Onward Technologies : January 17, 2022 Earnings Call Transcript

Onward Technologies Limited

Q3 FY '22 Earnings Conference Call

January 17, 2022

Moderator:	Good Day and Welcome to the Q3 FY '22 earnings conference call of Onward Technologies
	Limited. As a reminder, all participants' lines will be in the listen-only mode and there will be
	an opportunity for you to ask questions after the presentation concludes. Should you need
	assistance during the conference call, please signal an operator by pressing '*' and then '0' on
	your touchtone phone. Please note that this conference is being recorded. At this time, I would
	like to hand over the conference to Mr. Anuj Sonpal, CEO of Valorem Advisors. Thank you and
	over to you, Sir.
Anuj Sonpal:	Thank you. Good Afternoon everyone and a very warm Welcome to you all. Firstly to start, let
	me start by wishing everybody a very Happy New Year and I hope that everybody is safe and
	well. As you know, my name is Anuj Sonpal from Valorem Advisors. We are presently the
	investor relations of Onward Technologies Limited. On behalf of the company, I would like to
	thank you all for participating in the company's earnings conference call for the third quarter
	of Financial Year 2022. Before we begin, let me mention a short cautionary statement as
	mandatory. Some of the statements made in today's earnings conference call maybe forward-
	looking in nature. Such forward-looking statements are subject to risks and uncertainties,
	which could cause actual results to differ from those anticipated. Such statements are based
	on Management's beliefs as well assumptions made by and information currently available to
	Management. Audiences are cautioned not to place any undue reliance on these forward-
	looking statements in making any investment decisions. The purpose of today's earnings
	conference is purely to educate and bring awareness about the company's fundamental
	business and financial quarter under review. Now, let me introduce you to the Management
	participating with us on today's earnings call. We have with us firstly Mr. Jigar H. Mehta,
	Managing Director; and Mr. Devanand Ramandasani, Chief Financial Officer. Without any
	further delay, I request Mr. Jigar Mehta to give his opening remarks. Thank you and over to
	you, Sir.
Jigar Mehta:	Thanks Anuj, Good Afternoon everybody. It is a pleasure to Welcome you all to the earnings
	conference call for the third quarter of FY '22. Firstly, I hope you are all keeping safe and well
	and I would like to wish you all a very Happy New Year. Before we begin the earnings highlights,
	let me start by giving some background about Onward Technologies for the benefit of the new
	participants joining us today. Onward Technologies is basically focused on two industry
	verticals, which is transportation and mobility which includes automotive and rail
	transportation and second is industrial equipment and heavy machinery. There are two new

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verticals that we are focusing on investing, which is healthcare and hi-tech. In these existing verticals, which contributes today more than 70% of our revenues, we provide services in four lines of business, so one is digital engineering, second is embedded electronics, third is mechanical engineering and fourth is enterprise IT. The company has now grown to 2481 full- time experienced employees that are operating from multiple offices and client locations across India and North America and Europe. We are headquartered in Mumbai right here at Worli and with sales offices in Chicago, Detroit, Cleveland, London, Frankfurt, and North Toronto. Our offshore design centers are based out of Poona, Chennai, and now Bangalore. As we speak, later this evening, we are opening our new center in Hyderabad and are very excited about that.

Our engineers and technology consultants across multiple domains and are strategic alliance with a large enterprise of OEMs to help in providing comprehensive range of end-to-end services in the digital engineering space. We have a proven expertise in delivering mechanical engineering and digital transformation services to global 2000 organizations. We have a very young and dynamic team with our work of excellence supported by experienced Management and a very strong Board of Directors.

Over the last few years, we have been consciously transforming our service offerings from low margin traditional IT services in the domestic market to high margin, hi-tech services in both the engineering research and development, ER&D, and digital transformation services. The company's clear future growth strategy is to enter into with our existing global 2000 customers by investing in people and enhancing its capabilities and contouring deeply towards the complex hi-tech digital transformation. We have had consistent track record of giving dividends for last six years in a row and are committed in growing shareholder returns. Through our transformation journey over the last few years, we have been able to generate robust cash flows and are continue to be debt free.

Now coming to the quarter under review Q3 of the last 90 days, I am pleased to inform you that we delivered around 34% year-on-year annual revenue growth, which is better than we had guided earlier. The Q3 financial performance is a testament of our hard work and commitment to perform and deliver for all our stakeholders. Growth in revenue has been driven mainly by our increased outsourcing by all our top clients. We have added three new strategic customers during the quarter. Strategic customer, we define as customer which has potential to outsource minimum $10 million of revenue to one single supplier. Out of the three new strategic customers that we have added, one was one of the largest automotive European companies. We have also successfully finally launched our much anticipated electronics and embedded lab, it was delayed due to the pandemic but we are very proud and happy that we have launched that in Poona with a team of 50 engineers last quarter, it happened in the month of the November. These engineers are put on an intense training program, go through an internal SME subject by an experts and external trainers, which are for our large OEM customers. They will start generating revenue in a conservative manner approximately nine

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	months from now. We have also concluded the transaction to purchase the office premise from
	one of the funds in Pune which is spread across 26,000 square feet. This is the second office
	that we have purchased in the last 12 months. We have also added about 210 employees across
	offices taking the global head count as I mentioned earlier to 2481 employees, and lastly, the
	company has also awarded Dun & Bradstreet Award for business excellence under the SME
	category. As we continue to witness strong demand with existing and new clients, we are
	rapidly expanding our capabilities across geographies and we are confident that 2022 is going
	to be very exciting year. We see a huge opportunity in front of us for both our existing clients
	and new client acquisition and I look forward to discussing further with you over the call. Now,
	I hand over the call to our CFO, Mr. Devanand to give you the financial highlights. Dev, over to
	you.
Devanand Ramandasani:	Thank you, Jigar. Good Afternoon everyone and wish you Happy New Year 2022 and hope
	everyone is safe and healthy. Let me take you through the financial quarter and the YTD
	financial performance of the company on consolidated basis. For the third quarter of this
	financial year, the operating income was 77.3 crores, which was increase of approximate 34%
	year-on-year basis. EBITDA of this quarter is 9.7 crores and net profit after the tax is
	approximate 5 crores which was significantly up on year-on-year basis as well. The operating
	income for the nine months ended Financial Year 2020 was approximate 220 crores, which was
	increased approximately 26% on year-on-year basis. The EBITDA reported was Rs. 59.1 crores
	and the net profit after tax reported is 20.5 crores. This was an exceptional year and
	exceptional item in Q3, which is called one of the grant in the form of ERC received from the
	US entity which is 4.8 crores which is netted off in the employee expenses in this current
	quarter.
	With this, we open the floor for question and answer. Thank you.
Moderator:	Thank you very much. We will now begin the question and answer session. We take the first
	question from the line of Ujwal Kumar from Green Portfolio. Please go ahead.
Ujwal Kumar:	Jigar, great performance, I have two questions, one question is on the billing rate. I can see
	most of your revenues as time and material, so just wanted to understand, I think as per my
	calculation the billing rate is somewhere close to about $10 per hour, but if you can talk about
	the billing rate and how we are looking because the more complex the service, the more is the
	billing rate, so just trying to understand how we are looking at the growth in billing rates going
	forward? Second question is that the proportion of time and material itself, which has been
	about 74% to 76% over the last I think since FY '19 or so, so how do you see that improving
	going forward or is that going to remain the same in the near term as well?
Jigar Mehta:	Hello. Onward Tech has two revenue models, which is time and material (T&M) and Fixed Price.
	Last quarter, we had about 74%-76% of our revenue from T&M and going forward, we believe

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	that will go up on annual basis. Majority of our OEM & Tier 1 customers prefer T&M model and
	we are seeing more RFQs in this model currently.
Ujwal Kumar:	Understood, could you just quantify it from what it is today and what we can expect in let us
	say two-three years' time, and also if you can compare it with peers like KPIT and Tata Elxsi?
Jigar Mehta:	I do not know what these other companies do, so we are at about 76% as of today for the first
	nine months and we believe we will move more towards 80%-85% going forward, it is more
	and more of our projects that we are winning from new clients is on the T&M side.
Ujwal Kumar:	On the digital front we see more and more of your revenues are coming from the digital, so do
	you see higher rates on the digital side, is that something that you are seeing quarter-on-
	quarter?
Jigar Mehta:	Absolutely, so Ujwal we have two business units, International Business Unit, which includes
	USA, Europe and Canada that is currently at about average I believe about $22 an hour and
	then we have our India business unit, which is approximately a bit lower than the $10 an hour
	rate. We believe all those rates will move up as we pivot the company towards digital
	transformation.
Moderator:	Thank you. The next question is from the line of Hassan, an Individual Investor. Please go ahead.
Hassan:	I would like to understand what is the lock-in period?
Jigar Mehta:	Sorry, can you clarify that.
Hassan:	I see that there are some shares held in the lock-in period, can you take them to extend them,
	I am a bit new to this?
Devanand Ramandasani:	You are talking about the investment that is made by the Convergent Finance?
Hassan:	Yes.
Devanand Ramandasani:	There are lock-in period as per the SEBI is defined is the one year from the post investment,
	but there are the strategic investors. They are seeing the long-term value in the organization,
	so they will stick basis on the internal parameters, but so far we understand they will associate
	with the long term.
Hassan:	Jigar I have a question for you, is our model mostly on the outsourcing or our long-term focus
	is to develop our internal teams and to get projects directly from OEMs and other customers?
Jigar Mehta:	We work only directly with the OEMs and Tier-1s, so we do not work through any middle
	company or agents or brokers, so all our engagements are directly with the end customer. I

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	earlier spoke about becoming a preferred supplier to a large automotive OEM. This is probably
	after three to four years of effort, pilot projects, case studies, site visits, workshops and talking
	to our engineers, and we finally got selected last quarter. Obviously, those are delayed because
	of the pandemic, but that is what it is and Onward Tech will continue focusing on the direct
	business model. Our vision is as to become a value added partner and supplier to the largest
	OEM companies in our focused industry verticals. With new investments in Digtial, Cloud, etc.
	we have an opportunity to service our existing clientele and thereby increasing our wallet share
	of customers outsourcing budget. We were only playing on the mechanical engineering side till
	about an 18 months back, then we entered embedded electronics and now are building
	capabilities on the digital side, so we hope in the next few quarters, we will have 10 customers,
	which we potentially have an exit run rate of revenues of $10 million per year, which takes us
	to our spoken ambition goal of $100 million of revenue.
Hassan:	Any margin guidance for the year?
Jigar Mehta:	I believe margin will be outcome of the work that we do for our customers. The rates everyone
	gets in the outcome of the RFQ and/ or auction process which is very competitive. Currently
	our focus is to invest in new capability and capacity in new age Digital technologies and build
	the sales organization outside India. Once we have that in maturity stage, we should be able to
	deliver strong margins.
Moderator:	Thank you. The next question is from the line of Nishid Shah from Ambika Fincap Consultants.
	Please go ahead.
Nishid Shah:	Congratulations on a good set of numbers Jigar and thanks for taking my question. Can you
	give a roadmap on these headcounts and let me elaborate why I need this, because you see as
	you rightly said 18 months back, you guys were focusing more on the mechanical engineering
	side, now you are doing more on mobility, digital, embedded etc., but when you look at the
	competitive landscape, you have Tata Elxsi at 8500 plus people, you have KPIT again around
	10,000 plus 15,000-16,000 people in L&T Technologies significantly higher number, I think
	there is a lot of catch up to do so 500 people on 2480 people today, so in a year how many you
	think you would want to add and when do you see yourself at 5000 plus people in your team?
Jigar Mehta:	Hello. We are on track to deliver 20% plus if not higher growth this financial year, which is, FY
	'21-22 and we believe we have a very good shot based on the sales funnel and the opportunity
	we have that we will outperform those numbers next financial year. My team is focusing on
	delivering that today, and for that we will need to add lot of talent. For example, if we have to
	grow, we will add about net 300 to 400 people next year from a pure lateral hiring perspective,
	but what we are trying to do now is to build the additional capacity and capability for the new
	age technologies especially on the mobility side, on the cloud side and that can actually help
	us accelerate where our current 2500 people can become 5000 people in the next few years.

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