Onward Technologies Ltd Management Discussions.

Macro Economy Review

Global Economy

The early rollout of the vaccines provided a big relief and brought in optimism for an accelerated recovery. The FY 2021-22 started showing signs of recovery from the COVID-19 pandemic and it seemed like the global economy received a booster shot, but a new crisis started emerging with the Russia-Ukraine war, leading the uncertainty in the global economic growth. Prior to the conflict, inflation had been rising in different nations due to supply-demand imbalances and government support during the epidemic, necessitating monetary policy tightening by the authorities across the world. The recent Chinese lockdowns resulted in new supply chain bottlenecks. According to the International Monetary Fund (IMF), global economic growth will slow to 3.6% in 2022, down from 6.1% in 2021.

Indian Economy

India has emerged as the worlds fastest-growing economies, and it is expected to become one of the top three economic powers in the near future due to astable state of democracy and strong strategic ties. Despite well-crafted fiscal and monetary policy support, the COVID-19 epidemic caused Indias GDP to decline by 6.6% in FY 2020-21.

I. Industry Structure and Development

Indian Information Technology (IT) Sector

While the world economy and other industries struggled with the obstacles posed by the prolonged pandemic, Indias IT sector grew at a fast pace in FY 2021-22. This was partly due to the fact that technology became the fulcrum through which businesses were able to not only keep the lights on, but also fast track their journey towards becoming future-ready, agile, and resilient. Every sector of the industry is experiencing double-digit growth.

• ER&D (Engineering Research and Development): This industry not only recovered from a year of negative growth (FY2020-21), but it is estimated to have grown by 17% in FY 2021-22 accounting for a market size of $36 billion, the most since FY 2013-14, all due to improved pent-up demand.

• IT: As per the Nasscom technology report 2022, the IT sector also secured a 17% growth rate in FY 2021-22 by growing to a market size of $116 billion, due to huge demand for infrastructure management and networking services in a distributed setting, cloud- based software testing services, consulting services around cloud migration and digital transformation.

• BPM: The BPM (Business Process Management) sector recorded a 13.5% growth rate in FY 2021 -22 by rising to a market size of $44 billion, with this sector building specialized capabilities in data monetization, leveraging cloud-based AI (Artificial Intelligence) & Analytics. This sector also recorded growth in platform-based services and automation.

• Software Products (SW Products): Customers continued to spend in communication and collaboration, cybersecurity, content management solutions, and other areas, with communication and collaboration accounting for 19% of the total growth in FY 2021-22, reaching a $13 billion market size.

• Hardware: The Indian hardware market is expanding due to increased need for distant networking infrastructure; the education sector drove PC sales as the industry remained online.

FY2022E Segmented Market Size ($ Billion)

Engineering R&D

Engineering R&D (ER&D) services cover the entire product lifecycle, from concept to design engineering to maintenance to new product introduction across a wide range of products and platforms. India has emerged as a global engineering and design hub for several industries including aerospace, automotive, machinery, electronics and semi-conductor since ER&D is one of the fastest growing segment in the country. India is one of the largest ER&D services exporters in the world with the ER&D market predicted to reach $63 billion by FY 2024-25 from $31.1 billion in FY 2020-21. By using Artificial Intelligence (AI)/ Deep Learning (DL), Augmented Reality (AR)/ Virtual Reality (VR), automation, cyber security, and other cutting-edge digital technologies, progressive investments in smart linked products, plants (factories), and processes, Artificial Intelligence of Things (AIoT), edge computing, 5G, AR/VR/XR, robotics, block chain, drones, and other technologies are enabling a wide range of applications across verticals.

According to the Advantage India - ER&D NASSCOM report from October 2021, Global engineering R&D expenditures are expected to reach $1.2 trillion in 2020, with corporate R&D spending at $772 billion. Over half of the $772 billion spent on engineering R&D by firms went to automotive, software & internet, and healthcare. India accounted for one third of that spend across the world by recording a value of $40-41 billion in 2021.

The Indian ER&D environment is known around the world for its constituents creativity, innovation and teamwork. Even at the height of the pandemic, the industry continued to have an effect and generate value for its clients and parent companies. In the face of the epidemic, the whole ER&D ecosystem came together to help and support their employees, community, and country in a variety of ways. The sourcing market for ER&D in India currently accounts for almost 34% of global sourcing. From $31 billion in FY 2020-21, the Indian ER&D market is expected to develop at a 12% CAGR to $63 billion in FY 2024-25.

Indian ER&D market ($ billion)

Global Capability Centres (GCCs), Engineering Service Providers (ESPs), Start-ups, and India- based manufacturing enterprises make up Indias engineering R&D environment. Since 2015, the overall number of GCCs in India has increased by 20%. India has progressed from an offshore service center to a product innovation powerhouse that drives end-to-end ownership for multinational corporations. India already has over 1,430 GCCs in various verticals, employing over 1.3 million people. With a 55% market share in the IT space, Engineering R&D is driving Indias GCC growth narrative. From $33.8 billion in 2020, GCC income was estimated to rise to $35.9 billion by 2021. India is predicted to have over 1900 GCCs by 2025, employing over 2 million people, continuing the GCC growth trend. Aside from GCCs, India is home to a number of ESPs that work together to provide differentiated services to their worldwide consumers across numerous locations. Twelve of the top 50 ESPs are based in India, while 44 of the top 50 service providers have engineering R&D centers there.

Government support: Governments around the world are embracing technology to provide better services to their citizens, in addition to adopting new legislation. The Government is becoming a more important contributor to global technology spending. According to a Nasscom advantage India report October 2021, global government technology investment was estimated to reach $438 billion in 2021,\ with Engineering R&D spending accounting for a significant share of that total. Outdoor monitoring, road toll and traffic control, street and outdoor lighting, city asset tracking, safety and crime prevention, and other vital applications are among the many areas being investigated by governments on a large scale around the world. The administration announced intentions to establish a National Research Foundation to boost the countrys R&D. The government provides several incentives to both Indian and foreign firms to stimulate R&D investments in India. There are lot of tax reliefs and rebates given by the Indian Government for setting-up of R&D centers.

Digital

Digital operations have become more critical than ever, with many transformative changes accelerating over the past year. Emerging technologies such as IoT, AR, VR, AI, and cybersecurity are expected to find their place within business solutions. Consumer data platforms, analytics platforms, data warehouses, and visualization tools are experiencing an explosion aided by investments from global tech giants. These digital technologies are likely to be widely adopted by governments and industries such as Automotive, Manufacturing, E-Commerce, Semiconductor, ICT, and Medical technology.

Industry Outlook

Over one-third of technology companies intend to increase their R&D spending by 10% to 20% over the previous year as they look for newer ways to innovate and produce new goods and services. BFSI, Healthcare, Manufacturing, and Retail/ e-commerce are likely to be the key technology customers, with solutions centered on using AI, Analytics, Automation, and Cloud. The sectors upbeat outlook is reflected in recruiting trends, with major sector firms likely to ramp up their employment efforts. Infrastructure and managed services, consulting services, Platform BPM, data management, and RPA (Robotic Process Automation) are expected to drive growth in FY 2022-23; ER&D will see a wider adoption of the engineering cloud as the software component improves. Productivity software and cybersecurity solutions will see growing use in the software product market as firms diversify their tech portfolios. Finally, the e-commerce industry is projected to be greatly disrupted by the fastgrowing interest in the metaverse (a network of 3D virtual worlds focused on social connection), which is driven by the need for more personalized experiences. Due to rapid digitalization across the value chain, end user industries are poised to adopt comprehensive and high-end enterprise performance solutions in an evolutionary journey over the near to long term. The IT sector is expected to contribute significantly to Indias digital economy.

Company Overview Company Background

The Company is a leading Engineering R&D, Digital Transformation and IT consulting service company. The Company has strong expertise in Digital Transformation, Embedded Systems, Engineering Technology, Data Analytics, Artificial Intelligence (AI), and Machine Learning (ML). The Company provides services in four lines of business in these established verticals, which account for more than 70% of its revenues. The first is digital engineering, the second is embedded electronics, the third is mechanical engineering, and the fourth is enterprise IT. The Company has its presence in the Indian market as well as overseas markets such as the US, the UK, the Germany, the Netherland and Canada. The Registered Office of the Company is in Worli, Mumbai. The Company supports prominent worldwide organizations through sales offices in Chicago, Detroit, Cleveland, Toronto, London, Frankfurt, and Amsterdam, as well as state-of- the-art development and design centres in Mumbai, Pune, Chennai, Bengaluru and Hyderabad.

Financial Overview

Standalone: On a standalone basis, the Companys revenues from operations in FY 2021-22 were Rs 23,440 Lakhs, increased from Rs 17,267 Lakhs in FY 2020-21. Growth in revenue has been driven mainly due to increased outsourcing by all the Companys top clients. During the year, the Company recorded profit of Rs 1,302 Lakhs in Profits Before Taxes (PBT). In FY 2021-22, the Profit After Tax (PAT) was Rs 932 Lakhs, compared to Rs 1,267 Lakhs in FY 2020-21.

Consolidated: On a consolidated basis, revenue from operations increased to Rs 30,727 Lakhs from Rs 24,037 Lakhs recorded during the previous year. In FY 2021-22, Profit Before Taxes (PBT) were Rs 3,183 Lakhs. In FY 2021-22, the Profit After Tax (PAT) was Rs 2,368 Lakhs, compared to Rs 734 Lakhs in FY 2020-21.

The revenue split from ER&D was 71%, 8% from digital, and 21% from IT services. Offshore revenues accounted for 30% of total revenue, while onsite revenues accounted for 70%.

The subsidiaries continued to support the Companys operations while maintaining operational discipline in line with its customer-first approach. In FY 2021-22, revenue from subsidiaries was Rs 11,438 Lakhs.

(Rs in Lakhs)

Standalone Consolidated
FY 2021-22 FY 2020-21 FY 2021-22 FY 2020-21
Revenue from Operations 23,440 17,267 30,727 24,037
Total Expenses 21,676 15,305 28,586 22,312
EBITDA 1,764 1,962 2,141 1,725
EBITDA Margin (%) 7.53% 11.36% 6.97% 7.18%
Other Income 560 846 2,153 534
Depreciation 921 928 1,011 1,044
Finance Costs 101 208 101 232
PBT after Exceptional Item 1,302 1,671 3,183 981
Tax 369 404 815 247
Profit After Taxes (PAT) 932 1,267 2,368 734
PAT Margin (%) 3.98% 7.34% 7.71% 3.05%
PAT (After NCI) 884 1278 2,304 705
Diluted EPS (Rs) 4.79 7.50 12.17 4.35

Key changes in significant Financial Ratios

Details of significant changes in key financial ratios (i.e., change of 25% or more as compared to the immediately previous financial year)

Standalone Basis

Key Ratios FY 2021-22 FY 2020-21 Variance % Reason for change
Debtors Turnover 5.05 6.09 (17.08%) Decrease on account of increase in revenue and trade receivable in current year.
Inventory Turnover NA NA NA NA
Interest Coverage Ratio 1.20 2.34 (48.64%) Decrease on account of increase in lease liability for current year and increase in EBIDTA of previous year.
Current Ratio 2.36 1.83 29.06% Increase on account of increase in balances of trade receivables and cash and cash equivalents.
Debt/Equity Ratio 0.41% 0.94% (56.93%) Decrease on account of reduction in loans and increase in balances of securities premium account due to issue of equity shares on account of Share Warrants.
Return on Equity 8.41% 18.74% (55.15%) Decrease on account of decrease in net profit after tax and increase in other equity of current year.
Operating Profit Margin (%) 7.53% 11.36% 33.74% Decrease on account of increase in operating expenses.
Net Profit Margin (%) 3.89% 6.99% (44.44%) Decrease on account of increase in operating expenses.
Net Profit Ratio 3.98% 7.34% (45.77%) Decrease on account of decrease in net profit after tax and increase in revenue from operation of current year.
Return on Capital Employed 9.60% 26.69% (64.03%) Decrease on account of decrease in EBIT and increase in equity of current year.
Return on Net Worth (%) 6.08% 18.00% (66.23%) Decrease on account of decrease in total profit and increase in net worth in current year.

Consolidation Basis

Key Ratios FY 2021-22 FY 2020-21 Variance % Reason for change
Debtors Turnover 4.62 5.89 (21.59) Decrease on account of increase in revenue and trade receivable in current year.
Inventory Turnover NA NA NA NA
Interest Coverage Ratio 1.09 0.63 72.78% Increase on account of increase in lease liability and decrease in EBIDTA in current year.
Current Ratio 3.07 1.73 78.11% Increase on account of increase in balances of trade receivables and cash and cash equivalents.
Debt/Equity Ratio 0.37% 0.93% (60.46%) Decrease on account of reduction in loans and increase in balances of securities premium account due to issue of equity shares on account of Share Warrants.
Return on Equity 19.93% 10.30% 93.57% Increase on account of increase in net profit after tax and other equity of current year.
Operating Profit Margin (%) 6.97% 7.17% (2.89%) Decrease on account of increase in operating expenses.
Net Profit Margin (%) 7.20% 2.99% 141% Increase on account of increase in total income.
Net Profit Ratio 7.71% 3.05% 152.49% Increase on account of increase in net profit after tax and revenue from operation of current year.
Return on Capital Employed 19.98% 14.13% 41.35% Increase on account of increase in EBIT and equity of current year.
Return on Net Worth (%) 14.54% 10.11% 43.76% Increase on account of increase in total profit and net worth in current year.

Business Outlook

With the rise of emerging technologies, the Company is extremely focused on seizing big opportunities and helping its partner firms and potential clients construct a digital future. Onward Tech already has skills in a variety of emerging technologies and is continuing to develop them through employee upskilling and reskilling, subcontracting, and strategic relationships. The Companys distinct future growth plan is to invest in people, enhance capabilities, and dive deeply into the challenging hi-tech digital transformation with its existing "Global 2000" customers. To maintain a seamless flow of operations, the Company has approved a defined path for expanding digital budgets. The Company is planning to initiate transitioning from proof-of-concept to large-scale adoption model. The Company intends to concentrate on Industry 4.0, AI/ ML, ADAS (Advanced driver-assistance systems), cloud, and DevOp engineering. The Company is planning to make double the investment into digital in the coming years.

Internal Controls and Adequacy

The Companys global presence across multiple countries and sizeable associate strength makes it imperative for us to have a robust internal controls framework. The Company has adequate systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization, and ensuring compliance with corporate policies. The Company has a well-defined plan for delegation of authority, for approving revenue and expenditures. The Company has appointed M/s. Ahuja Valecha & Co. LLP, Chartered Accountant, as an internal auditors for the financial year 2020-2021. M/s. Ahuja Valecha & Co. LLP carried out the internal audit based on an internal audit plan, which is reviewed each year in consultation with the statutory auditors, M/s PwC, Chartered Accountant and the Audit Committee.

The Audit Committee reviews audit reports submitted by the internal auditors. Suggestions for improvement are considered, and the Audit Committee follows up on the implementation of corrective actions. The committee also meets the Companys statutory auditors to ascertain, inter-alia, their views on the adequacy of internal control systems in the Company and keeps the Board of Directors informed of its key observations from time to time. The statutory auditors have also independently audited the internal financial controls over financial reporting as of March 31,2022. They have opined those adequate internal controls over financial reporting exists and that such controls were operating effectively.

Risk Management

Risk management includes all processes and operations and is the responsibility of everyone in the organization. The Company has adopted a Risk Management Policy with the goal of integrating risk management into overall strategic and operational activities. The following important risks have been prioritized by the Company, and effective mitigation techniques have been developed:

• Business disruptions due to COVID-19 Pandemic: Risk Impact: The Companys operations may be adversely affected due to incapacitation of the workforce due to the pandemic, government lockdowns, limited travel and transition to work- from-home mode.

Risk Mitigation: The Company has designed a work from home policy and plan to oversee its global reaction and monitor pandemic conditions in locations where it operates as part of its business continuity management.

• Regulatory and Compliance Risks:

Risk Impact: The Company operates in a growing number of nations and industry sectors, increasing the risk of non-compliance with regulatory standards that are important to its operations.

Risk Mitigation: To counteract this risk, the Company has in-house and consultants to assess and monitor regulatory requirements across regions and industries. The Companys global regulatory compliance framework is intended to identify, assess, mitigate, and monitor regulatory risks that affect the Company. The framework protects the Companys reputation, employees, and clients. To ensure compliance, regulatory assessments are conducted, and extensive checklists are kept.

• Talent and Human Resource Risks:

Risk Impact: Hiring talented and attrition of skilled talent may adversely affect the Companys ability to pursue its growth strategies effectively.

Risk Mitigation:

a. Onward Techs culture of diversity, inclusion openness, transparency and meritocracy coupled with its growth orientation help attract top talent.

b. Formulated a process to forecast resource requirements based on project followed by appointing of recruitment agencies;

c. Onward Techs designed eTAP program that builds training and hiring of fresher to the organization;

d. Onward Techs has employee training programme helps build capabilities and expertise in various technical, functional and non-technical skills;

e. The HR team is constantly striving to reach out to every employee in order to assist their development and give internal possibilities for employees to advance their careers.

• Data protection and privacy risks:

Risk Impact: With the response to the Coronavirus epidemic, the Companys reach of processing personal data of individuals, organizations, vendors, and contractors has grown even more. Leakage and misuse of confidential data and proprietary information increases the risk of noncompliance of privacy and data protection laws and can damage brand reputation, relationships and growth.

Risk Mitigation:

• In place a framework that includes governance, policies and procedures, training and awareness programmes, data mapping, third-party contractual oversight and a mechanism for monitoring regulatory compliance for each area.

• Implementation of IT security practices in line with ISO 27001 standard and TISAX.

• Developed and communicated security awareness guidelines during work from home for our employees.

• Competition Risks:

Risk Impact: Indian IT companies, MNC IT organizations, and startups with a significant presence in low-cost locations, strong client relationships, in-house and captive services companies, and so on, compete fiercely in the global IT services industry. Key demand areas such as cloud, cybersecurity, and workforce transformation have gained more attention from competitors.

Risk Mitigation:

1 Strengthen strategic partnership with clients by offering them multiple service lines

2) Strengthening sales team to win new clients and relationship with existing accounts

3) Invested in new geographies, with a continuous focus on partnership and investment acquisition.

Geopolitical Risks:

Risk Impact: Instability and uneven growth in the global economy have harmed the IT industrys growth in the past, and they may continue to do so in the future. Any future global economic or political uncertainty may result in IT spending reductions, postponements, or consolidations, contract terminations, project deferrals, or client purchase delays. Increased geopolitical tensions among key economies may potentially have an influence on the Companys capacity to grow globally.

Risk Mitigation:

• The Company has established a geopolitical framework to continuously examine geopolitical concerns.

• To reduce reliance on any single country for revenue development and service delivery by extending its business across other countries.

• The Company also maintains its strategy of employing local talent through various internal programmes in order to prevent business disruptions caused by various constraints on employee mobility.

• To address these concerns and empower the greatest personnel to solve client business challenges, the Company strategically invests in a flexible workforce strategy comprising onsite and offshore workers.

Business Continuity Risks:

Risk Impact: In a complex and rapidly changing global risk landscape, the Companys reputation as a leading technology business is judged by its threat resilience and ability to respond effectively to disruptive events. If the Company is unable to assure the continuity of its operations across clients, delivery sites, and enabling functions, it risks a business continuity risk.

Risk Mitigation:

• The pandemic has shifted the paradigm of crisis and resilience planning dramatically.

• The crisis change has caused the Company to rethink its programme in light of the new normal, which includes many large-scale global events that last for extended periods of time.

Forex Exchange Risk:

Risk Impact: Onward Tech has significant local presence in North America and Europe. The Company is thus exposed to a wide variety of currencies. Fluctuations in these currencies could impact the Companys financial performance.

Risk Mitigation:

• The Company mitigates the risk of fluctuations in foreign exchange rates connected with receivables and projected transactions in certain foreign currencies by employing foreign exchange forward contracts and options.

• A well-defined hedging framework for managing any foreign exchange risk in India. The Board-approved policy in this regard is periodically reviewed for its effectiveness.

Human Resources

Human resources are critical to the Organizations long-term growth as a services Company with a highly technical business line. The Company promotes a positive and open environment. It advocates for a fair and just human resource management system that balances work and personal life. The Company made great progress in its policies and processes in the FY 2021-22. The Company intends to focus on employee safety, which was evident, both at the start of the pandemic and as it progressed. Onward Tech restructured its operations with a long-term perspective in mind. It moved quickly to provide equipment that allowed staff to work from home, huddled to solve difficulties, and implemented remote working.

Several digitization efforts were introduced by the Company during the year to empower employees. The Human Resource Management System was put in place to automate basic HR and provided access from anywhere at any time. Also, the Company has outsourced India payroll process to a leading global vendor for best-in-class payroll practices. As on March 31,2022, Onward Tech employed 2,641 employees.

Cautionary Statement

This statement contains statements about expected future events, financial and operating results at Onward Technologies Limited, which are forward-looking statements. By their nature, future looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that the assumptions, predictions, and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forwardlooking statements as a number of factors could cause assumptions, actual, future results and evert to differ materially from those expressed in the forwardlooking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications and risk factors referred to inter-alia in the Management discussions and analysis report hereunder.