Onward Technologies Limited (ONWARDTEC.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Onward Technologies Limited Q3 FY '26 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Jyoti Gupta from EY Investor Relations. Thank you, and over to you, ma'am.

Thank you, Bhumi. Good evening to all of you. Welcome to the Q3 FY '26 Earnings Call of Onward Technology Limited. The results and presentation have already been being mailed to you, and you can also view them on our website at www.onwardgroup.com. To take us through the details today and to answer your questions, we have with us Mr. Jigar Mehta, Managing Director of Onward Technology Limited. We 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 or which can be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in prospectus filed with SEBI and subsequent annual reports 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. Good evening, and warm welcome to all of you joining us today for our Q3 earnings call. It's always a pleasure to connect with you every quarter and share with you the amazing progress our teams are making across all of our technologies. I hope you've had a chance to go through the press release and earnings deck we released post the Board meeting earlier today. Let me start with a quick overview of what we are trying to do in Onward, a bit about the last 9 months and of course, in the last 90 days, in particular. So from an Onward perspective, we shared at the early part of last year or late part of last year and early part of 2026 that our goal is -- '25 sorry, our goal is to deliver double-digit revenue and double-digit EBITDA for the next 3 consecutive years, and we are building a leadership team in place where we move from a promoter driven, that is me, to a professionally-led vertical-led leadership team. So let me throw some light about that. So I'm very pleased to share that now the entire team is in place. We have 3 vertical heads who are leading the business with the largest vertical that we have is the industrial. A new leader joined us last week and he is settling down. So with that, we have Rajesh leading our healthcare vertical and 2 new leaders, each leading our transformation, mobility and IHM vertical. We want them to set it down and we will be very happy to introduce all of you to them in the next couple of weeks and quarters and including we hope to plan an Analyst Day very soon in Bombay. So with that, I take a step back from day-to-day operations and focus more on strategy and client engagement, while the 3 leaders will build the entire business. The focus on the 3 businesses is very straightforward. In the industrial vertical, it will be completely delivery-led growth. We have, as you already know dream clients and very, very focused on just one geography right now, which is North America. And so the focus is how do we take these 40-odd relationships and convert them into $5 million, $10 million, $15 million, $20 million per year engagements. And #2 is how do we expand into Europe, which is completely a new territory for us, where we have very minimal presence in this vertical. Number 2 is our transformation and automation vertical where we had a very strong presence in the GCC market in India and now we added a leader who has U.S. experience, Europe experience, and he is building his team across Europe and U.S. and we want to grow. And first part is to build a very strong sales organization, transition the relationships that we already have in place into the global market; and #3 is then leave the entire thing to offshore, where there will be substantial huge margin expansion. So that vertical continues to remain steady and we continue to focus only on the largest OEMs in the world while we have exited maturity or I think all of the Tier 1s and transactional business that we had. Third vertical is the healthcare vertical, which is a new vertical for us. That's a vertical where we continue to improve the client, the quality of clients that we have. So we have won some good client engagements. And now it's about how fast we can go in terms of deepening our growth with them. So I do see the next 1 to 3 years, that's going to be a very exciting vertical for us. Now coming back to the quarter, last 9 months has been a historic quarter; I think the rest of my career, best for my team, best for Onward Technologies. We delivered about INR 411-odd crores of revenue. which is 11.7% on annual basis, very similar to our budget. And our EBITDA margin is much ahead of where we thought we would be. We are at 13.9% for the first 9 months. But I said double digit last year, we were expecting to be about 11%, 12%, but we are ahead of where we should be predominantly driven by majority of the new business that we have signed is on the offshore side. Number two, in terms of last quarter, last quarter was, again, we surprised ourselves and we are very happy with what we have delivered. Our revenue stood at INR 136 crores. We were expecting to be a bit lower. If you remember same time last year, we had got or plus 2 years in a row, we were -- most of our customers, especially the GCCs in India and the automotive outside India had huge furloughs. But this time, we had done proper budgeting. Our teams were well equipped. So we knew while the customers continued with the furlough, I think we were very well equipped in terms of both in internal budgeting and which is budgeted from an annual perspective, obviously, we're not paying a quarterly gain. From an annual perspective, we have budgeted that we delivered double-digit. So it was budgeted for that. So we're very happy that we actually -- a lot of other client engagements can contracts ramped up, and we were very close to Q2 in terms of revenue. And in terms of EBITDA, EBITDA continues to grow for us. predominantly driven on offshore margin expansion and building amazing capabilities. In line with that, we had shared earlier part of the year where we expect huge offshore projections where we have budgeted a massive CapEx investment in India, where we upgraded our infrastructure in Pune, Chennai, Bangalore, Hyderabad. We have 2 of our -- Pune and Hyderabad running at full capacity now and with the addition of Chennai, opens up another few hundred seats for us and that's why we are very with starting 2026 and '27. So that gives us enough bandwidth to grow several new engagements or expand the current engagements across North America and Europe into Chennai. So yes, majority of the new offshore growth or offshore headcount growth will be in Chennai for us. In terms of -- our focus area continues to remain the same. As I said in -- just to summarize, on the industrial side, it's very delivery focused, and we have got a terrific leader, I am very excited to work with him. And I know he's inheriting our best teams who, again, have done phenomenally well and delivered beautiful CAGR for us in the last several years. And the whole focus there will be how do we transition majority of the business towards digital and AI, and that's the background that he comes with. On the transportation and mobility vertical, the focus, as I said, is the GCC business continues to remain strong and steady, and I think that will grow double digit every year. But the real icing for us will be is when we start opening up large OEM clients in Europe and U.S. especially on the embedded digital side and then that initially will be on site and then eventually will lead to offshore. And we have to find our own little niche in a very crowded automotive space. So I think there is -- we are seeing amazing traction, and the team continues to do well, continues to get a lot of meetings, have workshops, and I think we will find that niche, which will help us grow 5x, 10x from there, because keep in mind, as we have shared last quarter and the previous quarter as well, we have already signed and the customer OEM customers in Europe and U.S. have already hired Onward as a challenger to some of the large marquee -- the ER&D services companies in the last decade, right? So we are the new challenger, like us there are several other companies as well. So it's going to be lot of fun as we find our way with these OEMs. So it's all about hiring the right people and making sure we have a workforce that works harder and better than anybody else. And I think health care is fairly straightforward. I think we just need to keep building, investing and deepening our client engagements, build the trust, build the credibility and I think we will see amazing runway for us as we move forward in the next couple of years. So with that, I would like to summarize and open it up for questions. Sorry, from a financial perspective, we also wanted to share our DSO continues to improve. We are now at 70 days end of Q3. Our attrition continues to get better or gets lower. We are now at 14.73% and our headcount is at 2,491 employees. So let me explain what that is. So Q3 is a very significant quarter for us, as we have shared, in the last 3 years. Q3 for us is, while things are slow, there are for furloughs, a lot of our key customers are on holidays, especially in U.S. and Europe. That's a time when we do a complete performance check or a reality check across the organization. And this is where we also focus on reduction of the bottom 5%, right? So we finished our appraisal process in the month of July. By October 1, this year is we did some increments, very good increments for our top-performing people backed by client rate increase. And #3 is we do bottom 5%, with a significant portion of people. Keep in mind as a young company, we're always taking big bets, hiring a lot of people, but not necessarily everybody is successful, right? They drive their best, but sometimes it's just not meant to be. So this is a quarter where we actually move on from those people. We take a onetime hit if it has to be in Q2 and Q3, but that gives them an opportunity to build their career somewhere else. It gives us an opportunity to start fresh as we build a new calendar year, right? So a significant portion of the number of senior people exit in Q3 for us, especially on the delivery side, sales side and equal number, if not double the number of people that come in. So a lot of actual happens for us in Q3. It's usually the busiest quarter for us in the organization because we are getting ready for the next year and next -- we are getting ready for the next calendar year and the financial year because we're constantly learning from what went right, what went wrong, which customers we can scale, which customers are looking at us and which verticals or sorry, which LOBs and this product areas, so we can go deeper and deeper into those areas driven by customer feedback. With that, I would like to open it up for Q&A, and we continue to remain committed. As I said earlier, for 2026, our goal continues to remain same why we are ahead of where we want to be as of today, and we are very happy to do that. Thanks to all of your support and amazing work all our employees are doing. But our goal continues to remain the same for 2026 and '27, which is deliver consistently, annually double-digit revenue growth and double-digit EBITDA growth from the previous financial year. Thank you very much. And with this, I now hand over the floor back to the operator for Q&A session.

[Operator Instructions] The first question is from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, I wanted to understand regarding our -- so first, I wanted to understand regarding why customers chose Onward versus their own GCC. and sir what is the technology capability or the service capability that we have that these old GCCs don't have or they can't clear that's why there is stickiness with Onward versus their own offices?

Can you hear me? Yes, right. So I understand -- I hope you understand the GCC model, GCC is nothing but a cost center of a global multinational in U.S. and Europe or other parts of the Western world, which come to India for lower cost and large supply base. Right? And that supply base over a 5-, 10-, 15-, 20-year process gets built into a capability center where they actually deliver solutions and products and intellectual property. So there are 2 different parts of a GCC, but just to simplify the answer, customers -- all global companies are extremely clear, the GCC, the cost center that they have created in India is only for a particular area. They are not to do with everything to do with India, right? So while they might come into India for AI and digital engineering, entire embedded and mechanical engineering while we outsource to tons of other suppliers. So it's not only Onward, there're always about 5 or 6 other suppliers. So we always see the top 5, 6 companies, engineering, ER&D companies that you know of, which are all publicly traded, who are already there for the last decade. Onward is the company they've hired recently in the last 5, 6 years as the challenger. Number two, traditional outsourcing model saves 70% of the work they do in-house and 30% they outsource. So we come at a 30% outsourcing side, and I think that flexibility, agility that they always need from suppliers, right? So 70% of the work they will do in-house, so let's say they have a GCC of 5,000 engineers, 3,500 will be their own employees, 1,500 will be between Onward and other large ER&D service providers because they have the flexibility to end the contract, they have the flexibility of lower costs. They have the flexibility of agility. They have the flexibility of when project ramps up and down, they ask the service provider to change the personnel. So we are not stuck with the people for the next 5 years. The third part of the question is on the capability side. So that every customer is a unique proposition based on the 3 verticals that we have. And then we have for each customer, we have identified a niche area where we have built an ODC or a managed service desk, which is exclusively for that customer. So we built deep capabilities for XYZ customer based on the RFQs or requirement they had for the next 3 to 5 years.

Yes, sir. Sir, my next question was on, sir, I read that currently, most of our revenue comes from time and material contract. So how do we see this mix changing from time and material to either outcome-based or IP-led contracts? So I understand that LTT -- a large part of LTT growth has come from these IP-led contracts where the customer stickiness increases much more than these time and material contracts. So how do we see onward moving our revenue mix from this time and material contract to the other kind of contracts?

Good question. I think I did answer this question -- I am asked this question every quarter for the last few years. As I've shared earlier, I personally have no plans to change the mix. I like the time and material to be 90%. Please keep in mind, Onward is a young company. We -- let's say, we'll end up around INR 550-odd crores of revenue. Our goal continues to remain at 90% T&M, at least until the time we get to INR 100 million or INR 1,000 crores of revenue. And then we will relook at what the next INR 1,000 crores to INR 2,000 crores, INR 3,000 crores. But from where we are today to get to INR 1,000 crores, I think time and material is a great business model for us. It's very steady. It's very dependable. It's very sustainable. It gives the customer a lot of flexibility. That's why customers love us. Our cash flows are very solid. You can see the cash generation that we have done. We have been able to pay dividends to shareholders like yourselves for the last 10 years in a row. And I think we'll continue to sustain that, if not keep growing that for the next several years. And that's the business I would like to be in at least in a very sustainable focused where we add value to the customers.

Our next question is from the line of Dhruvin Doshi from NV Alpha.

Jigar, my question to you would be, say, on the long-term trajectory path, we aspire to reach INR 1,000 crores of revenue. I'm assuming that would also -- there will also be a component of an inorganic growth that would come in to achieve this in order to double our revenue from currently where we are. So any update on acquisition that you have thought of anything that you're evaluating? And just your sense on that, how the inorganic part will play in terms of reaching this INR 1,000 crores of revenue?

Absolutely. Ever since the PE conversion came in, we've always looked at acquisitions very seriously. So that we continue to remain open. So the best acquisition for us, as I have shared earlier, would be in where we are sort of buying out, you're getting an opportunity to acquire a competitor who's already serving our existing customer, right? So we have 70-odd customers today. So the best strategy, the best approach, at least from where at least we come from today is towards that. So we are always open to it. As of today, we continue to focus only on inbound where we will get several companies reaching out to us or our customers asking us to look at some supply, which is not doing well or looking at exiting for whatever reason and we've been open to that. We haven't found the perfect blend yet, but we continue to engage with them. Our Board is engaged with them. Conversion team and Harsh and his team are very helpful there as well. So we are always open about it, right? So if something comes up, we obviously will be the first person to know. But we are not looking at buying just for the sake of revenue. Right it can happen there. When it happens, we will give the first person to know.

Okay. Got it. So there's no immediate update or immediate actionable on that part at least for now?

Correct. Correct.

Understood. Got it. Secondly, on the margins front, I just want to understand, I guess, ex of this onetime labor code impact cost, we've done an all-time high EBITDA margins. If you just could throw some more light on the sustainability of these margins and how do you see them going ahead? Was it also because you mentioned about furloughs and a lot of the -- Q3 being the busy quarter for you with a lot of layoffs also happening. So was it also led by that? I mean, because of we laid off a lot of employees. And I just want to understand on that front, I mean, the sustainability of these margins going ahead?

Very different question. I'll go back to my projections or what we have shared with you and everybody last year. We were at 9% EBITDA last year, and we shared that we will grow double-digit EBITDA. At that point in time, nobody believed us and all the analysts and investors are asking us, is it possible? We are a high-volume, low-cost company. Today, we are now -- so our goal was how do we get to double-digit [ max ] , 11% to 12%, which included a significant portion of investments in the H1B on-site program and offshore. H1B program is gone, which means most of the customer engagements have led to substantial offshore work for us. We were -- I think our team did a brilliant strategy where we were ready for offshore work. Our design centers were ready. We opened -- upgrade one of our centers, and that led to the margin expansion, just to keep things personal. On the furlough side, it was just more about we had already budgeted that from an annual perspective. So we don't look at in onward quarterly numbers as such, right? Yes, we are a listed company, and we want to maintain hygiene. But our focus continues to remain on an annual basis, deliver double digit. And double digit, very honestly, for us, we started 11%, 12% was the goal for us this year. So yes, 12% is what we are budgeting very well for, and that's sustainable. Everything else on top is how well our teams execute the strategy.

Our next question is from the line of Sarvesh Gupta from Maximal Capital.

I had a couple of questions. So sir, one is strategy going ahead. So like you mentioned that you are a small company and this size guiding for a double-digit growth is a little bit lower in my opinion because the size is such that you could probably grow at a much faster pace than this 10%, 11% sort of a growth trajectory. So wanted to understand what is the constraint when we think about growth? Why can't we, for example, double in next 3 years rather than grow by only 30%, 40% in the next 3 years. So what do you see are the constraints why we can't grow despite having a lower size? And second question is that earlier you had mentioned that you have these 2,500-odd employees and you had the same number of employees many years back also. So if we now think about growing from the current level, what kind of capacity addition in terms of employees do you think you want to do or what is required to be done? Or will you be able to continue getting to a different scale altogether with the same employee base? These are the 2 questions.

Sure. So I think I've answered this earlier as well, but let me reemphasize or rephrase what I shared earlier. Where we are today is again, the best it's ever been. And when I say we will -- the projections that we have given to everybody, to all our shareholders, stakeholders and the Board is that we can deliver double-digit EBITDA and revenue growth based on so many external factors that are there. Can we grow faster than that? Absolutely, we can grow faster. There are no limitations. I think it's all about executing towards where we need to get to. But executing sounds -- it's more about building delivery capabilities, and I think everything needs to get into a mature cycle. Please keep in mind, we're not an IT company, it's an engineering company. And on the engineering side, if you look at any -- right, we had some of the best consultants come and talk to us that we are the fastest-growing organic-based company growing in the last 3 to 4 years. There's no company that's grown even bigger or smaller faster than us. Yes, through acquisitions, some companies have grown much more and they show bigger numbers, but not organically. Because in engineering, you have to build capabilities, you have to build trust and only then things happen. It doesn't happen overnight. So we are at that stage right now. As I said, we have just gone -- we have added a beautiful leadership team in place. They are building the #2 and #3 levels right now while they inherited some amazing talent. They are also going to add a lot more as we migrate more and more towards digital and AI. So it's going to take -- it's a process which happens. And we want to make sure we are always doing a very high-quality job for our customers, right? So in IT, it's very different. It's personnel, they come, they go, it's very different mindset. our goal is to make sure we deliver high-quality engineering solutions for our customers where we own the SLAs and we ramp up from there. So double digit is more about showing the confidence that we have as a leadership team, what will happen in the next 3 years.

Last thing, headcount?

And on the headcount side, I continue to believe we are about 2,500-odd people, a bit less today. And I think Q4 next couple of quarters, I think, going to be amazing for us. I see that very strong customer demand -- sorry, very strong demand from our existing customers. And it's all about, again, going back to execution. I think we have beautiful teams doing a fantastic job. We spent a lot of money in automation as well, which is simplifying workflows. So headcount-wise, I think by the time we get to $100 million, I think we should be about 3,000-odd people. Because keep in mind, majority of the growth is going to come from U.S. business and Europe, of course, but majority will come from export business, not from INR billing. So I think about 3,000 is where I think I've shared earlier as well is where we will be[indiscernible] to 3200.

Okay. And sir, when you are competing with other vendors for various new proposals, what are you exactly competing on? Is it the past work that you have done? Or is it the pricing of these contracts or [ expectedly ] differentiated capabilities? So if you can throw some light on how does that selection of Onward vis-a-vis other competitors happen from the customer's point of view?

So again, we have shared this multiple times in the past. But let me again rephrase, right? I think, if you see my earnings calls, you will see that consistently what we have shared in the last 3 years. But let's say, for example, the first part in engineering business is to become a qualified supplier. To become a qualified supplier to the largest companies in each vertical that we are in, we have to do a lot of delivery work, pilot works, POC work from anywhere from 3 months to 3 years, right? So that's strictly based on your delivery capability in-house. You're not allowed to subcontract that. You cannot outsource that. There is no cost angle there, something that you do. These could be paid or these could be complementary, where you are investing upfront for the customer to win that customer, win the customer's trust. Once you win that -- once you do that, customer doesn't only select you only for one particular, let's say, line of business, which could be mechanical engineering or robotics or [indiscernible] electronics or it could be digital and AI. I'm just giving you a very broad perspective. Now once the embedded part of Onward is great on the digital side for this one customer, then there's a standard rate card, which applies to us and the largest 3 companies in the world. There's no difference in terms of rate card. That's your standard rate card. The customer is the OEM gives all of us. There is no special treatment for anybody is what we understand. Now based on the complexity of the work, the customer has a preference to increase the rate drastically or reduce it because if that's the cost of people and personnel, that's how it works. Whether it is fixed price or time and material, it doesn't really matter is what, again, my understanding is. So that's where we come in. The number three part is the difference in terms of how you want to -- the real differentiation comes in when we start bidding for larger projects is how you want to bid for the project. You want to bid as a managed services, you want to bid an outcome-based, you want to bid as time and material, you want to bid what you can lower your rate in the final cost. That's your strategy based on -- that changes dynamically every day. right? So some very large multibillion-dollar companies like to do outcome-based. Young companies like mine love to do time and material. And then customer has a preference, right? For XYZ RFQ, they might do -- they prefer time and material. That's why we win. For XYZ, they prefer outcome-based, they might win. Sometimes at the city, customers are very clear they only want to go to Pune or Hyderabad. And we are the only supplier from that city, we get a preference. So it's very dynamic. There is no fixed thing. But standardization is based on your delivery capability in-house and your ability to continuously invest in the future because you could be great in something today. Tomorrow, the customers' needs will change. You should have that level of cash flows, you should have that level of vision, you should have that level of delivery capabilities to ramp up and invest in new areas and take that risk with the customer.

Our next question is from the line of Jayshree Bajaj from Trinetra Asset Managers.

My first question is...

Ma'am can you speak a little louder?

So my first question is India is accounting for 50% of revenue by geography. So that means India geography not India -- like we don't have any domestic customers. So does this indicate that half of our global contracts are being built through Indian subsidiaries of global OEMs? Or is this purely a reflection of offshore delivery center accounting?

Actually, a combination of both. India, we do 50% of our invoicing in INR, which includes the business that we do in with the GCCs in India, which is absolutely right, as you said earlier, the global clients have a captive center in [indiscernible] and have, let's say, subsidiary in India, and they prefer to do there because that's where they get the transfer pricing advantage. And number two, we also have an entity in U.K., which is a branch office of Onward Technologies, the parent company, not a subsidiary. So that revenue also gets accounted in the India part. So if you see our last year annual report of balance sheet, you will see all the breakup how we account for it.

And how does this impact our tech optimization and currency helping strategies?

It doesn't, right, because we don't -- it's -- we shared everything if you look at our earnings decks or if I look at our annual report, everything is clearly mentioned. We are only hedging. We are very conservative. I don't like to make money on hedges. I just want to make sure I don't lose money on it. So we are very conservative on that side. So we hedge about -- which is driven by the Audit Committee. It's predominantly, we are hedging our offshore revenue from U.S. and Germany. Germany is still very small. Predominantly, it's U.S.

Okay. And my second question is, given like we have a cash and bank reserves of INR 116 crores. So -- and as you have stated today also that we are not focusing on M&A other than competing suppliers for existing clients. So rather than can we look for acquiring specialized capabilities in high-growth areas like cybersecurity or NLP where we don't work right now?

Absolutely. Absolutely, it's an opportunity in area, cybersecurity is of areas and so many other areas. So we are open to all of that, right? So we have looked at acquisitions, as I said, we have looked at the buyback options as well. We have looked at rational dividend options at the Board. We have also looked at multiple other things, right, buying more assets, creating a campus in Pune and Chennai. So we're constantly evaluating. We have a very young dynamic team. We have a very dynamic CFO. We have a very strong finance team. So constantly, we are on the go every day, right? But we don't want to do anything just for the short term just to please 1 quarter or somebody. We want to do it long term sustainable. That's what Onward stands for. We have a beautiful legacy. We want to keep growing, and I know we can keep winning as we have done the last 5 years.

Okay. So can we expect something in the near future regarding this? Any acquisition or anything?

We are all very open. We are all as excited. For me, 116 sounds a lot of big money, but for me, not anymore. As I said, my bigger dream is I should have 6 months of payroll cash on hand. So what we went through as an organization and the whole world went through in pandemic should never happen again. So there are a lot of things we can do with positive cash flow. I think we will easily be at, let's say, double to where we are today 2 or 3 years down the line. So I think it's a very exciting phase for us. We have to just make sure we don't do anything short term just to please somebody. And I've been very fortunate. I have an amazing Board, which is constantly guiding me towards that. For the right opportunity, we'll be ready to strike tomorrow morning. You see us...[indiscernible] progressively thinking.

Our next question is from the line of [ Brahma Shetty Suresh from Brahma Financial ].

Sir, you are sitting in cash, but you go for acquisition and go for any special dividend or you can use the funds on expansion plans. Sir, this will -- revenue continue next quarter or other quarters also, it will be continued revenue grow around 20% is possible, sir? Sir, I know little bit English. You can understand.

It's going to be a very exciting 2026. If I understood your question well, we have a lot of options, which, as I said, the Board and the management team are looking at every day. You can be rest assured of that. And it is always in long term, and I think it's going to be very exciting.

Any special dividend, sir?

It's special only, right? I think we increased it to INR 5 a share 2 years ago. My job is to make sure I sustain that, if not grow that. So not looking at anything of one-off.

Shareholder side, I am asking. But you -- stock market wise price vary, 2, 3 years back, INR 800, it will trade around Onward. But it will be -- company is growing good, but I am not asking price increase. But why is the market will take Onward is the price not take good shape?