The rating agency noted in a statement that OYO's current liquidity position is very favourable.
"Its cash and cash equivalents (including short-term investments) of $203 million as of September 2024, along with its cash flow from operations of $299 million and committed credit facilities of $825 million, will be sufficient to fulfil its capital spending, $525 million Motel 6 acquisition and debt service obligations over the next 24 months," it stated.
The agency has also assigned a B2 rating to OYO Singapore’s $825 million senior secured term loan facility. The term loan is fully underwritten by Deutsche Bank. A part of the amount will be used to help fund the acquisition of US-based economy chain G6 Hospitality which, owns the iconic Motel 6 and Studio 6 brands.
According to Moodys, this refinancing, combined with $174 million in primary equity capital raised between June and August 2024, will be used to repay its existing term loan B maturing in June 2026. The move comes as part of OYO's strategic financial restructuring and expansion plans. Despite this, the company’s share price recently dipped to Rs 55 per share in the unlisted market trading from Rs 82 a year ago, according to UnlistedZone.
Moody’s estimated that OYO’s EBITDA will reach $200 million in FY26, its first full year of earnings from the newly acquired businesses. Consequently, OYO's leverage, as measured by debt/EBITDA, will gradually decline to around 4.2X by March 2026 from 4.8X in March 2024.
"The upgrade follows the proposed refinancing of OYO’s existing term loan B (TLB) through a long-term term loan that will alleviate the company’s refinancing risks, The upgrade also highlights OYO’s improved profitability over recent quarters, which has significantly strengthened its credit metrics and positioned the company for theB2 CFR,” said Sweta Patodia, a Moody’s Ratings Assistant Vice President and Analyst.
Sustained improvement in operating performance resulted in OYO generating $56 million EBITDA for the first half of FY24-25. Furthermore, its acquisition of French rental homes company Checkmyguest (CMG) in July will aid the improvement in its EBITDA to around $134 million in FY24-25.
“OYO’s interest expense will decline to around $65 million in FY24-25 from $101 million in the previous fiscal year, following the partial repayment of its TLB last year. Ongoing earnings growth combined with lower interest expenses will result in the company becoming free cash flow positive on a full-year basis in FY24-25,” said Moody's.
Earnings will further increase upon the successful integration of its Motel 6 acquisition, especially with cost synergies of $20 million-$30 million following a seamless integration of corporate and support functions, the agency noted.
Edited by Kanishk Singh