A decision is the financing decision involving fundraising from debt (loans) and equity (shares) at the lowest possible cost to the company. Debt capital include borrowings, accounts payable, and other commitments; while equity capital includes sale of shares, retained earnings, and returns on investments. This decision also refers to capital structure representing the proportion of firm financing from debt (bondholders) and equity (shareholders). If company borrow money or issue debt securities, they have to pay compensation to bondholders or borrowers who lend funds to firms by paying principal and interest on loans. Whilst if the company sells equity securities, they need to distribute cash in the form of dividends to shareholders.
Dividend decision is the third decision which refers to working capital management that handles the balance of current assets and current liabilities. This decision primarily relates to how short-term operating cash flows should be managed, whether to reinvest in firms or return capital to debt and equity investors. Table 1 provides more specific real-life examples of investment and financing decisions by major public corporations.
Table 1. Investment and financing examples
Source: Brealey et al. (2011); Anand (2002); Besley and Brigham (2000).
When making these decisions, the main purpose of corporate finance is to maximise shareholder value through long-term and short-term financial planning and execute management resources while balancing profitability and risk. Thus, corporate finance is a study of the relationship between business decisions and firm value to shareholders.
1.1 Corporate Finance Practices
There are several corporate finance practices aiming to maximise shareholders' value:
1.1.1 Capital Budgeting Practices
Capital budgeting mainly deals with whether to pursue an investment to generate highest risk adjusted returns. Firm will identifies capital expenditures, estimates cash flows from the project, compares alternative projects, and lastly decides which projects to include in the capital budget. Hence, capital budgeting practices defines the firm's investment opportunity schedule. Table 1.1.1 shows the notable investment evaluation tools for corporate manager. Damodaran (2014) and Anand (2002) stated NPV and IRR are often used as primary investment criteria in comparing the projects.
Table 1.1.1 Investment Evaluation Tools
1.1.2 Capital Structure Practices
To finance its capital expenditures, firm seek to finance with debt, equity, or mixture of both. Balancing both sources of capital should be carefully managed because too much debt can increase the risk of default in repayments while relying too much on equity can dilute earnings and value for the original investor. Hence, the practices of capital structure is optimising the firm's capital structure that result in lowest weighted average of the cost of debt and equity, also known as the weighted average cost of capital (WACC).
1.1.3 Working Capital Management
This practice involves determining whether profits should be distributed to shareholders in the form of dividends or kept in business for sufficient resources. Retained income can be used to finance the businesses’ future investment and operational requirement. This is often the best source of funds, without incurring additional debt or diluting equity by issuing more shares.
2 Corporate Finance in the case of OYO in India
This section discusses OYO's success story based on a corporate finance perspective.
2.1 About OYO Rooms
OYO Rooms (OYO) is a six-year-old start-up for hotel booking and is the largest budget hotel chain in India. The company was founded in 2013 by Ritesh Agarwal and based in Gurgaon, India. Referring to Figure 2.1, OYO’s global hotel chain has spread to more than 304 cities in India, Malaysia, Nepal, China, Indonesia, the United Arab Emirates (UAE), and the United Kingdom (UK), with more than 8500 hotels and 270,000 rooms offering convenient in-room experience at affordable price.
Figure 2.1 OYO’s Global Network
The company's vision is to replace the way people stay away from home and become the most preferred and trusted hotel brand in the world. Based on its website, OYO focuses on the three main goals shown in the table below.
Table 2.1 OYO business objectives
Source: Oyorooms.com (2019)
Based on Table 2.3, Oyo has launched new segments to further sustain in market.
Table 2.3 Different segments for OYO Rooms
Source: Sathyanarayanan (2015), Srinivasan (2017), and Chengappa (2018)
2.2 OYO Success Stories
Oyo started in May 2013 with one property (Oyo Rooms Huda City Centre) in one city (Gurgaon, India) and as of Jan 2019 has grown to over 8500 properties in more than 300 cities across nation with recorded of four (4) million booking room nights every month. OYO revolutionised the traditional legacy-driven hospitality space by providing standardised budget hotel rooms with features such as an air-conditioned room, free breakfast, free Wi-Fi, clean bathroom, and branded toiletries with 24-hours customer service support (Figure 2.3).
Figure 2.3 Facilities Provided in OYO Rooms
Additionally, the OYO Room app now has over 10 million downloads, allowing guests to reserve hotel rooms on the go, order food and beverages, request room service, find restaurant nearby, and book a cab through the app. OYO also provides a special assistance service through OYO Captains which ensure on-ground support for convenient travelling and in-room experience. Thus, guests can book hotel rooms with OYO through call centre, website, and app.
According to Oyorooms.com (2019), the company was selected as the Most Promising Hotel Network in India and has obtained several awards including the 2015 Express IT Start-up of the Year Award, 2016 NDTV Dream Chaser of the Year, and 2016 IAMAI Digital Start-up of the Year. By the end of March 2017, their consolidated revenue was declared at $ 19 million. Argawal told reporters of Nikkei Asian Review that OYO’s earnings for the end of 2017 rose by 130 percent; while in year 2018 it was increased by 200-300 percent on previous year. This significant increase in OYO's revenues has proven the company’s success.
2.3 OYO Business Model
OYO Rooms started as a hotel aggregator where they partner with hotel owners by signing a contract and ensuring the hotel provides standardised quality of services under its own brand. Table 2.4 illustrates the Oyo aggregator business model.
Table 2.3 Oyo Aggregator Business Model
Source: Pahwa (2017)
As of December 2017, Oyo changed its business model from hotel aggregation to franchises. OYO stops aggregating hotels on its platform and allows hotel owners to operate hotels under its brand. Anupam (2017) stated the transformation was to decrease operating costs and enhance serviceability.
Moving from an aggregation into a franchise business model has allowed OYO to increase its monthly commission charged from hotel owners by 5 percent point from 18% to 22%. Besides, Salman (2018) also stated that OYO has around 60,000 rooms and adding another 10,000 room every month under its fully managed franchise model. Traditionally, it took more than 10 months to sign a franchise agreement with new hotel partner. However, the transformation in franchise model enables OYO to improve its inventory management and the time it takes to sign franchise agreement within 5-10 days.
According to Nikkei Asian Review (2018), OYO uses ORBIS, a mobile app that allows hotel partner to instantly estimate earnings, risks of involvement, and other expenses once their property is brought under OYO brand. If the hotel partner agrees with the estimated amount, Oyo’s civil engineers will visit the property and access the capital expenditure required to run the hotel. The franchise agreement can be signed using the ORBIS app instead of the traditional time-consuming signing process with paper-based agreements and few lawyers making negotiations. After making the deal, Salman (2018) stated designers and architects of OYO will make a renovation plan and their construction engineer will be able to make the renovations and construction works done within 3-14 days depending on the property size. In addition, the company hires hotel staff and floor managers to manage overall operations.
2.4 OYO Source of Capital
OYO is a public corporation where they can raise capital by selling shares. According to Chanchani and Gooptu (2018), the largest shareholder in OYO is SoftBank which holds about 45%, followed by Lightseepd Venture Partners with 15%, and Sequoia Capital with about 11%. The company is funded by seven (7) leading global investors, including China Lodging Group, Grab, Greenoaks Capital, Hero Enterprise, Lightspeed India, Sequoia Capital, and SoftBank Group. The table below summarise the funding of Oyo rooms since it established.
Table 2.4 OYO Rooms Funding Analysis
Source: own construction based on research by Rai (2015), Vardhan (2015), Sen (2016), Sharman (2016), Mishra (2017), Sean O'Neill (2017), and Chengappa (2018).
In December 2012, OYO Rooms raised $ 5 million in its first round of funding from Venture Nursey. Later in 2013, Ritesh was granted a $100,000 from Thiel Fellowship to pursue his start-up idea. By May 2014, OYO also raised about $650,000 in seed funding from DGS Consumer Partner and Lightspeed Venture Partner. Then, OYO raised another Series A round of funding $25 million from a group of investors including Sequoia Capital, Lightspeed Venture Partners, DSG Consumer Partners, and Greenoaks Capital. In July 2015, the company has raised $100 million in its fifth round of Series B funding led by venture capital from SoftBank Group.
Additionally, the OYO aggregation business model in Aug 2016 also raised $ 90 million from its existing investor, SoftBank. In this case, Sharma (2016) stated that OYO has received $61 million and the company will receive the remaining fund of $29million in mix of equity financing and debt financing. Oyo raised total $ 5 million in debt financing from InnoVen Capital. A year later in September 2017, Oyo raised another two rounds of funding. The company first closed a $ 250million funding from Softbank Vision Fund and it was followed by another $10 million corporate round of funding from China Lodging (Mishra, 2017; Sean O'Neill, 2017).
After the shift in franchise model in late 2017, Oyo raised $ 1 billion Series E funding in September 2018. Chengappa (2018) stated 80 percent of Series E $ 1 billion financing was led by SoftBank’s Vision Fund with participation from existing investor including Lightspeed, Sequoia, and Greenoaks Capital while the rest of 20 percent is raised by unnamed investors. This round of funding values the OYO Rooms at about $5 billion.
The latest round of funding was $ 100 million raised from Grab in series E. According to Nikkei Asian Review (2018), after the last round of funding, Argawal is estimated to own less than 10 percent of the company. Based on Figure 2.5.2, the company franchise business model has raised around $1.6 billion in multiples rounds of funding.
Figure 2.5.2 Total Capital Raised in Oyo
In short, Oyo's capital structure largely comprises equity financing which shows that the bulk of its capital expenditure is funded by equity rather than debt. In other words, there is more investor funding used in business operations.
2.5 OYO Capital Budgeting
Oyo's investments are primarily focused on technology development, property development as well as mergers and acquisitions. For example, Oyo in 2015 raised 125 million to build innovative technology products, increased customer acquisition, and expanded its technology-enabled hotel network globally to 50,000 rooms across 100 cities by the end of 2015 (Paul, 2015; Vardhan, 2015). In the words of Prasad (2016), Oyo also used the new $ 90 million fund raised in 2016 to increase its offerings, 'OYO Flagship', which allows hotel owners to have full control over the hotel's business operations. In 2017, Oyo has used SoftBank funds to invest its newly launched OYO Townhouse to create luxury and self-managed hotels under the Townhouse brand. It also allows OYO to fend off competition from online travel agencies (OTAs) such as MakeMyTrip and Goibibo. The funding has been used to diversify long-term investment in technology, international expansion plans, and merger and acquisition (M&A).
2.5.1 International Expansion
Having raised funds, OYO planned to invests in South-East Asia and further expand its international market. In 2016, OYO launched its first international operation in Malaysia, followed by growing to Nepal in May 2017. According to Shah (2018) and Shrivastava (2018), Oyo raised another $1 billion in September 2018 and the company plans to invest $600million of this new funds in China and use the remaining funds to expand its business in India. In 2018, OYO further expand its international presence by launching its commerce operation in UK and China in June and November respectively. Since venturing into China, OYO today has around 50,000 exclusive rooms in 26 cities including Nanjing, Shenzhen, Chengdu, and among others.
Figure 2.5.1 Number of Rooms in China (Source: ChinaGoAbroad.com, 2019)
OYO has announced that it moved to UAE in October 2018 by launching operations in Dubai, Sharjah, and Fujairah with more than 1,100 rooms. With the recent $1 billion funding raised by Softbank, Oyo plans to open more than 12,000 rooms in 150 cities throughout UAE by next year (The Hindu, 2018). Additionally, OYO was recently officially launched in Indonesia with 30 hotels in three cities namely Jakarta, Surubaya, and Palembang, which are operated under lease or franchise agreements. Sorrells (2018) stated that OYO has announced a $ 100 million investment to extend trade operations to 35 cities in Indonesia in the next 15 months. As of Jan 2019, Oyo doubled its investment to $ 200 million planning to reach 2 million rooms in 25,000 hotels in Southeast Asia by 2023 (Hamdi, 2019).
2.5.2 Inventory of Property
Table below shows the expansion in Oyo properties over past six years, which has increased in Oyo's total assets. The company started with one property in one city and now has increased to over 8500 properties in more than 300 cities.
Table 2.5.2 OYO’s Inventory of Property
2.5.3 Technology and Quality Services
Oyo also focuses investment in technology to ensure the company remain prepared in the future. In this case, they use machine learning techniques to understand customer behavioural patterns, which in turn improves customer experience and drives key business metrics such as conversion and repetition rate. Based on Crunchbase (2019), Oyo using 42 technologies for company tech (Figure 2.5.3.1) and 34 technologies for its website (Figure 2.5.3.2).
Table 2.5.3.1 Technology Products and Services used in Oyo
Source: Craft. co (2019)
Table 2.5.3.2 Oyo Website Technology Profile
Source: Builtwith.com (2019)
The funds will also be used to set up a new technology development centre in Telangana to support technical expertise (Gupta, 2018; Anupam, 2017). With over 700 engineers in current Oyo’s Technology Team, several mobile apps has been successfully developed to improve customer experience and hotel operations, these include Oyo App, Oyo Owners, Oyo OS, Co-Oyo, Krypton (Audit app) and Oyo Mitr which shown in Table below.
Table 2.5.2.3 Oyo Mobile Applications
To ensure the quality of services, Oyo also use funds to finance construction and renovation converting unbranded hotels to OYO brand to provide standardised services. In addition, Oyo employed professionals across different functions and capabilities including sales and marketing, technology, accounting, customer relationship management, civil and software engineers, interior and exterior designer to deliver quality services to OYO guests (Bhattacharyya, 2017). By Jan 2019, Oyo recruited around 7000 employees and is planned to employ over 2,020 technology experts and engineers by end of next year. According to Hertzfeld (2018), Argawal stated with another 2,020 professionals joining Oyo, they will continue invest in technologies including Machine Learning, Internet of Things (IoT), Artificial Intelligence (AI) and other newer technology.
2.5.4 Merger and Acquisition
Merger and acquisition play an important role in corporate finance because expansion through acquisition enhance potential aggressive growth in the company. In the case of Oyo, founder acquired three companies for their competency that can assist their business and provide more facilities to their customer. However, the financial transaction of the three acquisitions were undisclosed.
Based on Table 2.5.3, Oyo first acquired Novascotia Boutique Homes in March 2018 for its expertise in operating the corporate and service apartment segment. Then, Oyo has acquired AblePlus Solutions, a Mumbai-based technology company that develop hospitality-based internet of Things (IoT) solutions such as remote monitoring, IoT managed smart locks, management of rooms across hotels, control of hospitality utilities. According to HRA Today (2018), Ritesh Argawal added that OYO in forthcoming years will develop voice-based assistance in hotel rooms allowing automation in appliances, and guest entertainment programme that will include gaming, fitness, and augmented experiences. The most recent acquisition is acquired Weddingz on August 2018 moving OYO into wedding banquet services and get access to their 1500 wedding events per quarter. Varshney (2018) stated the company also introduced “Auto Party”, a new service that offers banqueting and event planning services for weddings and other events.
Table 2.5.3 OYO Recent Acquisition
At present, OYO also partnered with over 8000 real estate owners and build strategic partnerships. For example, Oyo corporate with Ola in 2015 for cashless payment platform; while in 2016, it partners with Crown-it to enhance hotel booking experience, cooperating with IRCTC to use technology, teams up with Paypal for international reservations and payment, and partners with ItzCash building strong omni-channel presence; it also alliances with Telangana Government (NITHM and TSTDC) in 2017 to promote hospitality and skill development; as well as cooperating with Airbnb in 2018 to expands as business travel platform.
2.6 Conclusion on OYO Corporate Finance
Oyo is a public corporation with a franchise business model dealing with corporate financial decisions to maximise the shareholder value. Their capital structure largely comprises equity financing from the sale of shares.