Rationale

The ratings upgrade factors in the continued strong operational performance of Onward Technologies Limited's (OTL or the company), aided by its established relationships with reputed clientele, new business/client wins and presence across various geographical markets. The rating upgrade also favourably considers the strong financial risk profile of the entity, characterised by a comfortable liquidity position (~Rs. 76 crore approximately) and debt-free position as on December 31, 2021. The infusion of funds following the recent round of investment from Convergent Finance LLP (~Rs. 70 crore in the current fiscal) has strengthened OTL's financial risk profile and is likely to bolster its growth prospects, going forward. The company already has an established presence in the US, the UK and Germany, and has recently launched two subsidiaries in the Netherlands and Canada. OTL continues to have plans to enhance its geographical presence, going forward, which is expected to reflect positively in OTL's order book. The ratings, however, continue to remain constrained by the modest scale of operations and moderate level of profitability exhibited by OTL over the years. ICRA notes that its recent phase of expansion along with enhanced focus on high-margin service offerings are expected to expand its revenue base and profitability metrics to an extent. The company faces intense competition in the engineering research and development (ER&D) space from much larger peers and, therefore, remains exposed to constraints on its pricing flexibility to an extent. The company also remains inherently exposed to currency movement risk with its presence in overseas markets. Any adverse movement in forex could, therefore, affect its profitability, although the presence of a hedging mechanism provides some cushion against extreme volatility in forex movement. The Stable outlook takes into consideration the established relationships of the company with its customers, which is expected to help it report healthy revenue and earnings growth over the medium term, and maintain a healthy credit profile