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Onward Technologies Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤23rd Jan 26

Summary : Onward Technologies reports strong Q3 FY26 results, driven by offshore expansion and new leadership, targeting sustained double-digit growth.

Management Perspective positive : Management repeatedly stated Q3 and the last nine months were the 'best period' for the company, expressed excitement about future growth, and highlighted exceeding EBITDA targets.

Concall Report Analysis & Insights

Business Overview

  1. Onward Technologies aims for double-digit revenue and EBITDA growth for three consecutive years.
  2. Transitioning from promoter-driven to a professionally led, vertical-led leadership structure.
  3. Three key verticals: IEHM (Industrial, Engineering, Heavy Manufacturing), Transportation & Mobility (T&M), and HCLS (Healthcare & Life Sciences).
  4. Q3 FY26 revenue was INR 136.1 crores, with 9-month revenue at INR 411.8 crores, growing 11.7% annually.
  5. EBITDA margin for the first nine months reached 13.9%, exceeding the 11-12% target.

Future Growth Prospects

  1. Focus on delivery-led growth in IEHM, expanding into Europe and scaling 40+ North American client relationships.
  2. T&M vertical aims for double-digit growth by expanding to large OEM clients in Europe and the U.S., transitioning work offshore.
  3. HCLS is a new vertical with significant growth potential over the next one to three years.
  4. Significant capex investment in India for offshore expansion, adding hundreds of seats in Chennai.
  5. Targeting 3,000 employees by the time revenue reaches $100 million, with growth mainly from US and Europe.

Management Insights

  1. The last nine months have been the best period for the company, exceeding revenue and EBITDA margin guidance.
  2. New leadership team is fully in place across all three verticals, with plans for an Analyst Day soon.
  3. Committed to double-digit annual revenue and EBITDA growth for 2026 and 2027.
  4. Offshore engagements are driving margin expansion, leveraging upgraded delivery capabilities.
  5. The company remains open to strategic acquisitions that align with existing customer base or capabilities.

Signs of Skepticism

  1. Analyst questioned why growth is not faster given the company's smaller size.
  2. Analyst probed the sustainability of current high EBITDA margins.
  3. Management did not provide specific P&L impact for an ongoing ex-employee legal case.
  4. Analyst noted that the export business target of 70% revenue was not met, remaining 50-50.

Good To Know

  1. Days Sales Outstanding (DSO) improved to 70 days at the end of Q3 FY26.
  2. Attrition reduced to 14.73%, and headcount stands at 2,491 employees.
  3. Completed appraisal process in July, with increments for top performers effective October 1.
  4. Reduced bottom 5% contributors and saw senior exits in Q3, replaced by new leaders.
  5. Maintains 90% time and material (T&M) revenue mix, aiming for $100 million before re-evaluating.

Key Drivers

  1. New leadership team drives growth.
  2. Offshore expansion boosts margins.
  3. Digital and AI services focus.
  4. Strong existing client relationships.

Key Analyst Discussions

Competitive Environment

  1. Differentiates from GCCs by offering flexibility, agility, and niche capabilities for specific customers.
  2. Builds deep capabilities for customers through ODCs or managed service desks.
  3. Becoming a qualified supplier involves extensive capability presentations, pilot projects, and financial checks.
  4. Customer selection is dynamic, based on in-house delivery, investment, and ability to take risks.
  5. Standard rate cards apply to Onward and top competitors for digital services.

Market Trends & Consumer Behavior

  1. Demand environment is improving across all three verticals.
  2. Focus on existing customers, as current wallet share is less than 1% of their outsourcing budget.
  3. Demand has always been positive from Onward's perspective.
  4. Customers are ramping up capacity and capability by 30-40% in areas where Onward excels.
  5. GCC expansion grew faster than expected in 2024-2026, boosting Onward's GCC business.

Financial Highlights

  1. Inorganic growth is considered for reaching INR 1,000 crores revenue, focusing on existing clients.
  2. EBITDA margins are sustainable at 11-12%, with current higher margins due to offshore work.
  3. Company prefers 90% time and material contracts for stability and dependability.
  4. Cash reserves are substantial, with options for acquisitions, buybacks, or dividends under review.
  5. US revenue contribution is expected to increase, but US margins are not necessarily higher.

Product Composition

  1. No plans to change the 90% time and material revenue mix until reaching INR 1,000 crores.
  2. Post-pandemic, the company shifted from purely mechanical engineering to digital services.
  3. Majority of new business signed is on offshore engagements, driving margin expansion.
  4. Future growth is expected to be entirely offshore, leading to higher margins.
  5. On-site billing rates are low single digits, while offshore rates are double digits.

Strategic Considerations

  1. Growth constraints are primarily about building delivery capabilities and trust, not market size.
  2. Headcount expected to reach 3,000 employees by $100 million revenue, with automation simplifying workflows.
  3. US region offers clear opportunity for growth, though not necessarily higher margins.
  4. Export business mix at 50% due to faster-than-expected GCC growth in India.
  5. Project profile shifted to digital, embedded vehicle software, and electronic sensors.