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Onward Technologies Ltd. (ONWARDTEC) - Shifting from low-margin legacy services to high margin ER&D and Digital businesses

Onward Technology Ltd. (OTL) is involved in fulfilling client needs in the ER&D (Embedded Electronics), Digital (Cloud, Data), and IT Services space. Most of the background of the company is derived from its rich history in providing mechanical engineering solutions. Slowly the company wishes to shift to a 50-50 revenue split between the ER&D and Digital Businesses. OTL mainly focuses on the Transportation & Mobility (automotive & railway transport), and Industrial Equipment & Heavy Machinery (Off-Highway, Agriculture, Construction, Mining Equipment) industries. Lately, OTL has also made efforts to serve Healthcare & Medical Devices and Hi-Tech industries (Semiconductors, Digital Platforms).
During July 2021, OTL picked up PE investment to the tune of Rs 70 cr. from Convergent Finance LLP at a post-money valuation of Rs 283 cr.

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Summary

Onward Technology Ltd. (OTL) is involved in fulfilling client needs in the ER&D (Embedded Electronics), Digital (Cloud, Data), and IT Services space. Most of the background of the company is derived from its rich history in providing mechanical engineering solutions; slowly the company wishes to shift to a 50-50 revenue split between the ER&D and Digital Businesses. OTL mainly focuses on the Transportation & Mobility (automotive & railway transport), and Industrial Equipment & Heavy Machinery (Off-Highway, Agriculture / Construction / Mining Equipment) industries. Lately, OTL has also made efforts to serve Healthcare & Medical Devices and Hi-Tech industries (Semiconductors, Digital Platforms).

During July 2021, OTL picked up PE investment to the tune of Rs 70 cr. from Convergent Finance LLP at a post-money valuation of Rs 283 cr.

 

 

Company Overview

Business History & Future

 

Time Period	Key Highlights
1991 - 2000	• Company was founded by Mr. Harish Mehta in 1991 and it grew as a 50-50 JV with Novell Inc. from 1993 and named Onward Novell Pvt. Ltd. • Expanded into North America through fully owned subsidiary.
2001 - 2010	• Focused mostly on providing Engineering Design Services (mechanical). • Expanded into Europe through new subsidiaries in Germany, and a Branch office in UK.
2011 - 2020	• Mr. Jigar Mehta (s/o founder) appointed as MD in during FY17. • Made investments into Embedded Electronics (EE) business and other Digital Capabilities such as Cloud Migration, DevOps, Data Science, Data Analytics, etc.
2021 – 2025 (Future Guidance / Expectation)	• In the future, OTL wishes to focus more on the massive opportunities in ER&D and Digital and wants to derive an even split of revenues from these two, while relying less on the legacy businesses (IT Services). • Digital capabilities to improve by incorporation of AI/ML, IoT, and other cloud based intelligent technologies. • The company also wishes to derive a larger pocket share from existing clientele and is not concerned about the customer concentration risk.

 

Management Profile

Mr Harish S. Mehta

Founder & Executive Chairman

 

Mr Harish founded OTL back in 1991 and guided the company in its JV days (1993-2005) and then continued to serve as MD & Chairman till 2015, from when Mr Jigar (son) took over the duties.

Mr Mehta also co-founded NASSCOM (IT Industry Assn. in India).

Currently, Mr Mehta overlooks the operations from the position of Executive Chairman.

 

 

Mr Jigar H. Mehta

Managing Director (MD)

 

Mr Jigar took on the MD responsibilities from his father and has led the second phase of the company with continuous and rapid expansion into newer businesses and geographies.

Mr Jigar’s efforts have led to –

1. A shift in revenue mix of ~50% from US & Europe.
2. Expansion into new businesses (Digital, Health, and Hi-tech).

 

 

Mr Devanand Ramandasani

Chief Financial Officer (CFO)

 

Mr Devanand is a qualified CA with experience at organizations such as Accenture, Infosys, and Datamatics. He was appointed as CFO in Oct 2019.

He has headed the finance dept (incl foreign subsidiaries) and has put in place some automation, system implementation, and other steps to further improve the finance function.

Besides the above, he has experience in M&A and was instrumental in working out favourable results in discussions with the Tax Authorities.

 

 

Mr Harsha Raghavan

Director & Managing Partner, Convergent Finance LLP

 

Mr Harsha is the Managing Partner at Convergent Finance LLP (PE firm that invested ~Rs 70 cr for ~25% stake – July 2021).

Convergent Finance is actively involved in improving the business of Onward. Previous success stories of the firm include – Sequent Scientific, Quess Corp, Camlin Fine Sciences, ADF Foods, Welspun India, and many more.

Convergent is known for their exceptional business building history; which is based off of a quality management.

 

Business Model

Problem to be Solved / Size of Opportunity

OTL provides ER&D and Digital services mainly to Industrial Equipment & Heavy Machinery (IE&HM) (~45% of 9MFY22 revenues), and Transportation & Mobility (T&M) (~28%). The IE&HM clientele includes heavy equipment (off-highway, agriculture) and mining end-users; whilst the T&M includes Automotive, Rail Transport, and Aerospace clientele.

Technological developments in end-user industries have led to a greater innovation demand for the OEMs, which provides a massive gap for companies such as OTL to bring in their expertise.

Manufacturers need a large amount of simulation-based data for prototyping new parts/equipment, OTL provides such services and is involved in every step from ideation to the final prototyping (not involved in manufacturing).

 

The data that is used by OEMs to base their product off of is enormous, and the Digital side of OTL's business caters to that with continued efforts in building expertise in Cloud, Data Analytics, Data Science, DevOps, and Digital Twin.

 

 

Industrial Equipment & Heavy Machinery (45% of Revenues)

Heavy Equipment & Machinery

The Industrial Equipment Manufacturing (IEM) industry has been the backbone of the IE&HM sector. Today, IEM provides essential equipment and sophisticated tech for other manufacturing and service industries alike. Biggest challenge in this space is with regards to intense competition among players based on technological advancements.

OTL provides expertise from process flows to developing manuals and drawings. They are involved in new product developments, value engineering, prototype development, CAD Automation, etc.

The company has 2 decades of experience serving IEM clients through the Mechanical Engineering business.

 

Mining

The mining space is facing large disruption with rapid digitization, automation, and ESG consciousness (energy-efficient machinery).

OTL specializes in turnkey projects with regards to excavators, generators, skid-steer and backhoe loaders, articulated boom, etc. and has set up Offshore Dedicated Centers (ODCs) for some of its top clients.

The engineering services offered are top-to-bottom all the way from New Product Development (NPD), testing, to the publication of write-ups. (incl. Mech Design, FEA, Embedded software, VA/VE).

Under Digital, the company offers Machine Application Control, Fleet Management, and Human-Machine Interface (HMI).

Other tech-related offerings such as analytics, cloud, etc. are provided to OEMs as well.

 

Transportation & Mobility (T&M) (28% of Revenues)

Automotive

Recent trends in the automotive industry are interconnected and automated vehicles. Such tech requires embedded, and data-driven solutions.

OTL is involved with tier-1 & 2 OEMs in providing NPD, testing, prototyping in Exteriors, Interiors, Transmission, and Chassis.

Shift to software-based industry driven by ADAS, Connectivity, Multiple ECUs, Engine Management System, etc.

Other tech-related services include big data, AI, ML, Blockchain, Augmented Reality (AR), and Digital Twin are provided.

 

Rail Transport

Cost management is key in the rail transport industry due to the expensive and complex nature of components, this is the main goal of OTL.

Design solutions, Kinematics, Telematics, Fleet Tracking, Equipment Monitoring, etc. are provided under the ER&D business.

Other predictive analyses and information modelling are done using AI, IoT, Blockchain, etc.

 

Aerospace

The Aerospace industry is one with innovation at its core with an extremely low margin for error. Safety, ergonomy, weight, time-to-market, are of extreme importance.

Increased pressure in the industry is pushing players to adopt more sustainable business models.

Virtual Simulation, Electronics and Embedded systems, Safety & Reliability along with mechanical and engineering design of components and upkeep are the key strengths of OTL.

 

Healthcare & Medical Equipment (H&M) (7%)

Medical Devices

OTL focuses on bringing the time-to-market for global HealthTech and MedTech OEMs down by providing key value add services all the way from conceptualization of the idea to the final implementation. 

Regulatory risks are mitigated, and patient experience is enhanced.

OTL is involved in product realization (Prototyping, H/W & S/W development, regulatory filing), managing manufacturing, post-market (service, VA/VE), and Digital (mobile app, portal development, data analysis, IoT implementation, etc.)

 

Pharma

Pharma and Life Sciences companies have seen a significant uptick in demand with the onset of the Covid-19 pandemic as well as other lifestyle-related reasons.

OTL supports the industry with product & process engineering, quality assurance, etc.

More importantly, on the digital side, OTL provides supply chain analytics that would significantly reduce lead times on APIs.

Other key solutions include digital factory, data, cloud, data management, etc.

 

Hi-Tech

OTL has used its experience in providing Hi-tech solutions to clients to build its own capabilities and provide improved services.

The technologies focused on by OTL are - Offline & Online Programming, Virtual Commissioning, Manufacturing Execution Systems (MES), Connectivity & Data Solutions, Cloud, IoT, and Automation.

This set of capabilities is set to expand as and when the OEM clientele demands.

 

 

Revenue by End-User Industry
	FY 19	FY20	FY21	9M FY22
Ind Eq. & Heavy Machinery (IE&HM)	36.0%	42.0%	42.0%	45.0%
Growth %		16.7%	0.0%	7.1%
Transportation & Mobility (T&M)	26.0%	26.0%	24.0%	28.0%
Growth %		0.0%	(7.7%)	16.7%
Healthcare	4.0%	5.0%	8.0%	7.0%
Growth %		25.0%	60.0%	(12.5)

 

Solutions offered to each End-User Industry 

Classification	Sub-Group	ER&D	Digital	IT Service
IE&HM	IEM (Ind. Equip. Manufacturing)
	Mining
T&M	Automotive
	Rail Transport
	Aerospace
H&M	Medical Devices
	Pharma
Hi-Tech

 

Key Capabilities

Product Design & New Product Development (NPD)

Developing a new product requires multiple rounds of evolution and analysis to make the product viable for the market and commercializing it well. OTL uses the BAH (Booz, Allen, Hamilton) model (link - http://samples.jbpub.com/9780763782610/82610_ch02_pass02.pdf) to fulfil the client expectations. The product development phase is equipped with advanced CAD & CAE systems.

 

Electronics & Embedded (EE) Engineering

OTL provides all the required services for Embedded products from the starting of initial designing and developing, to testing, production support, and post-production support. This is done using Digital Signal Processing (DSP) (incl. single-processor, multi-processor as well as microcontroller-based). OTL is present in providing services to Embedded Software (Automation, HMI, Protocol Stack, System Software, etc.), Embedded Hardware (VE/ Obsolescence mgmt., Component Selection, PCB layout, Sensors, Design Verification, etc.), and Simulation (Model in Loop (MIL), Software in Loop (SIL), and Hardware in Loop (HIL)).

 

Virtual Simulation

To make the process of design and prototyping quicker and more efficient, OTL uses the AD3 approach (Analytically Driven Design & Development). OTL utilizes various tools such as Abaqus, HyperWorks, LA-DYNA, Fluent, etc. to provide Finite Element Analysis (FEA) (Durability and Fatigue, Thermo-Mech Analysis, Crash and Rollover, Process Simulation, etc.), Computational Fluid Dynamics (CFD) (Engine, Heat Exchangers, Aero & Wind Resistance, Thermal Comfort, HVAC, etc.), and Products with a dedicated Computer-Aided Engineering (CAE) engagements (Transmission, Steering, Fuel Lines, Battery Thermal Management, etc.).

 

Manufacturing Engineering

OTL’s rich experience in traditional engineering services gives them an upper hand in providing manufacturing engineering solutions to OEMs. OTL has worked with Volkswagen Group, Audi, BMW, GM, Chrysler, Ford, JLR, Daimler, etc. The services include process planning (Assembly Sequence, MTM Studies, System Layout, etc.), Design & Detail Engineering (Ergonomic evaluations, Fixture drawings, Material list, Pneumatic plans, etc.), Simulation Engineering (Robot definition, Cell simulation, Layout development, etc.), 2D System Layout (Fencing sheet, tooling location, general arrangement, etc.), Offline Programming, and Production Support (Process Engineering, documentation, etc.).

 

Value Engineering (VA/VE)

OTL follows the methodology suggested by the Society of American Value Engineers (SAVE). The process is as follows –

1.     Scoping & Benchmarking

2.     Info Collection

3.     Value Analysis

4.     Function Analysis System Technique (FAST) Analysis

5.     Competitive Analysis

6.     Creativity / Concept generation phase

7.     Concept Shortlisting

8.     Detail Engineering

9.     Should Costing Analytics

10.  Fine-tuned 3D model to final concept

11.  Final Concept Presentation

 

OTL provides solutions in each step of the way using tools such as Costimator, aPriori, DFMA, and other excel-based manual costings.

 

Digital Factory

Industry 4.0 has led OEMs wanting to digitize their shop floors, this is provided by OTL through Cloud Technologies (AWS, Azure, etc.), Analytics and Insights (Big Data), IoT & Integrated factory to improve efficiency, and Automation using simulations, virtual commissioning, cobots, etc.

 

Data Management & Analytics

Big data analysis is the need of the hour with the plethora of data available in the daily course of business now. The value of the data is based on the value that can be derived from it based on analysis and findings. OTL provides consulting services to build a data architecture, define the architecture and migrate the current platform, other cloud-related services, advance analytics using AI & ML, Image / Text / Video / Speech analytics. OTL is also involved in presenting this data through Tableau, Power BI, etc.

 

Enterprise IT Managed Services

The normal functioning of the business depends on the IT Services now with the increased digitization in businesses globally. This includes database support, technical support, IT asset management, etc.

 

 

Need for ER&D + Digital  Industry Overview

The ER&D industry is undergoing a massive change from being a purely mechanical and structural engineering dependent business to now increasing the use of electronics and software. Digital engineering is now the prime for enterprises across industries to (1) Stay relevant to their client’s needs, and (2) To further strengthen their capabilities due to a large portion of global ER&D spending going into the creation of smart, connected products. Digital spending is rising quicker than traditional ER&D spending as is seen in the expectation of Digital to contribute to 53% of ER&D spending by 2025, compared to the 30% in 2019. Digital engineering spending is expected to touch $1.15 tn by 2025 (2.8x growth in digital engineering spending). (Source – Axis Securities, LTTS IC – 08/03/21).

 

This translates to global ER&D spending total to come up to $ 1,093 bn (in 2013), to $ 1,357 bn (in 2019) [3.67% CAGR], but the higher expected spending takes the total spending expectation to $ 2,196 bn by 2025 (8.35% CAGR).

 

India, despite facing competition from major ER&D delivery locations, remains well-positioned to tap the opportunities with its low-cost, skilled talent availability and manufacturing capabilities advantage. It is fast emerging as the engineering, design, innovation and technology hub for automobiles, aerospace, consumer electronics, machinery, semiconductor, telecom, construction, industrial automation, medical devices, energy, and computing companies. This is facilitated by proactive and supportive policies.

 

India’s share in the ER&D global outsourcing market is to increase from $31 bn in 2019 to $63 bn by 2025, with an approximate 35% i.e., ~$22 bn in digital engineering. (Source: NASSCOM Digital Engineering Report)

 

The key trends driving digital ER&D spending are as follows –

1.     Internet of Things (IoT)

2.     Big Data Analysis, AI/ML

3.     Cyber Security

4.     Advanced Robotics

5.     Mobile Applications

6.     Digital Reality.

According to NASSCOM estimates the global technology services spend are to grow from $2.8 tn in 2014 to $4 tn in 2025 translating to a 3.3% CAGR, while the Indian IT Services industry will grow from $108 bn in 2016 to $350 bn in 2025. Digital will account for the majority of business from both global and Indian perspectives. In the Indian landscape, the companies have evolved from low skilled BPO services to becoming global capability centres (GCC) that undertake R&D, digital and drive innovation in emerging technologies. India currently accounts for ~45% of global GCCs with a large proportion being R&D centres catering to IT, BFSI, engineering and manufacturing industries. (Source: NASSCOM, OTL AR FY21)

 

 

Other Observations

· The fastest-growing client segment for OTL is large OEMs directly due to rich relations built with them through providing mechanical engineering and IT Services.

· OTL is in the midst of a shift from a transition from being a traditional IT Service provider (low-margin) to now being a digital and ER&D partner to OEMs (high margin, high growth). All the old ITS client engagements have either been discontinued or are in the process of being converted to ‘Digital’ revenue.

· Repeat revenue for the company is close to 65% with the rest being project-based revenue.

· Client wins are done without intermediaries, the typical process includes OTL showing pilot projects over the course of many years. Although, the company is less focused on bringing in new clients than it is to grab a higher wallet share from each of the existing clients. The company does not see concentration as a risk.

· The typical sales cycle from doing pilot projects for prospective clients to achieving ‘supplier’ status lasts for 16-18 months, post which to achieve ‘preferred supplier’ status it takes 2-3 years more.

· The fundraise by Convergent Finance LLP was done to (1) Accelerate Digital Transformation business adoption, (2) to expand in Canada, Netherlands, etc. to fulfil client needs in those regions, and (3) for inorganic growth (an ideal company for this would be someone serving the same clients – this would ensure high wallet share is maintained + rapport is maintained.)

· The company uses Strategic Customer Account Mechanism to check order book (aim to grow to $10 mn accounts) i.e. each strategic client is one that has the potential to contribute $ 10 mn.

· The company provides services to 6 out of the top 10 global automotive OEMs, and 5 out of the top 8 global heavy machinery companies. The stickiness of the clients is commendable as well with 7 out of the top 10 clients (contribution to revenues) being 10+ year old customers.

· Management Guidance – 20% growth YoY from Organic efforts and any other growth from inorganic efforts will be added on to that.

· The company is currently in very nascent stages of investment in bringing in talent and training them to be able to provide comprehensive support regarding all the services to the clients. E-TAP & D-TAP have been started by the company to train new hires in batches for 6 to 9 months. The goal is to bring in 400 people per year for this training.

· The proportion of Time & Material contracts is expected to reach around 80-85% of total revenues, the rest of it being the fixed-price contracts.

· The revenue per hour statistics of the company are - $22/hr (in International markets) and $10/hr in India. This average rate will move higher as the proportion of Digital goes up.

· EV plans of the business will be announced during FY23.

· Currently, OTL employs 2,481 employees out of which 95% are based in India.

 

· The company heavily investing in strengthening infrastructure with the opening up of travel; totally the company is present in 13 locations; 6 in India - Mumbai, Pune, Chennai, Bangalore; 7 International - 3 North America (Chicago, Detroit, Cleveland), 3 Europe (London, Frankfurt, Amsterdam), 1 Canada (Toronto).

 

Key Metrics

Particulars	#
Revenue (TTM Cr.) | Growth (%)	286 cr | 7.3%
EBITDAM % | PATM %	6.6% | 7.9%
P/S (x) | P/E (x)	2.7x | 33.1x
ROE | ROCE (%)	9.85% | 14.2%
Employees | Rev / Empl. (lakh)	2,481 | 11.5 lakh
Revenue Breakup India | USA | Europe + UK (%)	54% | 33% | 10%
Customer Conc. Top 1 | Top 5 | Top 10 (%)	14% | 31% | 47%
Cash | Debt | Net Debt (Cr.)	37 | 6 | (31)
D/E (x) | Net D/E (x)	0.05x | (0.25x)
Days Sales O/S (DSO) (Billed)	53.4
Promoter Holding (%)	45.97%

 

Other Metrics

Revenue Metrics

 

 

 

 

Client Metrics

* Strategic Global Customer is one that is a potential $10mn account.

 

 

 

Employee Metrics

 

 

 

Valuation

The management at OTL has provided guidance of a 20%+ organic growth rate, above which any further inorganic efforts will take effect, considering this, we see the company trading at a 31.7x FY24E EV/EBITDA vs a 38.8x FY24E EV/EBITDA for the peer group.

 

 

Final Thoughts / Analyses / Conclusions

Onward Technologies Ltd. (OTL) provides a unique opportunity for investors in the listed equities space to enter into a quasi-startup style business. The changes in the business mix + the guidance of Convergent Finance LLP would be favourable to the company in terms of achieving the 20% organic growth target. Further, the capital infusion through the PE deal (total Rs 70.2 cr) would also be acting as an inorganic growth war chest which would further improve the growth rate.

 

The shift to 50% ER&D and 50% digital business by 2025 is an interesting prospect in terms of margin expansion. The one area of concern is the drop in promoter holding at 46% currently. This should hardly be seen as a concern as the shift has happened to Convergent Finance (PE firm).

 

The valuation for OTL seems reasonable for its size and track record. The biggest focal point must be the growth guidance vs actual growth and the rest of the story would unravel there. OTL is in its growth stage with rapid infra expansion to onboard a large number of employees into the ER&D and Digital spaces (along with training) and to serve the clients from a closer base. Apart from this, the management has also guided that all EV and ADAS plans will be revealed during FY23, which could be the next area where the company enters.

 

Financial Summary

Statement of P/L

 

Balance Sheet

 

Statement of Cash Flows

 

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Comments

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  Amitoj

  28 March, 2022, 9:51 pm
  Beautiful article
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  David John

  29 March, 2022, 3:51 pm
  Beautiful article
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