Onward Technologies Limited (517536) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q1 FY '27 Earnings Conference Call for Onward Technologies Limited, hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference call over to Mr. Luv Gupta from Go India Advisors. Thank you, and over to you, sir.

Good afternoon, everybody, and welcome to Onward Technologies Limited Earnings Conference Call to discuss the Q1 FY '27 results. We have on the call Mr. Jigar Mehta, Managing Director. We must remind you that the discussion on today's call may include certain forward-looking statements and therefore must be viewed in conjunction with the risks that the company may face. May I now request Mr. Jigar Mehta to take us through the company's business outlook and performance subsequent to which we will open the floor for question and answers. Thank you, and over to you, sir.

Thank you, Luv. Good evening, everyone, and thank you for joining us today. Q1 FY '27 marks an important milestone on the technology journey and represents a strong start to a new financial year. We delivered a higher term of quarterly revenue of INR 151.2 crores, crossing INR 150 crore milestone for the first time, with revenue growing 11.5% year-on-year and 8.7% sequentially quarter-on-quarter. Our EBITDA increased to INR 18.4 crores, growing 20% quarter-on-quarter, while EBITDA margins improved by 113 basis points sequentially to 12.3%. Profit after tax stood at INR 11.2 crores, up 16.9% sequentially, demonstrating improving operating momentum as we enter FY '27. Beyond the financial performance, we continue to strengthen the quality of our business from our existing clients. During the quarter, we won a INR 33 crore offshore development center engagement with a leading power -- global power and management company from North America, and also increase the number of customers generating over USD 1 million per year revenue, annual revenue from 16 to 18 customers, reflecting deeper account penetration and stronger steady and [indiscernible] relationships with our customers. We do believe that majority of our customers, if not all, have the potential to get to $1 million per year, and majority of them -- in that majority of the potential to $10 million per year. What excites me most about the results of Q1 are not driven by a single client, a single geography or a onetime event. These are the outcome of strategic investments we have made over the last few years in Digital Engineering, in the ER&D, and offshore delivery expansion, leadership capability, and account mining. Today, we are beginning to see those investments translate into greater scale, stronger execution, and improving operating leverage. We continue to invest in subject matter experts across all the 3 lines of business, which is mechanical engineering, embedded and digital, in lab infrastructure, proof-of-concept development, engineering accelerators, and reusable IP that enhance our ability to win larger, higher-value engagements across our target investment segments. These investments are strengthening our competitive differentiation, improving speed to value for customers and creating a scalable platform for future growth, deeper account penetration and longer-term margin expansion. We are also seeing increase demand... [Technical Difficulty]

I'm sorry, sir, we are not able to hear you, sir, speaking.

We are -- sorry.

Sir, now we can hear you. You may please continue.

We are also seeing increased demand from our global enterprises investing in software-designed products, AI-enabled engineering, automation, digital manufacturing and intelligence products. The huge expansion which is happening across North America and Europe on data centers and AI and energy are the areas where Onward is focusing now to build newer capabilities and stronger capabilities and where we believe we are well positioned to capture a large share of customer spending over the coming years. Importantly, we completed -- we also completed our first ever buyback program during the quarter reinforcing our confidence in the business, our cash generation capabilities and our long-term growth outlook. As committed, the promoters did not participate in the buyback program. As we look ahead, our focus remains unchanged, accelerating revenue growth, expanding margins, increasing wallet share within our strategic clients, scaling our offshore delivery model and continuing our evolution into a digital engineering and ER&D partner for our global industrial enterprises. While macroeconomic uncertainties remain, we entered the balance of FY '27 with record revenues, a stronger client portfolio, a growing pipeline, and a significant opportunities ahead. What's even more exciting for me to share with all of you today that our order book or ACV for this year has crossed last year's revenue, and we have amazing trajectory, as I said, and the sales funnel as we are good -- as we deliver Q2, Q3 and Q4 of this financial year. Before I hand over back to Luv, I want to just, sort of, give you 3 key takeaways. We have delivered a strong -- first, we delivered a strong start FY '27 with record revenue, improving sequential profitability and continued momentum across our strength of customers. Second, the quality of our business continues to improve, as evidenced by the growth in our strengthened customer base, increased offshore opportunities and larger engagement bids. Third and most importantly, we -- we believe we are building a company that is significantly stronger, more scalable and better positioned than ever before. Our investments in talent, engineering capabilities, offshore delivery and strategic accounts are creating a solid foundation towards sustainable growth and long-term value for everybody in our ecosystem. While we remain disciplined and realistic about the evolving macroeconomic environment, we are optimistic about the opportunities ahead. We have entered FY '27 record revenues and improving operational momentum. We crossed INR 150 crores this quarter. Our ambition is much bigger. We are building the capabilities, customer relations, and operating platform required for the next chapter of Onward's growth journey. And we believe the best is yet to come. Thank you again for your continued trust and support. We remain committed to delivering profitable growth, creating long-term value for our shareholders and establishing Onward Technologies as a leading global digital engineering and ER&D partner. With that, I hand it over back to Luv. Thank you.

[Operator Instructions] The first question is from the line of Hitaindra Pradhan from Maximal Capital.

So my question is with respect to the auto segment specifically. So what is our growth expectations this year in the -- for our auto projects and all? I mean, we hear a lot of mixed kind of commentaries from the industry, like the European OEMs are struggling, U.S. [indiscernible] green shoots. So if you can give us some kind of commentary or color on that and how we have stack with respect to the auto segment?

So, what we are seeing this quarter is the spending patterns remain very selective, but customers continue to invest in initiatives, which are tied to automation, so engineering, AI, automation and cost optimization. And these are areas where Onward Technologies is well positioned and where we continue to see the healthy demand. From your particular point about European automotive OEMs, we are seeing a similar trend while there has been a lot of industry news about project cancellations and standouts. We at Onward are seeing positive momentum with very select customers -- in a very select areas where we have specialization. So we remain quite positive about where we are with our existing customers.

Sir, is it fair to assume that, we will be having a positive growth in the segment this year?

Yes. We believe all [indiscernible] all technologies, but we have the larger mobility business, our industrial business and healthcare business are well positioned, all the verticals to grow this year.

Got it, sir. Got it. And the second question is slightly long term. It's like, I mean, I just wanted to get your view in terms of the strategy that you had. So what gives us the confidence about winability in this domain, because as far as we understand, the competition seems to be really good. I mean, and some of the new platform or the things that companies are trying to do, they seem to be even Tier 1 and the OEMs are also struggling. So what gives us -- what is our approach there? And what is our view? You briefly mentioned and touched upon how you've been investing into digital, the stuff and building some kind of platform. But if you can give us some broad color on your strategy from a medium- to long-term point of view, that would be helpful.

Sure. Just to clarify again, on the technologies, we have 73 live customers today, and we are focusing only on those customers where we have existing master services agreement signed, where we have existing client relationships, where we are working in one particular design center or office location or a factory of these customers, right? So we don't -- we are not a sales organization chasing new customers. So our confidence is based on our conversations, our discussions with our customers. right? So that's fundamentally that gives us the biggest strength. There are no unknowns from that perspective. Number two, the feedback that I'm sharing with all of you today is a feedback consistently I've been sharing for the last several quarters. And I continue to maintain what we are seeing is a very healthy opportunity for a company of our size to continue to deliver robust double-digit revenue and double-digit EBITDA year-on-year. And we remain continue to focus on that. And we have selected 3 broad verticals, which all the 3 broad verticals continue to -- as I said, it's not going to be that every vertical will grow every quarter. But on an annual basis, on a 3-year basis, we do believe all these 3 verticals have huge potential for us with the projections that we have shared with all of you.

[Operator Instructions] We will take our next question from the line of Rehan Saiyyed from Trinetra Asset Managers.

So sir, I have a couple of questions. So first on the healthcare vertical. So could you please provide me the color on the healthcare vertical? Are any clients close to crossing the $1 million revenue mark? And how should we think about its contribution over the next 12, 18 months? This is my first question.

Sure. So in healthcare, we don't have clients yet, which has crossed $1 million. But in healthcare, we -- the way I would -- the way I'm looking at it can grow anywhere from, let's say, 20% to 50% year-on-year. It's all about execution. Q1 was -- this quarter, in particular, was a very good quarter for them. The team did a fantastic job. I think they have to maintain the momentum. I shared last year, the best part about our Healthcare/Life Sciences vertical is we have already won the clients. We hired several people, both in delivery engineering and also in our sales team in Chicago. So I think it's all about just executing, continues to invest in the business and grow with our existing customers because when they added us, they added an incumbent to challenge the current suppliers, which are all American companies. And I think the potential is massive in terms of what we can achieve with healthcare.

Okay. And my second question is around just all my understanding regarding the ODC deal that we have recently. I'm that -- so given the recent ODC deal and continued focus on large accounts, so how should we think about the evaluation of deal sizes and the potential for more such multiyear engagements going forward?

So just to reinforce the same point, all 70-plus customers that we have are large customers. Each of these customers have massive opportunity, right? When I say massive opportunity is each of them has anywhere from $100 million to $1 billion outsourcing budget in the space that Onward Technologies operates, right? So what we are seeing is increased opportunities across mobility, across industrial equipment, across healthcare and across our software-defined product engineering space. The ODC deal that we won this quarter for INR 33-odd crores is only a starting point. And this is just an example of, we believe, there will be several large multiyear engagements and RFQs that we are participating in today and where we are invited to compete. So our pipeline today at a much higher quality than a year ago.

Okay. Sir, my last question is on your offshore mix. So your offshore mix has moderately slipped this quarter. So what led to this change? And when do you expect offshore leverage to resume as the margin driver? And just continuing this part, and so what EBITDA margins we are expecting for 2 to 3, 4 quarters going forward?

So again, to reinforce our commitment and the projections that we have shared, -- the number of customers that we have with $1 million-plus revenue has increased this quarter. Several customers will increase on site, several will increase offshore, and I think it's all about timing. But year-on-year, you will see an improvement across all our customers because companies in U.S. and Europe hire companies like Onward Technologies to leverage the offshore advantage, right? That's where the real strength is. That's where the real value play for them and for us is. So you will see improvement in that part. And in terms of EBITDA, we have shared before, it will be continuously we will -- we are confident that it will be double digit, and it will be -- we will keep improving quarter-on-quarter, year-on-year. And I think we have quite a reasonable pipeline for that.

Next question from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, firstly, I wanted to understand regarding our aspiration of improving revenue per employee between INR 30 lakh and INR 40 lakhs. So that would mean that our revenue on the base of 2,500 employees moving mostly to INR 750 crores to INR 1,000 crores levels. So what kind of foresee -- when is this aspiration do we expect to achieve this? And sir, what kind of upskilling or what kind of contracts will be required to reach these levels? Because it seems that our employee cost is currently upwards of 70%, 75% of our revenue versus 60% for larger peers. So if you could help us understand this trend?

So what you are talking about is an aspiration, what the benchmark in the industry is the top 3 or 5 companies in the world. So that's an aspiration that we have shared. We don't have a particular time line when we will hit that. What we have a very clear time line, which we have shared with everybody is that we will deliver -- we are confident of delivering double-digit revenue and bottom line, right? Last year was a solid year. We delivered that in the first year that we shared. Our bottom line grew substantially higher. I think this year, our top line will be substantially higher than the 10% plus that we grew last year. We already have the order book for that, as I shared earlier, right, on the run rate, we are already at INR 150-odd crores, which gives us a run rate of INR 600 crores for the year. So that's where our focus lies, right? And as the overall numbers improve from our existing customers, I think revenue per person will increase as well. To add the last point on revenue per person to increase the revenue from current INR 22 lakhs per employee that we have, let's say, INR 35 lakhs, I think it's only about adding more and more on-site people in U.S. and Europe, which currently doesn't exist in the H1B program. But we do believe, based on what you and me are reading, it will open up because the demand continues to be very high. The shortage of talent in the U.S. and Europe is extremely high. But at least for companies like -- on Technologies, we are not focusing on that today like we did 2, 3 years ago. Offshore is where customers want us to focus on. I think our team is doing a fabulous job in delivering that. The large contract that we won last quarter was against some of the biggest companies out there in the world. We were a new entrant. And we are very excited with that, and we similar see similar deals coming up where we are participating, which will again improve both top line and bottom line.

Got it. Sir, our target of achieving the high -- mid- to high teens EBITDA, so what will it require from our end to scale our EBITDA margins going forward?

[indiscernible] So would it be more and more offshore. It's just about mining, right? So that currently top 25 customers, deliver 87% of our revenues. More and more customer engagements, we have to bid for larger projects, win larger deals, which we are doing now, more offshore the margin improves, and that's where we will see the margin expansion happening from each of our existing customers. each customer goes towards from $1 million to $3 million per year, $5 million per year, $10 million per year, and that's where the margin expansion will happen. Because keep in mind, the fixed cost for each client remains the same. Today, on the technologies is investing substantial capital upfront to behind these customers, right? So we will not need to keep investing more. Eventually, for 70 clients, we will only need 70 account managers, same number of G&A staff, same number of offices. So it's more about growing with the customers and executing and broadening our engagement with them.

Got it. Sir, if you could help us understand in our main segment of heavy engineering and industrial. So how has been the trend of our -- you don't tell what your customers are, but if you could help us understand the top 5 customers that you have, how has their R&D budget moved over the past 3 years? And how has their out -- so first, how their R&D budgets have moved over the past 3 years? Out of that R&D, how is the outsourcing work shifted? And how much has been awarded to Onward currently versus what it was 3 years back?

Sure. So just to clarify, our industrial equipment and heavy machinery segment is the oldest vertical of Onward. We have been doing it for 15 years plus, and most of our client engagements are 10-year plus, right? So we are very stable long-term engagements. with these customers. The difference was pre-pandemic, Onward is only focused on the India market and the GCC business. Now we are expanding with them in the global markets, right? And that's where the revenue growth and the margin expansion will come. To answer your second point, these customers are all flourishing. They are doing record revenues today. They are doing record profit today, record cash generation today. And if you look at their market cap as well across North America and Europe, the industrial segment, the agricultural segment, the power generation segment, the oil segment, everything is at an all-time high. So that's where -- and when the revenue goes up, obviously, that investment in technology, innovation, R&D goes up even higher. So the outsourcing budget is very high. And with them, we are growing as well. We believe the momentum will continue. The deal that we signed this quarter is an example of that. We have been supporting this customer for more than 5 years already, I think 4.5 years. And it's not a new customer for us today, but they've been testing us, doing pilots with us, giving us a lot of different small opportunities to prove our capabilities. We have done that. Hence, they invited us for this deal, and this is just one deal. Post this deal, they've already invited us for several new RFQs, which are part of the same customer, right? So it's all about executing and then bidding for larger and larger contracts with these customers. So each of these customers have outsourcing budget that onboard is not in, I would say, 0.5% or 1% of their outsourcing budget. So that's the kind of potential we are talking about.

Got it. Sir, just a final question from mind. So does the outsourcing budget rather than outsourcing a portion of R&D budget that is outsourced increases in companies that are going through a down cycle, so like automotive OEM out of EU whose balance sheet is already stretched. So are these players more open to outsourcing to a player like Onward or a player in industrial and heavy machinery who might be making turbines or who might be making many equipment, he is more willing to outsource the software -- the ER&D work to a player like Onward, if you could help us understand?

Customers which are growing very quickly. Customers that are growing exponentially, customers that are buying companies, they're doing a lot of acquisitions, that's the sweet spot, right? Those are the companies that outsource to us more. When customers are downsizing, definitely, they look at there's an opportunity there as well, but that's not what the Onward Technologies and my team is focused on today. We are focusing on customers, which are the biggest brands, which are at the forefront of innovation and it's all multibillion-dollar companies.

Got it. And sir, have we had discussion because we see that this time and material contract will become less and less relevant going forward with these AI models. So have we had any discussions with our customer about how these -- our contracts should move going forward, if you could help us on that front?

Every day, as I said, these are customers that several -- the majority of our customers, we are working for more than 10 years, large bund of engagements more than 5 years, and we have very few customers which are new customers. So we are talking -- me and my team, my employees are talking to customers every day. right? And so far, there's been 0 conversation about time and material going away. Actually, we are seeing time and material only increase in this quarter, in Q1 of this year. And we see similar momentum in Q2. AI is affecting IT companies and Onward Technologies is not an IT company, right? We are a product engineering company. So it makes a big difference. So as of today, we are seeing time and material only increase where customers try to scale much faster. And I think Onward Technologies will see the benefit of that.

Next question is from the line of Omkar from [ KCP. ] As there is no response from the current participant, we will move on to the next question. The next question is from the line of Abhijit from [indiscernible] Asset.

So in the last call, you had mentioned we were setting up the digital AI lab in Chennai. Can you share an update on its progress? And have we started rolling out the...

Yes. Absolutely. Chennai office has been amazing. The center is fully operational. We have a few hundred people working from there. We still have some more small capacity left, I think which will get filled very soon, and we will start looking for even bigger expansion in Chennai as of now. Our focus today for this quarter is, we are opening our fourth design center in Pune. We have 3 offices, which are fully functional and occupied. So we decided to open a fourth center, which is coming up in August. So our focus lies there. Once this center gets full, our focus again goes back to Chennai, which will become again a big growth focus or investment for us.

Got it. And the other question is regarding the rise in our fixed price mix in this quarter, I think it was somewhere around 16%. So is this a deliberate pivot or how is it going forward?

Sorry, you are not very clear. Can you please repeat?

Yes. I was asking regarding fixed price mix. So out of the total revenues, it was around 16% in this quarter, right? So was this -- is this one-off or was this a deliberate pivot and the trajectory from here?