Q&A with Harish Mehta (MD & Chairman), Onward Technologies Ltd.

On 5th December 2011, we had met up with the MD & Chairman of Onward Technologies, Mr. Harish Mehta to discuss and understand his companies business at length and gather information on his their future prospects. Following are the extracts of our conversation with him:-

1. Can you please explain in detail the business model of Onward Group?

We have two business lines, one is the mechanical engineering business and the other is the IT business. In regards to the structure, the company has three wholly owned subsidiaries – Onward Technologies Inc. our North American subsidiary, Onward Technologies GmbH our Germany arm and Onward eServices our domestic IT services business. In addition to this we have our two branch offices at UAE and the UK.

This is how we are legally structured, but internally we have only two segments-Engineering business and IT services business. Our Engineering business is headquartered out of Pune and has a dedicated and focused management team for handling all the activities. As for the IT services structure, we have two offices in India- one at Andheri Seepz (Mumbai) and other one at Chennai (Tamil Nadu) which handles majority of the IT business. Out of our global subsidiaries and branch offices, our Dubai branch office is dedicated to IT business, our German subsidiary and UK branch office are 100 per cent engineering and finally the North American arm is divided between engineering and IT segments. The engineering business in North America is headquartered at Chicago and the IT business is headquartered at Boston. The reason I emphasize on headquartered is that each of our offices have respective dedicated and independent management teams. We are very unlike a traditional Indian company, where the entire management team is based out at one place like Mumbai and global offices are basically sales and marketing units. Our structure is more like an independent individual profit centre growing in line with the global trend and focusing on their core business.

2. Can you please give us your revenue contribution in terms of the two business segments and the geography?

Around 60-65 per cent of our revenues come from the engineering division and 30-35 per cent from the IT services business. In the engineering business around 70 per cent of our revenues come from North America, about 10 per cent from Europe and balance 20 per cent from Indian Market. Though both are extremely strategic to us, majority of our focus is on the engineering business.

3. We would like to understand your revenue model, as in which services do you offer to your clients and how do you charge your clients?

On the engineering business front, we are a 100 per cent service provider. As in all our revenue in this segment comes from providing pure services. We do not undertake any resale, license sale or product sale activity for our clients. In regards to the way we charge our customers, we follow per hour, per day, per week or per man month basis billing.

4. Do these charges vary from sector to sector or industry to industry?

Yes, it’s different for every industry and every license we use. For every geography the charges are different. For every project it’s different.

5. Can you elaborate a bit on the kind of contracts you sign with your clients and terms of it?

All the terms and conditions, nature of work are in-built in the client contract. The company floats an RFP (Request for Proposal) stating their requirements. Then we have to bid for it, quoting our method of pricing, nature of job work, the duration and etc.  After a contract is done, it can obviously be re-negotiated on mutual consent.

6. Can you name a few clients?

In our key clientele we work with companies like John Deere, Tata Motors, Caterpillar, Ashok Leyland, Honda, Punjab National Bank and Thermo Fisher amongst many.

7. So are you more focused towards the Auto Sector?

Yes, on the industry side our majority of the focus is towards the automotive sector which comprises of off-highway vehicles, auto ancillaries etc. and a bit of Aerospace. However, internally from Onward perspective we are not focused on any individual business. What we are focused on are a few key areas which we call ‘parameters of excellence’ internally. Each of it is in an independent domain, for example like Engines, Transmission Fixtures etc. So our main area of focus is like becoming an engines expert and so on. We don’t want to be a niche player in automobile sector. We would rather want to be a niche player in engines for example, where we work with customers in designing engines. Like another vertical would be transmission, seating or fixtures.So basically the way we are structured, we have 14 key parameters of excellence in which we keep expanding and innovating from time to time.

So when we say, we are hiring mechanical engineers, we are not actually hiring any fresher straight off the campus, as the nature of our work is very high end and requires good amount of expertise. For example, let’s take one of our clients we work with, say Tata Motors. Now Tata Motors doesn’t want any Mechanical engineer, that the can hire in abundance. In fact the have some subsidiary companies which do this mechanical work for them. What they are looking for is engines expert. So our lookout is to hire a mechanical engineer, with automotive background having experience in designing engines and one who specializes in tools used by Tata.

8. What kind of tools are you talking about? If you could explain briefly on few tools?

Every company uses different tools on a global level. Some of the tools will be for example the CAD tools like PTC (Pro-e), Catia, Auto CAD etc. Nowengineering is not like the IT business where you have something like a doctored license, which is applicable to all companies globally. Say a Pro-e license for Tata is very different from what is applied to John Deere. An engineer who works on John Deere cannot work on Tata Motors and a guy from Tata Motors cannot work for an aerospace company like Zodiac Aerospace. They are completely different, focused and niche.

Second is CAE, which are basically the high end application tools for mechanical or engineering purpose. The licenses for these are very expensive. Each license would cost anywhere from between Rs 3 lacs to Rs 25 lacs and only one engineer works with that license.

9. Okay, could you throw some light on what kind of investments you make to achieve all this?

Our investment’s basically goes into buying licenses. So when we say we are going to hire some 350 mechanical engineers, it implies that we have to simultaneously by 350 licenses.

Our biggest bet, or let’s say calculated risk is to decide which licenses to buy for which client. Like deciding which industry would grow and within the industry which company would. Let’s see Tata Motors again.The company has more than 1000 engineers. Will they outsource work for a few more 100 workers to Onward? Yes very easily. But to do that as a company Onward has to invest in it and also invest in those areas that its subsidiary companies won’t invest in or touch. These areas of investment could by our various parameter of excellence like transmission, fixtures etc. By virtue of this we become an extended R&D arm of the company. That means that they don’t actually outsource work to us and we are as good as a part of their team. So it’s not like they give us one project and say Onward you do this. It’s like they have this one large project for which they need 50 engineers. They hire the 50 best engineers working on that project on a global basis. That’s how engineering business works too.

There is no project driven work here, where you say like I give you work for two months, 6 months or 2 years. Once you’re a dedicated design center for a client it becomes a sort of dedicated relationship.

So this makes it a very closely integrated business model. Hence Onward has to continuously expand on a very high level to maintain this relationship.

10. You had mentioned in last year annual report about the water treatment business? Can you elaborate on that?

The company looks to tap into water treatment as time goes by. Right now we are focused on providing automation services to plants that have been set up here. So we do the designing work for water treatment players.

11. On the IT business side can you please explain in brief?

In the IT business like I said earlier, it’s carried out domestically from India through our 100 per cent subsidiary – Onward eServices. On the international side it’s carried out from the US subsidiary and branch office in Dubai. We yet again only provide services. Like in the state of Tamil Nadu we provide services to the district co-operative banks. We have also been providing core banking solutions to UCO bank.We have just recently completed a large project for Allahabad Bank. The entire bank is now computerized by Onward, using the Pinnacle. Another banking client would be United Bank of India.

12. So are you purely concentrated to the banking industry for your IT business?

No. we also provide services to agricultural sector. Like there is a primary agricultural body in Tamil Nadu that we provide services to.

13. So going forward in IT where do you see yourself focusing on?

We thrive to be a pure play service company and are focused on providing infrastructure management services. We have a dedicated team for that and we are in process to expand it on the global front further.

14. Who do you think are you competitors?

On the engineering division side, one can say TCS and Infosys as they have their very own divisions for that. But actually you really cannot say that there are any direct competitors as everybody collaborates.

15. In order to grow further, you have to incur some amount of capital expenditure? So what your expected figure on that?

In order to grow at our projected target of 20 per cent, we might need to hire around 200-250 mechanical engineers every year. So according to that we may have to also buy licenses and hardware as per requirement. You cannot really say figuratively but we invest around a few million dollars every year on these.

16. On a consolidated level your debt pile up seems quite substantial? In order to invest more how do you plan to fund your future projects?

If you see, we have been using promoter’s money to fund our projects. Hence you will see substantial amount of unsecured loans. As for raising fresh debt, we have not really done much of that.

Now majority of our debt is actually close to zero. The reason is that majority of our money is in TDS. Like if you see our books, for the past three year we have been expanding our domestic business and every year around 10 per cent goes into TDS. So I think we have more than Rs 10 crore lying in TDS, which will get refunded to us shortly. So by setting it off you can see that it’s virtually zero debt.

17. Last year company earned Rs 44 lacs in Foreign Exchange? Any estimates for this year?

We are a very conservative company and have hedged everything for the next 6 to 12 months. We don’t do any gambling or any sort of risk taking strategieson the forex front.

18. What items do fall under your miscellaneous income, which has been a consistent part of your revenues?

It comes from some value addition services that do not fit under any of our business domains.It’s basically to provide more transparency to our numbers.

19. What are you expectations of the margin front going forward?

We feel very comfortable in maintaining our margins in order to maintain our growth path of 20 per cent. We have a very good client base, strong order book and don’t see much of a challenge in continuing our good work forward. But please keep in mind, we are a growing company and need to invest heavily in order to meet that. You must note that the cost we incur to grow next year would reflect in financials for current year.

20. Moving on, how much growth are you expecting going forward?

Internally we envisage growing at 20 per cent in our top-line and 25 per cent on the bottom-line.