Q&A with Harish Mehta, MD & Chairman of Onward Technologies

Harish Mehta
MD & CEO, Onward Technologies

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

We have 2 business lines – one is the mechanical engineering business and the other is the IT business. With regard to the structure, the company has 3 wholly-owned subsidiaries – our North American subsidiary, Onward Technologies Inc., our Germany arm, Onward Technologies GmbH and our domestic IT services business, Onward eServices. In addition to this, we also have 2 branch offices in UAE and the UK.

Of course, this is how we are legally structured. Internally, though, we have only 2 segments – the engineering business and the IT services business. Our engineering business is headquartered in Pune, and has a management team dedicated to handle all the activities. As for the structure of the IT services business, we have 2 offices in India – one  Mumbai, and other in Chennai (Tamil Nadu), which handles the majority of the IT business.

Our German subsidiary and the UK branch office are dedicated 100% to engineering. Finally, the North American arm is divided between the 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 emphasis where the operations are headquartered is that each of our offices have dedicated and independent management teams. We are unlike a traditional Indian company, where the entire management team is based at one place like Mumbai and the global offices are basically sales and marketing units. Our structure is more like an independent individual profit center growing in line with the global trend and focusing on the core business.

2.    Can you please share with us the respective revenue contribution of the 2 business segments and the geography?

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

3.    We would like to understand your revenue model. What are the services that you offer to your clients, and how do you charge your clients?

On the engineering business front, we are a 100% service provider, in the sense that all our revenues in this segment come from providing pure services. We do not undertake any resale, license sale or product sale activity for our clients. With regard to the way we charge our customers, we follow Time & Material (T&M) & fixed project billing.

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

Yes, the charges vary according to the industry & based on the complexity of the project. For each geography and each project, the charges are different. [PAGE BREAK]

5.    Can you name a few clients?

Our key clientèle includes includes companies like John Deere, Tata Motors, Caterpillar, Punjab National Bank, Bank of Baroda and Thermo Fisher, among many others.  

6.    So, are you more focused on the auto sector?

Yes, on the industry side, our primary focus is towards the automotive sector, which comprises off-highway vehicles, auto ancillaries etc., and we also have some interest on the aerospace side.

However, from the Onward Group perspective, we are not focused on any individual business. What we are focused on is a few key areas which we call Centers of excellence (COEs) internally. Each of these is in an independent domain, like engines, transmission fixtures etc. So, our main area of focus is more on the lines of becoming an engines expert and so on. We do not aim to be niche players in the automobile sector, but would rather be niche players in engines, for example, where we work with customers in designing engines. Other such verticals would be transmission, seating and fixtures. Basically, the way we are structured, we have 14 key Centers of excellence which we keep expanding and innovating on from time to time.

So, when we say that we are hiring mechanical engineers, we are not actually hiring freshers straight off the campus, as the nature of our work is very high-end and requires a fair amount of of expertise. For example, lets take the case of any one of the clients we work with, say, a global automotive giant. What they need is not mechanical engineers – they can hire them in abundance, and in fact, they have their own subsidiary companies that do the mechanical part of the work for them. What they are looking for are engines experts. So, our lookout is to hire mechanical engineers with an automotive background, who have experience in designing engines and who also specialize in the tools used by this particular client. 

7.    What kind of tools are you talking about? Can you touch upon a few of these briefly? 

Each company uses different tools on a global level. Some of these tools are CAD/CAE tools like PTC (Pro-e), Catia, Unigraphics, Hypermesh, ROBCad, Ansys, Ansa, etc. The licenses for these are highly expensive, each costing anywhere between Rs 3 lakh to Rs 25 lakh.  

8.    In light of what you just told us, could you throw some light on what kind of investments the company makes to achieve all this?

Our investments basically go into buying licenses. When we say we are going to hire some 350 mechanical engineers, it implies that we have to also procure 350 licenses.

Our biggest bet, or let’s say a calculated risk, is to decide which licenses to buy for which client. We need to figure out which industry would grow, and within the industry, which company would do well. Here again, let us take the case of an Automotive giant The company has more than a 51000 engineers. Will they outsource more work to Onward Technologies? Yes, they surely would, but for that, Onward has to invest in it, and also invest in those areas that its subsidiary companies won’t invest in or touch in the forseeable future. These areas of investment could be our various parameters of excellence, like transmission, fixtures etc.

By virtue of this, our vision an extended R&D arm of the company where quality, capabilities & capacity is fundamental to make the relationship successful.

This makes it a very closely integrated business model. Hence, Onward has to continuously expand on a very high level to maintain this relationship.  [PAGE BREAK]

9.    You had mentioned the water treatment business in last year’s annual report? Can you elaborate on this?

The company looks to tap into the water treatment business over time. For now though, we are focussed on providing automation services to plants that have been set up here. We do the designing work for water treatment players.

10.    Can you please explain the IT business side in brief?

Like I said earlier, our IT business is carried out from India through our 100% subsidiary, Onward e Services. On the international side, it is carried out by our USA subsidiary and the branch office in Dubai. Here too, we provide only services. For example, in the state of Tamil Nadu, we provide services to the district co-operative banks. We have also been providing banking solutions to UCO Bank, Bank of Baroda, Punjab National Bank, United Bank of India etc. We have recently completed a large implementation project for Allahabad Bank, where the entire bank is now computerized on the FiPnacle Core Banking Solution.  

11.    So, are you concentrating purely on the banking sector for your IT business?

No, we have been building capabilities & expertise using our experience in the BFSI sector in ramping up our teams for Application Development & Maintenance, Testing Services, FMS services, etc for various different industries.

12.    With respect to IT, what do you see yourself focusing on going forward?

We are currently in the process of becoming CMM-Level 3 compliant & are investing in building delivery capabilities as per the focus areas mentioned above. We will continue to expand in both Chennai & Mumbai.

13.    Which companies do you think are Onward Technology’s competitors?

With respect to the engineering division, one can say Tata Technologies, QUEST, Infotech Enterprises are our competitors, as they have been in this industry for a long time & each has a unique advantage over each other. The market is very large so there are several areas of collaboration as well within all these companies.  

14.    In order to grow further, you have to incur some amount of capital expenditure? What are the expected figures on that?

In order to grow at our projected target of 20%, we might need to hire around 3200-3250 mechanical engineers every year. In line with that, we also have to invest substantially in scaling up our internal infrastructure, customer facing teams, etc. You cannot really put a figure to it, but we invest around a few million dollars every year on these. [PAGE BREAK]

15.    On a consolidated level, your debt pileup seems quite substantial. In order to invest more, how do you plan to fund your future projects?

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

The majority of our debt is actually close to zero. The reason is that the majority of our money is in TDS. If you see our books, for the past 3 years we have been expanding our domestic business, and every year around 10% goes into TDS. So, I think we have more than Rs 10 crore lying in TDS, which will be refunded to us shortly. By setting this off, you can see that we have virtually zero debt.

16.    Last year, Onward Technologies earned Rs 44 lakh in foreign exchange? Any estimates for this year?

We are a very conservative company, and have hedged closed to 90% for the next 6-12 months. 

17.    What items under your miscellaneous income have been a consistent part of your revenues?

The miscellaneous income comes from some value addition services that do not fit under any of our business domains. This is basically to provide more transparency to our numbers.

18.    What are you expectations of the margins front ahead?

We feel very comfortable in maintaining our margins in order to maintain our growth path of 20%. We have a very good client base as well as a strong order book, and don't see much of a challenge in continuing our good work forward. 

Keep in mind though, that we are a growing company and need to invest heavily in order to meet the growth requirements. You must note that the cost we incur to grow next year would reflect in the financial for current year.

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

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