Onward Technologies Limited (517536) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Onward Technologies Q2 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Jyothi Gupta. Thank you, and over to you, ma'am.

Thank you. Good evening to all of you. Welcome to Q2 FY '25 Earnings Call of Onward Technology Limited. The results and presentation have already mailed to you, and you can also view them on our website of www.onwardgroup.com. To take us through the results today and to answer your questions, we have with us Mr. Jigar Mehta, Managing Director of Onward Technology Limited. He will start the call with the business update and financial performance for the quarter, which will be then followed by a Q&A session. As usual, I would like to remind you that anything that is said on this call that reflects any outlook for future, which can be construed as a forward-looking statement must be viewed in conjunction with risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual report that you can find in our website. Having said that, I will now hand over the call to Mr. Jigar Mehta. Over to you, Jigar.

Thank you, Jyothi. Good evening, everyone, and thank you for joining our Q2 earnings call. It is a pleasure to speak to all of you again. I hope you have received the results and presentation of the quarter. We had an excellent board meeting earlier this morning, and I will share a bit more about some of the progress that we've made both on the financial numbers last quarter and the corporate initiatives going forward. On the quarter side, quarter was okay. We were hoping to be much better. While our revenues have been the highest at INR 123 crores for the quarter and INR 240 crores for 6 months, bottom line to [indiscernible] in terms of EBITDA because some of the slowdown that we saw in the automotive vertically and the Tier 1 vertically -- in the Tier 1 segment in particular. There was one big parameter. The secondary parameter was we shared that in the last quarter that we have started building up the delivery engine for growth. We continue to see a lot of momentum and opportunities in RFQs coming our way. We onboarded and hired 300 plus in last quarter with a net hiring of 133 new employees. All these employees are getting trained today as we speak and will be on projects very soon in Q3 and Q4. In terms of projections, we have not done that in the past, but I thought it's important and we discussed at the Board level as well. [indiscernible] want to share some guidance with you guys where we think we will go -- going forward. We are aiming to close this financial year between INR 490 crores and INR 520 crores in terms of revenue. And in terms of bottom line, we still believe we can be between 9% and 11% for the year. Why are we investing when there's a lot of macroeconomic situation and geopolitical situation, because we continue to see opportunities. It's just we have to get better with execution is what I've shared before. We believe next year, if external scenario doesn't change too much more than what it is today, we believe we should aim to get to INR 600 crores in terms of revenue, and we believe we should get too much higher EBITDA number compared to what we will end up this year too. All our fixed costs have been taken into consideration. All our big investments has been done and only additional cost that we incur is the delivery engine or more delivery people, which is a key or the core part of our business. In terms of the Board meeting and some of the other initiatives, today, we had the Board approved the new ESOP scheme. This will be run through a trust, and we are outsourcing that to one of our professional firms out in Bombay. We will be putting it out to the shareholders for their approval. This closes the old schemes, which was there earlier, which was at a very base price of INR 20 a share. This will be now at a small discount of the market price. So that gives more accountability and responsibility to my team including myself in terms of performance and [indiscernible] scaling the game in terms of the growth and the future of the company. Another very important thing, I think we've discussed today and I was very satisfied with the conversation and support everybody gave. It was in terms of, we would love to build now, we believe we had a stage and the kind of clients that we are working with and the stability that we have in our business is to build our own campus in Pune. We have three offices, as you guys know, two, which is fully owned by Onward Technologies, one directly, one through step down subsidiary OT part. And third is the new office that we opened recently for our health care vertical. We believe in the next two to three years, it will be great to consolidate the entire team, which will take up [indiscernible] 2,000-plus people and we can build a beautiful campus with state of the art labs, facilities, care down facilities, both for our customers to see the main work that we do and also for our employees to get direct access to the product that they are working on instead of just working on a computer or a team. In terms of customers, we continue to only work with very high-quality customers. Some have been growing, some are static and some then [ negative ] this quarter. We were hoping to have a much higher revenue as I started my conversation, and I do believe the revenue growth will bounce back. Starting October, we have seen some positive momentum where if I remember -- if you remember two quarters back I spoke about a large deal that we had won, which have completely stopped or got delayed. That billing actually has started as of October 14, which was just two days back this week. Similarly, another project automotive company that we have signed end of last year, the billing has not started. This is the third large automotive OEM that we had won. That project and billing also started in Q2. So a lot of positives from that perspective, these all OEMs, with direct customer and it's all about scaling up and ramping up with these guys. In terms of number of customers went from 86 to 82. And we -- again, there were several Tier 1s and smaller companies transactions that we were part of that we exited. Not intentional, it was just more with the force of the geopolitical situation that's happening in U.S. and Europe, especially with the U.S. elections coming up in November. We are hoping post that, the momentum will pick up. That's what our customers are hoping as well. We don't see a budget issue so far. I think we just playing a careful game, and wait and watch the things just get come. And we do hope things get better in terms of the momentum of the customers and the projects that we have already won. In terms of the last point, I also want to share we as an organization last quarter did a massive work in terms of consolidation of all our vendors. We in multiyear contracts and agreements with several of our large product companies that we work with, whether it is Microsoft, Salesforce, LinkedIn and few others. And at the same time, we have started actually using our strong technical teams, combined we have 2,600-plus employees today and some of the best in the world. And we launched our own internal HR tool. We launched our own internal recruitment tool and similarly, we will see -- we will share very soon. We will launch at least five other tools internal which are highly customized to our business processes, to our customers and highly integrated in terms of how we work with the, our customers going forward. So again a very proud moment for us. There are a lot of celebrations in terms of internally. We wish that revenue and the bottom line have been a bit better to share with you guys, but I'm sure we will bounce back. With that, I thank you all again for all your support, the belief and the trust in us. I will now hand over to the operator to start the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Mohit Motwani from Tara Capital.

My first question is on your guidance for FY '25 and '26. So if I look at the remaining half of FY '25 and FY '26, the growth, which you're projecting for second half is about 14% and 18% for FY '26. Just want to understand what gives the confidence with -- there's some slowdown in auto, many of your peers have spoken about the tough conditions in Europe. So just want to understand what gives the confidence on the growth? And secondly, which segment of your will be driving this growth? Will it be broad-based across all the sectors and verticals or it will be some particular ramp-up of some deals which will drive this growth?

So thank you for the question. Two points. I think you spoke about revenue. So revenue growth or the momentum -- while we are not -- one is the momentum that we're talking about. We're talking about the order book or more than the order book, the confirmation that we already have and the visibility that we already have for our clients. If you remember last quarter, I shared we are, in terms of the existing clients that we work with, we had 700 open positions. We hired about 300-odd people this quarter, post attrition 133 net. So we are building the delivery engine capabilities towards where our clients want to go, right? And this is across U.S., Canada, Europe and India. So this is from existing clients where we have a clear visibility of in terms of what we need to do. We're not budgeted very aggressively, we've taken some consideration based on last year's experience of holidays, furloughs, some slowdown here and then war escalates, but not very drastically. We're taking a very conservative view on that right now because we've already taken a substantial hit in Q2, we believe. So it comes from that perspective, right? We believe what we are seeing in October for the first two or three weeks and if that continues through the rest of the quarter and early next year, I think we should be fine, and we believe we can get to those numbers. And I think we have a very outside chance to much better those numbers as well, because the entire team is solid. People are working hard. Our fund is increasing every day. It's existing projects, which got us shelved, and I think you've mentioned about Europe slowdown, the war, and all of this stuff. But keeping that aside, I think this is the strongest Onward has ever been, right? We've spoken for more than a year about amount of high-quality people that we have hired. And all of them are working extremely hard, and we have a remarkable job in terms of solutioning moving some of the on-site heavy business model to manage services and offshore. We have won multiple projects recently, multiple awards recently from our customers as well. And I think it's all about just being at the right place, right time over the next few weeks.

Sure. And in terms of -- now that you have invested aggressively behind the talent pool and also you have taken some increase in the -- you've taken wage hike I think in Q1, right? So what is it -- what is the guidance for the rest of the year in terms of margins and for FY '26?

I shared that earlier. So we believe if all goes well, just looking at the momentum of the first two weeks of October, we should be at INR 490 crores to INR 520 crores in terms of revenue. And we have an outside chance of crossing that number as well. And let's keep that away. And on the bottom line, on the EBITDA side, we believe we should still be at 9% to 11%, very similar to last year for this financial year. And for next financial year, all our investments in the external environment calms down a bit. We believe we should easily we should get to INR 600 crores in terms of revenue next year with a much higher EBITDA, whatever we end up closing this year with. There is no new on-time costs coming in for the next 12 months to 18 months.

[Operator Instructions] The next question is from the line of Udit Desai from [ DES Capital ].

I just wanted to understand in the company in the next 5 years, say, where do you see Onward Technologies in 2030? And could I just have a broad overall strategy towards that goal, please?

So the goal and the vision is very straightforward, what we shared about 2.5, 3 years ago. Our goal is -- the first milestone is to build a $100 billion company, which -- and we believe that the best thing for a company of our size is based on having 10 customers which delivers to $10 million, right -- [ not deliver ], sorry, where we generate $10 million of revenue with the customer. And that's what we are focused on, right? So our customer focus at the top continues to remain there and that's why you see a sort of a number of customers where we have a transaction more continuously coming down, right? It's come down from [ 250 to 82 ] right now. And I think a sweet spot for us is 60, 65, and we continue to maintain that. Number two, in terms of focus, we are continuously focused only on the 3 by 3 metrics that we shared last quarter. That's the new Onward after the transformation and the transition of the legacy got completed, where we are focused on the three large verticals that we are in, two large and one new large vertical to industrial equipment and heavy machinery and the second vertical is transportation and mobility. These two constitute about 95-plus percent of our revenues and the new vertical that we incubated from April under a new leadership team is healthcare and life sciences. That's the key verticals and the key horizontals. Mechanical engineering continues to remain, and it's bouncing back is what we are seeing in a big way for us, at lease from our existing clients as generics about 50% plus of our revenues. Second is digital services and third is the engineering services. These like all three, we are seeing momentum in all three. We are seeing RFQs in all three, and it's all about continuously being investing and being ahead of the curve from a delivery perspective. And we are trying to do that as we speak every day. So in a simple summary, 3x3 metrics, focus on 10 large customers, which can generate $10 million in revenue per year gets us to $100 billion. That should be a 15% to 20% EBITDA. And if Onward can execute that with our amazing delivery centers that we have opened in Pune, Chennai, Bangalore and Hyderabad, I think we are in a very good spot. All the heavy lifting, all the heavy investments have been completed. We have strong leadership teams in Europe and U.S. We have great engine working. Automation is now completely in our control, which was in a delay mode because we're constantly buying products in the market and trying to integrate with each other. Today, we are building our own team. We have our own amazing team internal, which is building all this. We're putting a lot of capital behind that. So we have in control and the initial two tools or two modules that we have launched just been a game changer for us. So a very simple business model. It's all about execution. We have 2,600-odd plus employees today. So we don't need that many more to get to where we need to be. It's just a delivery engine is there. We have to keep hiring the best engineers, train them, mold them into the customers, products and processes and then scale globally with them.

[Operator Instructions] The next question is from the line of Shriram Ranjan, who is an individual investor.

I think the previous call or the one prior to that FY '24, I had asked this question saying whether there's going to be a revenue that's linear and you were saying that it is more of getting still resources on-site than adding volume engine at the -- in India. But it looks like, again, the hiring is back. Do we -- is this going to continue quarter after quarter? Or what's your sense about this?

So it's exactly what we shared for the last one year, and I think a couple of quarters, I think, last quarter as well. The hiring is both. So when we say we hired about 300-odd people, it is not only in India. We've actually grown in the U.K. Our Germany business has grown marginally. Our U.S. and Canada business has grown as well, right? So we are hiring lots of people there. A lot of the hiring that we were doing for the last one year where costs got loaded. It was on account managers and account sales managers, account delivery managers, and building the leadership team in Europe and U.S. That all has been completed now. Majority has been completed. Rest will be all replacement and stuff like that. The new hiring that we did was what we saw last quarter, where a lot of the large customers, especially the GCCs opened up a large number of positions. Onward where some place customers where we were #7, #8 rank, we are now in the top 5 or top 3, that opens up more opportunities for us to grow. Lot of our work, which used to be on-site back in the day for the last 3 to 5 years is now moving to offshore. Hence, we are strengthening our delivery engine or our infrastructure as well. So it's all the same thing. I think it's all about -- we decided to push the bucket as soon as the Board approved in terms of it's a perfect time of us to actually build our delivery engine and consolidate our operations internally and then start going after scale. What we did not anticipate is suddenly the slowdown that popped up for us in the month of September. Otherwise, the revenue and the margins would have been much higher.

Okay. Okay. So do we -- do you think this number would stay in the 2,600 range or you foresee a similar hiring in the subsequent quarters as with Q3, Q4 of this year?

I think the number -- the budget, I think we had given as 2,700 by March end. And I think that's a good number for us to be in unless the India business ends up growing much faster than Q4. Today, India has been the best country to be in. I think you would agree with me in terms of stability, in terms of geopolitical [indiscernible] everything. So there is a momentum building up here, which we had not anticipated, and we want to make sure we capture that if it does come up, right. The GCCs are growing, they are expanding and things are looking very positive.

I agree. I run my own business, so I understand this, yes. So Jigar just that the EBITDA has been a little below par from where we had forecasted it to be. And I think the September slowdown perhaps is a cause. And the cost of those 300 resources or net 150, 180 that's come in, is going to get actually loaded in Q3. So will this have a bearing on the overall EBITDA and given that the guidance of 9% to 11% for the year, will this all, that means you are looking at a much higher EBITDA in Q3, Q4, despite the cost getting loaded in Q3 completely? Is it correct understanding of mine?

I think it's -- September was a slowdown and what I see from the market from our customers and October suddenly, we are seeing positivity back, right? It's a very drastic shift is what you've seen. I would like to believe other companies must be seeing something very similar. And that's where we are at. So we do believe that will increase. We also -- if you look at H1, I think it's been about 8%. So it's not that bad. I think, but we are hoping to be at 11%, 12%. And that's where we are at, right? So it's not that big a change. I think it's more about the projects that were stalled for the last 3 months, 6 months, some places, we have seen some positive movement, some places where we're still hoping to see some positive movement. These are large projects, right? Some of the biggest projects that we have won or customers that have shortlisted us. It's about just getting the momentum right. We suddenly have people flying to U.K. and Canada and U.S. in the last few weeks. So things are moving, I think it can only get better from where we are today. And that's the reason I was a bit comfortable sharing some guidance with you guys as well. So you guys understand that this is not bad. I think it's about the right timing, a few days here and there.

Got it. So last question, I'm just asking it as an order of magnitude question. For example, if the guidance is towards INR 600 crores for FY '26 and say, close to INR 520 crores, you've given a [ band ] which is INR 490 crores to INR 520 crores, but let's assume you get above INR 520 crores. Are these internal targets for the leaders and reps adding up to this and more? Or how does it work?

It's always more for the sales team. Please keep in mind, majority of our sales team in Europe and U.S. has just been hired or transferred in the last two years. So they had the time to settle down, they had the time to build the credibility with the customers and get to know the customers, the buying patterns, the own cycle, the process. We were expecting that this quarter, sorry this year, right? So there's no two ways about that. We thought there will be momentum based on our deal pipeline or the visibility that we had at the start of the year. Things got delayed because of a lot of external factors or stuff, which is beyond our control. And we do believe next year it continues to remain strong, and I think it can be even better, but we must execute. I don't want to give over promise. I want to make sure that we are able to execute this seamlessly.

[Operator Instructions] The next question is from the line of Sanjeev Damani from SKD Consulting.

Actually, you have just now mentioned that anticipating a very good growth in Indian business. Actually, that was my question, that how much we will be able to help the Indian manufacturing getting into international supplies that is in the engineering design and engineering facilitation. And how much is AI business that is taking place in manufacturing will help us get more business? My two questions, sir.

These are great questions, but unfortunately, I don't think I can answer any of them because the work that we do for our customers is very confidential and they don't allow us to share specific what is AI, what is non-AI. What I can tell you is about our India business, we are only working with the multinational companies who have captive centers or capability GCCs in India. So we don't work with Indian companies which are going global. Now from a GCC perspective, where things were very slow and calm at least for us in the last 12, 18 months. What we are seeing because of the global geopolitical situation and because of so many things happening in the world today and hope that [ is pretty ] soon. There is a huge opportunity opening up with the GCC for existing suppliers who have built the credibility in the last 3, 5 years. And that's where we've taken our hiring to the -- we've done some aggressive hiring in Q2, and I think that's going to actually help us in terms of -- with customer satisfaction and improving our capability with the customer. So that's what we are focused on. GCCs I believe, the customer that we work with, which are some of the biggest brands and biggest companies in the world. I think they're going to grow 2x to 3x -- invest 2x to 3x in India in the next few years. This is a massive opportunity opening up for everybody who are building capabilities. Number two, the value player on the technology guys is we're not a staffing or a payroll vendor. And a lot of those guys are getting rebadged towards engineering services companies and lot of a large engineering company, which are never focused on GCC business are all entering aggressively. So all in all, it's very positive. The market is growing. There's a lot of opportunity for you to grow. And I think the external environment in Europe and U.S. is only [ fuel ] GCC growth even further. And that's what we are getting ready for.

And sir, this GCC word I could not follow sir, if you can kindly clarify what is this GCC, the word that you used.

It's the Global Capability Center or the Global Captive Center or the Global Cost Center for multinationals in India. There's a lot of different terminology for it.

[Operator Instructions] The next question is from the line of Shriram Ranjan, who is an individual investor.

So my experience with GCC is that the margins are much lesser than what we get for fixed player on-site contracts. I don't know how it's for you, but will that have a bearing on the overall EBITDA. You've factored that in when you gave your guidance, but I just thought I will ask it.

The guidance that we have given is after consideration of all of the above.

Okay. And absolutely, the GCC business margin will be much lower in terms of what you would do directly with the customer in U.S. or Europe.

[Operator Instructions]

So I think there are no more questions, so I can quickly summarize. Again, a big thank you to everybody who joined today. We are looking forward to the next 2 quarters. And I am very happy to again hopefully share some more progress at the end of Q3. I wish you all a very happy Diwali, and thank you for your continued support. Have a lovely evening. Thank you.

Thank you. On behalf of Onward Technologies, that concludes this conference. Thank you for joining us. You may now disconnect your lines.