Onward Technologies Ltd

BSE:517536

Thank you, Luv. Good evening, everyone, and thank you for joining us today. I appreciate your continued interest in Onward Technologies, and I'm very pleased to share our Q2 and H1 FY '27 performance.

Q2 FY '27 marks an important milestone in our transformation journey. We delivered our highest ever quarterly revenue at INR 170 crores, representing a 22.4% Y-o-Y growth and 13.2% sequential growth. Total income for the quarter was INR 171.2 crores, while EBITDA grew 33.2% (sic) [ 33.7% ] year-on-year to INR 26.5 crores, with margins expanding to all-time high at 15.6%. PAT increased also to 41.2% Y-o-Y to INR 16.8 crores.

These results reflect the operating leverage we continue to build into our businesses. What is particularly encouraging for me is the quality of the growth. It was driven by deeper engagement with strategic customers, improved utilization, higher productivity and strong offshore execution. This was -- I want to take a moment to congratulate my entire team for a very disciplined execution and operational management.

Our focus as an organization continues -- remains firmly on delivering that growth and converting execution excellence into sustaining -- sustainable profitability. The U.S. and Europe regions continue to be our primary growth engines. We also increased the number of customers billing for $1 million annually from 16 to 18, demonstrating our ability to expand wallet share within our existing clients.

A major highlight this quarter was a renewal of a 3-year digital engineering engagement valued at approximately INR 44.5 crores with a global construction and mining equipment leader. The contract value increased by over 70% compared to the previous term, reflecting our customers' confidence in our ability to deliver quality and long-term partnership approach. This is very important because the earlier contract while was also sizable.

We were getting the -- while we had the statement of work and the contract, we were getting deals on a 6 monthly or annual basis. This time a customer has awarded us the entire contract. And we are -- as we speak, we are participating in bidding for a number of large RFPs in our existing customer.

We are also seeing a lot of encouraging opportunities across U.S. and Europe for digital engineering, AI-led transformation programs, data center infrastructure engineering and particularly in areas such as power management, cooling systems and intelligent industrial platforms.

We will be very happy to share more in the subsequent quarters. At the same time, we continue to invest big in hiring a lot of people across all our 4 delivery centers in India, which is in Pune, Chennai, Bangalore and Hyderabad to get ready for 2027.

Based on the strong half year performance and the visibility we see across our customer portfolio, we have increased our FY '27 outlook. We now expect revenue growth of 15% to 18% for FY '27 and an EBITDA margin in the range of 13.8% to 14.3%.

While we are obviously very pleased with the momentum, our focus remains on long-term value creation. We continue to strengthen our delivery engine, improve revenue productivity and expand offshore leverage and most importantly, deepen our engagement with our existing customers across all the 3 verticals.

We believe Q2 performance demonstrates the strategy that we've been sharing with you over the last couple of years, and now it's finally working. The foundation we have built is now translating into stronger growth, expanding profitability and greater business resilience.

We remain confident in our ability to scale sustainably and create long-term value for all our stakeholders. Thank you once again for joining us today. With that, let me hand over the call back to the operator, and we look forward to your questions. Thank you again.

So we upgraded our guidance based on our H1 -- our strong H1 execution and the improved visibility that we have from our existing customers across -- especially across North America. It's the momentum that we have with the customers, the hiring that we have done in the last 6 months, we've onboarded net about 430-plus employees and the RFQs that we are participating in, especially with the large demand in the AI data center space.

So most of our manufacturing customers in the industrial segment have been growing very rapidly. There is a huge talent need which across U.S. and offshore. And we have been building up this over the last many years, and now we are finally seeing the clear visibility towards that. And hence, we feel comfortable giving a 15% to 18% revenue guidance.

Sure. So we view -- I've shared this earlier, but we view AI both as a productivity enabler and a growth opportunity, right? So one is we are embedding AI into our engineering workflows in our software development and delivery processes. And while we're also helping our customers accelerate their own digital engineering initiatives.

And we have the skill sets. As I said, we have now almost 3,000-plus people in our team, employees. And all of them are focused only on few customers understand the customers' products, which eventually are going into building those large data centers, right? So whether it's power generation, cooling systems, and that's where we have the skills already in-house. Our employees and engineers are well trained from a domain perspective. And that's where we see the advantage in terms of when we participate in the RFQs.

Onward Technologies only has U.S. and Europe customers, right? So we have no India customers.

So we are definitely a bit cautious about that. We do need to ramp up substantially in the U.S., and we are hiring local people, which we've been doing for many years. There is definitely an impact on that. And the guidance that we have given is post the new regulatory -- the external environment, which is out there.

Sure. So unbilled receivables went up marginally to 80 days. Our DSO has gone up to about 80 days. And I think it will come down, very quickly. We had a very quick ramp-up and there were some instances where were [indiscernible] delayed or at the same time, there was some customer payment delayed, but all that has been rectified. September itself was one of our highest months. And we will see in Q3 and Q4, things getting normalized again. We continue to have...

Sure. So the credit was through the normal course for the last 12 months for the current period. It is for FY '26. It's not just a credit for us, it's for every other company which operates in the U.K. So since the number is material for us, hence, we report it as a special line item, but all engineering companies get that.

Second, the margin expansion for us was driven predominantly by 4 factors, right? So one was higher utilization for our offshore engineers, improved leverage of offshore, especially with the earlier question when the new policy came out, it was anticipated for many months. Customers started ramping up offshore more without the dependence on site, and that changed as well for us because then we could start projects much faster.

And third, it was, again, just very strong delivery discipline focusing on a few customers investing behind a few customers, keeping ready capacity, training the whole LOB that we have been investing in for many years. I think it's just slowly now settling in beautifully in terms of what our customers expect from us and we're able to ramp up at the speed that they expect from us.

Will grow, we will see the benefits.

So the Y-o-Y constant currency growth will be 17.7%.

Sorry, what is segment-wise?

No, I don't have it right now, but I'm sure my team can share that.

Q-o-Q is 13.5%. You can reach out to of GI, they can share that with you. But Q-o-Q is 13.5% and Y-o-Y 17.7%.

So we started building on it, we started hiring a lot of people in Chennai. I would love to welcome all of you guys. I think it will be up and running by Q4 or early 2027. It's going to be a lab, right? It's a lab which we can showcase. One is we can train all our engineers, all our managers.

Second is going to be where we can showcase all the innovative work that we are doing for our customers. Third, we can actually dedicate for customers who are looking for an AI lab to test their own products. So there are a lot of amazing opportunities towards that when we make this kind of an investment. So I think in 2027 is when we will see the first benefit of it.

So we've already increased the guidance based on the visibility we have today. We obviously prefer to remain prudent and execute rather than get ahead of ourselves. So, so far, we are very comfortable and happy that where we are at. And I think there's definitely a huge potential out there in terms of what we can do. So revenue is not the challenge, right? For a company of our size, execution is the challenge, right? Ramping up that quickly is the main thing, and that's what we are doing as we speak.

So it's both, right? So it's capacity -- ready capacity and second, capacity is the people and the infrastructure. And number two is the capability, right, where we are executing large programs. And that's what we've been investing in. So I think it's a gradual process, and I think you will see that over the next couple of quarters how we, as an organization, get ready towards that.

Opportunities there and customer expects the same from us and all its suppliers. So we will keep ramping up towards that. And we have a substantial cash reserves where we can proactively invest behind each customer engagement and opportunity out there.

So Q3 hiring will be a bit slow. It's a holiday period. We continue to onboard people, and we have released a lot of offers out there. So in Q3, we are prioritizing bringing in a lot more subject matter experts getting ready for 2027 and '28.

In Q4, we will add, I think, another few hundred people is what we are anticipating. The market is getting competitive. And we are -- also our design centers are getting full. So we are -- we have opened our fourth design center in Pune earlier this month, which is already expected to get full by end of November, December.

We have signed a lease to add more seats in Pune. So we're building up capacity as well. We're hiring people as well. So more and more in terms of Q4 is going to be a critical quarter for us and Q1 in terms of adding a few hundred people.

Net.

So this is not for this quarter. This is a normal benefit any company that operates in U.K. that gets it. This is for FY '26. It's for the entire last financial year. The pandemic, it's about investing in the U.K. We're investing in R&D in engineering programs, research programs, AI programs, anything which is technology disruption, which U.K. does not have. So they encourage foreign companies to actually do that.

So all engineering companies, all IT companies are benefiting from that for investing in the U.K. region for U.K. market per se. For ours, because it is the larger -- I mean, larger companies don't have to do it because it's not strategic. But for us, it's important that we share with you guys and hence, we have put a note in the results as well.

So it happens once a year. It's usually about 10% to 15% of your revenue. There's a long process, you claim for it with all the projects that you've done and then there's an evaluation, and that's when it comes in. So once we got the approval in September and hence, it was booked in the quarter, and it's net of employee expenses because the expenses are already incurred last year. So when you collect the money or when you receive the refund or subsidy from the government, that's where you adjusted against the employee -- against the expenses.

We've been sharing the similar guidance for the last many quarters, right, for the last 18 months when we sort of fine-tune that strategy further for account management and existing customers. And if you see our customers, majority of our customers come from North America, a majority of our revenue comes from North America.

And this is the ramp-up that we are seeing, and we were ready at the right time. This ramp-up actually started in Q4 of last year when we started winning programs, larger programs with a very quick ramp-up. And we already had people trained with the right infrastructure in place where we could actually invoice in this quarter. So it's not a one-off thing. It's a sustainable thing, which we see over the next many quarters.

We have highlighted it this quarter. We just want to share more and more engineering programs, more and more projects that we are doing successfully for our customers. So again, right? So just to summarize, onward at 70-plus customers. We are an engineering partner to them. Historically, we would just be doing mechanical engineering.

Now we're doing a lot of work in a lot of other areas. The new technology disruption is key to our future growth and success while we continue to invest behind it, right? So we are looking at this opportunity when we share the earnings deck to share new case studies, new areas where we've been building capacity and capabilities and the customers are valuing us. So it's going to -- we just -- we're going to try and do this a few times a year where we keep sharing more and more stuff with you guys.

Sure. So the transportation and mobility vertical has 2 sub verticals, automotive and rail transportation. Our rail transportation has been growing meaningfully for the last many quarters. Our automotive business last year, as you knew, there was a lot of furloughs and shutdowns across -- especially across Europe.

Now I think that has bounced back. And I think a lot of places we are seeing positive momentum. But I think it must be industry broad-based. So there is a lot of opportunities coming up, both in the automotive side. We've invested a lot more in our rail vertical starting earlier this year, and we continue to invest behind that.

Just last month, our entire team was at InnoTrans in Berlin. So now we're attending the right conferences and taking Onward Technologies brand out there with our technical capability that we have built across 3,000 people. So we are seeing value of that as well.

So we do believe this business, the PLM vertical will continue to grow and grow much faster over the next couple of quarters. On the health care side, we have done -- the team has done a fabulous job in terms of winning large customers, and we continue to do that.

So in a very similar spot as what we were in the industrial segment 2 years ago, where we had the customers, we had to just wait for the right opportunity in terms of where we start bidding for larger programs. And that's the spot that we are in. So I think the ramp-up in health care or in HCLS will be very similar to our other verticals and maybe even faster because we're starting at a very small base.

But we're just waiting for the right opportunity in terms of winning some large programs where we ramp up much faster. But in terms of customer base, HCLS has done a remarkable job in terms of opening up some remarkable brands, some of the biggest brands in North America.

So far, there definitely will be impact of AI, which we have shared before. I think it's going to be again industry broad. Currently, customers are utilizing or asking us to see AI, how to improve efficiency in the system, how to improve the workflows, but it's not reducing the workload, right?

Because our business continues to be very heavy on engineering, not IT. So from that perspective, I think so far, we have not seen any negative pushback from our customers. But definitely, everybody is expecting productivity improvement.

We are 100% Microsoft shop. Our entire team uses Copilot. And definitely, we are seeing a lot of value. We are able to showcase a lot of case studies and a lot of benefits to their customers. But eventually, customers will make a final call when they're ready to put their IP out there because for a product company, they have to put the entire IP on the AI system, which I don't think they're doing yet.

So what we are doing is still on the periphery on the plant side, on the manufacturing side, on the robotics side. And all the revenue guidance that we have given, the revised one also includes -- is taken into consideration some impact from that, but we see, again, a huge opportunity in terms of the ramp-up that our customers are expecting from us over the next few years. So we are pretty excited about that.

It is the right way to think about it. The revenue guidance that we shared, again, 18 months back, it was an aspiration, which is a platinum standard in our industry, right? The INR 35 lakhs to INR 40 lakhs is what some of the best companies globally do, Indian and globally.

And that's sort of where we would like to be. It's more about showcasing that we do the same quality work and that we are aspiring to do the same quality work, not just resource-based or people-based organization. So that's the aspiration of the organization of the Board.

In terms of we are hiring people because we need to build up capacity today because the demand is that high. And number three, important point, I think we had a question earlier as well, when the U.S. visa and all the other restrictions started coming in '18 again a couple of quarters ago, that revenue guidance, that revenue aspiration of INR 35 lakhs to INR 40 lakhs also comes down because on-site is a significant portion of that to get a blended rate per engineer. So just keep the last point also in mind when you are thinking about that. INR 35 lakhs to INR 40 lakhs per engineer is not -- I don't think it's possible only from doing offshore work. It's a blended outcome of 10% onsite, 90% offshore.

So just to summarize, earlier, we had said double-digit EBITDA. And then we were constantly -- people are asking us analysts and investors are asking us questions on what double digit is 10% or close to 14%, 15%. Hence, we have revised, we feel comfortable giving a revised guidance for the whole year. We believe we will be between 13.8% and 14.3%.

Disturbance sorry, somebody is on unmute.

Sorry, the question was on constant currency.

I thought I shared that detail earlier just one second. constant currency for the quarter Q-on-Q was 13.5% Y-o-Y was 17.7%.

Yes, there's definitely further opportunity over time. The key point is that margin improvement that we are seeing is being driven by structural levers, which is higher utilization, increased offshore delivery, as I said earlier, more productivity and better account mining.

And I think it is going to play out over time across all the 3 verticals and across both the regions. So definitely, there is over time, a lot of opportunity to do much better or scale much faster in terms of the overpricing.

Absolutely. So we shared this earlier as well. Our vision is each customer that Onward works with gets to close to $10 million per year in terms of revenue. We are already seeing a lot of amazing traction. So a lot of customers are moving towards that.

So $1 million is the -- is what is the base number for us where we know the relationship and the investment that we have made over many, many years is working. And then $10 million is the aspiration to your recurring revenue, sustainable revenue with each customer.

So the investments behind each customer -- each customer is very unique for us. Each customer is a world leader in a particular product, right? So we being an engineering company, we are building product knowledge, we are building domain knowledge, we're building manufacturing process knowledge. So every customer is very, very unique. While at the bottom of the pyramid, we could use common skills, which is engineering.

At the top of the pyramid, we need very specialists, as we call them subject matter experts, SMEs, and we have to hire them in hundreds, just for one customer, right, when we want to scale in a very big way. So that's where the majority of our investments go.

Second, large investment goes in L&D or in training to train people because you can't find these people ready made in the market. And as an engineering company, we don't hire directly from colleges. We need people from the manufacturing shop floor, and then we have to train them. So that's definitely a huge investment for us as well.

And third is on the front-end side, which we call an ICOR, I-C-O-R indirect cost of revenue, which is our sales team, account management team, the presentations and the workshops that we do, participating in seminars where our customers are going and being aware of all the new -- where they want to go in terms of the technology disruption coming their way, so we can get ready for that.

So these are the few areas where onward has to invest proactively every day, every week, every year. So we identify a few customers every year where we see a lot of visibility. We invest behind that. I hope that over the next couple of years, we will be ready to invest behind all 70 at the same time, then that's going to be very exciting as we have to reach that stage in terms of relationship and maturity with the customer.

Yes, you are.

So we -- let me answer the question a bit differently. Just if I understood the question right. We as a services company, have to constantly hire people, right? So we hire a lot of people every day. And the number we are talking about for H1 is about 450-odd people. We have hired 50-odd employees. This is a net hiring, right? So when you add the attrition and everything else, people don't leave and all kinds of other stuff that happens, people on higher education. So that's our net intake so far.

Number two, we don't hire freshers. So Onward Technology so far have never gone out in the market for colleges and hire directly from campuses because the learning curve there is very, very high, and that's why customers like us. So we have chosen the hard way where we do a lot of lateral hiring.

And we don't depend on external agencies for hiring, right? So we have 90-plus recruiters on our payroll, which is in our talent acquisition group, where we do all the hiring ourselves because that's what customers value about us, our ability to find the right -- the best teams, talents on the shop floor, let's put it simply. So that's what we do.

In terms of the guidance that we have given, in terms of the revised revenue growth guidance that we have given, yes, the hiring has been done for that, majority of that. Now we just have to make sure there are no external factors that can delay the projects, right? There is so much happening in the world today that there could be some element of surprise there. But we are budgeted for that as...

So sure. So the DSO has gone up to 80 days, and that's due to fast growth and some delays in customer approvals. I think the sweet spot for us, as we have shared earlier, I think it's about 65 to 70 days, and I think that will normalize in the next 2 quarters.

And your second question was in terms of depreciation going up. Depreciation went up predominantly because of 2 factors. One is we acquired an asset. So that's -- we bought an office in Bombay at Worli. So that was one area where the depreciation went up.

And second is all the hardware that we have been purchasing across our new design centers when we added 400-plus people, which is the first time we have done that over the last many years. So that's the second part where the depreciation has gone up.

Thank you, everyone, again, for joining us today and for your continued interest in Onward Technologies. Q2 was a very important quarter for us. We delivered strong revenue growth and improved profitability, expanded our margins and most importantly, upgrade outlook for the year, again, a first for Onward Technologies. The results reflect the progress that we have been making over the last many, many years in strengthening our delivery engine, offshore leverage, improved productivity.

And we are seeing that with some of our customers where our engagements are getting deeper and larger on a global level. We are again encouraged by this momentum in the business and the increasing interest from everybody in the Onward ecosystem.

We believe the opportunity ahead of us remains significant across all the 3 verticals, industrial being the most dominant and the most mature, but the T&M and the HCLS vertical also are very critical to our success and future growth, and we remain very excited about it.

Our focus continues to remain to create long-term value for all our 3 stakeholders, which is our customers, employees and shareholders. On behalf of our entire leadership team, I want to thank all our customers for their trust, our employees for their dedication and commitment and of course, all of you and our shareholders for your continued support. We look forward to updating you on our progress next quarter. Thank you, and have a great day.