Aeroflex Industries Ltd Management Discussions

Industry structure and developments

Global and Indian economic backdrop

The global economy is navigating a period of elevated uncertainty. Growth is projected at 3.1% in 2026 and 3.2% in 2027, which is well under pre-pandemic averages and with the Middle East conflict amplifying the effects of the earlier shift in United States trade policy. Global inflation is expected to rise to 4.4% in 2026, with oil prices averaging approximately USD 82 per barrel under the reference scenario. Advanced economies are projected to grow at just 1.8% in 2026, while emerging markets and developing economies are forecast at 3.9%.

India is a material exception to this subdued global picture. With GDP growth of 7.6% in FY26 rising from 7.1% in the preceding year, India reaffirmed its position as the fastest-growing major economy in the world. The RBI has projected real GDP growth of 6.9% for FY27, with the World Bank and IMF projecting 6.6% and 6.5% respectively. This sustained growth, combined with the Governments continued focus on infrastructure investment, manufacturing expansion and digital transformation, provides a favourable structural backdrop for Aeroflexs businesses.

Global and Indian stainless steel flexible hose market

The global market for stainless steel flexible hoses is valued at approximately USD 2,182 million in CY2025 and is projected to reach approximately USD 4,380 million by CY2035, registering a CAGR of 7.2%. This outperformance reflects the ongoing migration toward corrosion-resistant, long-life fluid transfer solutions across industrial end markets. Demand is led by oil and gas (CAGR of 6.9% over CY2020-2024), followed by chemical and petrochemical (6.3%), power generation (6.5%), pharmaceutical (7.3%) and food and beverage (7.0%). In India, the growth is supported by the versatility of stainless-steel hoses across automotive, oil and gas, and chemical processing, as well as the steady shift away from rubber, PTFE and polymer alternatives towards stainless-steel hoses.

Source: Report by Future Market Insights

Global and Indian metal bellows market

The global metal bellows market is estimated at approximately USD 3,012 million in CY2025 and is projected to reach approximately USD 5,608 million by CY2035, a CAGR of approximately 6.4%. Demand is anchored by the energy, automotive, industrial, aerospace and defence sectors. South Asia Pacific led by India, is forecasted to be the fastest-growing region at a CAGR of approximately 7.1% through CY2035.

Source: Report by Future Market Insights

Global and Indian data centre liquid cooling market

The global data centre liquid cooling market was valued at approximately USD 5.65 billion in 2024 and is projected to reach USD 48.4 billion by 2034, representing a cAgR of approximately 24%. This expansion is driven by the explosive growth of AI workloads, the proliferation of hyperscale data centre deployments, and the structural inadequacy of conventional air-cooling systems as server rack power densities rise with AI-optimised GPU clusters generating heat loads of 50 to 100 kW per rack and above. Direct-to-chip cooling is the only cooling option for such high computing GPUs. North America currently dominates the global demand; Asia-Pacific is projected to be the fastest-growing region over the forecast period. Indias strong internet user base, our governments Digital India programme and active hyperscale operator commitments from global cloud majors are accelerating the build-out of data centre infrastructure across Tier I and Tier II cities. As rack densities and AI workloads intensifies, the transition toward liquid cooling will accelerate rapidly.

Source: BIS Research

Expansion of domestic manufacturing capacity

The Make in India initiative and PLI schemes have catalysed a broad-based expansion of domestic manufacturing capability. As OEMs deepen local supply chains across data centres, AI infrastructure, automotive and other industries, demand for precision flow control products will grow rapidly.

Rising defence and aerospace spend

Sustained increases in defence expenditure, combined with the IDDM indigenisation framework, are accelerating domestic production of mission-critical sealing and flow-control products for aerospace and defence platforms. The phasing out of import- dependent supply chains is opening a significant addressable market for certified Indian manufacturers.

Energy transition and clean-energy infrastructure

Indias shift towards green hydrogen, solar and clean energy is expanding the application of flow control products in high-purity gas handling, thermal management and process isolation. Government missions in this space are expected to sustain capital investment over the medium term.

Electric vehicle growth and automotive electrification

Rapid EV adoption is creating demand for bellows in battery thermal management, battery cooling and fluid-handling systems. The shift from conventional drivetrains introduces tighter engineering requirements that favour quality focused domestic suppliers.

Semiconductor and advanced electronics manufacturing

Indias emerging semiconductor fabrication and electronics manufacturing base is creating demand for ultra-precision products used in vacuum systems, wafer handling and cleanroom equipment.

Opportunities and threats

Opportunities

Indias sustained industrial capex cycle underpinned by the National Infrastructure Pipeline, PM Gati Shakti, PLI schemes across manufacturing, aerospace, semiconductors and advanced electronics, and rising private investment is expanding addressable demand across virtually every sector that Aeroflex serves. Oil and gas, petrochemicals, refineries, power generation, ports and terminals, firefighting systems and process industries are all in active investment phases, creating pipeline for higher-value customised hose assemblies and engineered flow solutions. The Make in India initiative and defence indigenisation frameworks are opening new addressable markets in aerospace and defence, where Aeroflexs precision engineering and certifications provide a strong platform.

The most significant medium and long-term opportunity before the Company is the structural shift toward liquid cooling in data centre and AI infrastructure. The global data centre liquid cooling market is expected to grow nearly tenfold by 2034, and Indias market is projected to grow nearly fourteen-fold over the same period. With our established engineering capabilities, global technology partnership, and early commercial traction, Aeroflex is well positioned to capture a meaningful share of this opportunity. The Companys export presence across 90+ countries additionally provides a platform to address the global market for data centre cooling products.

Within the data centre cooling landscape, liquid cooling is increasingly being preferred over conventional air-cooling methods on account of its superior efficiency and sustainability profile. Liquid coolings higher thermal conductivity enables more effective heat transfer, reducing energy consumption by over 27% relative to air-cooling systems, while also allowing for more compact, higher-density rack designs and lower auxiliary capital requirements. Liquid-cooled systems are also quieter, less susceptible to dust and contaminants, and support longer component lifespans with fewer hardware failures.

Although capital expenditure for liquid-cooling systems is higher upfront, the payback period is typically short (ranging from less than a year to about three years depending on regional electricity costs). It is supported by operating expenditure savings of up to 31-37% compared to air cooling.

Source: McKinsey & Company, "Keeping Cool in the Data Age"

Adjacent growth vectors including hydrogen infrastructure, electric vehicle thermal management, HVAC, semiconductors, and robotics and automation, each represent nascent but high-value end markets for the Companys precision-engineered hose assemblies and bellows. The Company currently has 16 products under active R&D specifically related to data centre liquid cooling, and 58 products in total across various stages of R&D, reflecting the depth of the innovation pipeline.

Threats and risks

Global geopolitical uncertainty including the ongoing Middle East conflict, residual trade policy uncertainty and the risk of further fragmentation of global supply chains may affect export demand, commodity pricing and transportation costs. Foreign exchange volatility poses a risk to export realisations and raw material costs, given the Companys significant international revenue exposure.

In the thermal management business, the principal risk is the pace of adoption of liquid cooling in Indian data centres, which remains at an early-stage relative to North America and Europe. Longer customer qualification cycles, higher initial investment costs for operators and the prevalence of gas-based cooling in Indias installed data centre base may moderate the near-term revenue ramp. The Company is managing this risk through phased capacity expansion, active customer engagement and a diversified go-to-market approach that spans domestic and international markets. Competitive intensity in both the core and new businesses is a continuous risk that the Company addresses through engineering differentiation, product quality and customer intimacy.

Segment-wise/product-wise performance

The Company generates revenue across three principal product categories, and FY26 saw a meaningful evolution in the composition of that mix with Assemblies emerging as the largest contributor at 52% of consolidated revenue from operations, and SFN Skid Assemblies gaining early but rapid commercial traction.

SS flexible hoses with and without braiding

Stainless steel corrugated flexible hoses accounted for approximately 43% of consolidated revenue from operations in FY26. The core business continued to deliver steady growth during FY26, supported by healthy and broad-based demand across fire suppression, oil and gas, petrochemicals and refining, power generation, steel and metals, ports and terminal handling, chemicals, food and pharmaceutical processing, and solar energy. The business sustained strong engagement with global customers, with export revenue diversified across the Americas (59%), Europe (27%), Asia (11%) of total exports during FY26.

Installed manufacturing capacity for SS flexible hoses stood at 17.5 million metres per annum as at 31 March 2026, with capacity utilisation of approximately 70% during the year. The capacity was augmented by 1.0 million metres during Q3FY26, and a further expansion to 20 million metres per annum is on track for completion by Q2FY27, providing headroom to accommodate growing demand.

Assemblies and others

Assemblies and other products constituted approximately 52% of consolidated revenue from operations in FY26, making it the Companys largest product category by revenue for the year. This segment carries higher realisations and margins relative to standard hose products and is the primary vehicle through which the Company moves up the value chain.

The assemblies and fittings business continues to deliver steady growth, supported by strong demand from end-user industries and the Companys established relationships with global customers across 90+ countries. The Company operates 46 assembly stations as at 31 March 2026, with two robotic welding lines added in Q4FY26 representing a further step in the Companys programme to integrate automation and advanced manufacturing capabilities into the assembly process. Planned addition for more assembly stations, together with the commissioning of an automatic welding station and annealing plant by December 2026, will substantially strengthen both throughput capacity and product quality in this segment.

Metal bellows are manufactured in sizes ranging from 50 mm to 3,000 mm serving high-precision applications across multiple industries. Installed capacity for metal bellows stands at 1,20,000 pieces per annum.

Hyd-Air, the Companys wholly owned subsidiary focused on manufacturing fittings and fluid connectors, delivered a standout performance during FY26, recording 194% year-on-year revenue growth, a result of improving operational performance, upgrades to its quality laboratory and R&D centre at Chakan, Pune, and growing customer traction. The integration of Hyd-Air continues to deepen the Companys end-to-end fluid flow solutions capability and reinforce its competitive position in the higher-margin assembly segment.

SFN skid assemblies: liquid cooling solutions for data centres and AI infrastructure

The SFN liquid cooling skid assembly is a compact, plug-and-play unit that integrates stainless steel piping systems, precision-engineered metal hoses and metallic expansion joints into a closed-loop coolant distribution system designed to remove heat from high-density AI and compute hardware reliably, efficiently and without leakage. The product is certified as per ASTM standards, and complies with PED and CE requirements, and is engineered for zero leakage, high reliability and continuous operation in mission-critical data centre environments.

SFN Skid Assemblies, commercialised at the end of Q3FY26, contributed approximately 5% of consolidated revenue from operations for the year. Total FY26 volumes stood at 617 units, generating revenue of T21.2 crore at an average realisation of approximately T3.44 lakh per skid.

To accommodate the rapid scaling of demand, skid assembly manufacturing capacity was expanded from 2,000 units per annum in December 2025 to 6,000 units per annum as at 31 March 2026. Further additions in capacity to 9,000 units in Q2FY27 is on track, targeting total installed capacity of 15,000 units per annum by Q2FY27.

Outlook

Aeroflex enters FY27 with a strong outlook, supported by a healthy order pipeline, established customer relationships and a strong balance sheet. Expansion of the core hose-and-assembly business and increased contribution from the liquid-cooling skid assembly segment will fuel the growth for the company in the near future. The Company expects ongoing investments in capacity expansion, automation and product development to support growth across both traditional and emerging applications. Increasing adoption of value-added products, including assemblies, bellows and liquid-cooling solutions, is expected to further strengthen the business mix and enhance profitability. The Company also remains focused on expanding its presence across high-growth sectors such as data centres, semiconductors, robotics and advanced manufacturing, while continuing to evaluate selective opportunities to enhance capabilities and broaden its market reach. With a diversified global customer base and growing engineering capabilities, Aeroflex remains well-positioned to capitalise on evolving industrial and technology-led opportunities.

Risks and concerns

Potential impact	Mitigation framework
Regulatory & compliance risk
Changes in environmental regulations, export controls, trade policies, taxation frameworks and industry-specific standards across domestic and international markets may increase compliance costs or affect market access.	Structured compliance framework with periodic reviews, internal controls and proactive monitoring of regulatory developments across key geographies.
Market & demand risk
Slowdowns in industrial activity, changes in customer spending patterns, competitive intensity and sector-specific demand fluctuations may impact order inflows, capacity utilisation and revenue growth.	Diversified customer base across industries and geographies; continuous portfolio expansion; focus on value-added applications to reduce dependence on any single market.
Export & geopolitical risk
Geopolitical tensions, trade restrictions, tariff measures, sanctions and regional economic disruptions may affect demand, pricing and supply-chain continuity across the Companys 90+ export markets.	Geographically diversified customer portfolio; close monitoring of key export markets; active pursuit of opportunities across multiple regions to reduce concentration risk.
Foreign exchange risk
Currency fluctuations may affect export realisations, profitability and the value of foreign- currency-denominated transactions.	Prudent treasury practices, including natural hedges and appropriate risk- management measures, to minimise the impact of currency volatility.
Supply chain risk
Disruptions in raw material availability, logistics bottlenecks or supplier concentration may affect production schedules and customer deliveries.	Diversified supplier network; appropriate inventory levels; continuous monitoring of procurement and logistics processes to strengthen supply-chain resilience.
Operational risk
Manufacturing interruptions arising from equipment failures, process inefficiencies, utility disruptions or human error may impact productivity, quality and customer commitments.	Investment in automation, preventive maintenance, process standardisation and continuous operational improvement across manufacturing facilities.
Technology & cybersecurity risk
Increasing reliance on digital systems exposes the Company to risks related to cyberattacks, data breaches and system failures.	Cybersecurity controls, periodic system assessments, data-protection measures and employee awareness programmes to safeguard critical information and business systems.
New product adoption risk
Investments in liquid-cooling solutions and other emerging areas may face longer adoption cycles, execution challenges or slower-than-anticipated market acceptance.	Phased capacity expansion; customer-led product development; technical validation and continuous innovation to align investments with evolving market requirements.

Internal control systems and their adequacy

The Company maintains a robust internal control framework designed to safeguard assets, ensure the accuracy and reliability of financial and operational information, support efficient business processes and ensure compliance with applicable laws and regulations. The internal control system is supported by established policies, standard operating procedures and periodic reviews across key business functions. The Company uses an integrated SAP ERP platform that provides real-time visibility into operations, procurement, inventory, finance and customer management, and has implemented Salesforce CRM to manage the complete lead-to-order- fulfilment cycle.

The Board of Directors, supported by the Audit Committee, oversees the adequacy and effectiveness of the internal control environment. The Audit Committee reviews the findings of internal audits, assesses the robustness of controls and monitors managements responsiveness to identified gaps. The internal audit function is conducted by qualified professionals with the scope, independence and access required to provide the Board with an objective assessment of control effectiveness.

The Companys controls have been designed to address the risks inherent in a manufacturing business with significant international exposure including inventory management, trade receivables, foreign currency risk and data security. No material weakness in internal financial controls was identified during FY26. The Company continues to invest in strengthening its digital infrastructure, including real-time production monitoring through tablets installed at each manufacturing line, to enhance process control and management visibility.

In a further demonstration of its commitment to sustainable operations, the Company has commissioned a 750 kilowatt rooftop solar project at its Taloja manufacturing facility, which has led to reduction in electricity costs, dependence on non-renewable energy sources, and the Companys carbon footprint.

Financial performance

Income and profitability

In FY26, Aeroflex Industries delivered its strongest financial performance to date. On a consolidated basis, total income increased 17.0% year-on-year to 7443.29 crore, driven by steady growth in the assemblies segment, addition of new vertical of SFN skid assemblies and continued expansion across domestic and international markets. Revenue from operations grew to 7441.94 crore in FY26 from 7376.23 crore in FY25.

EBITDA rose 26.2% to 799.74 crore, with EBITDA margin expanding by 156 basis points to 22.6% from 21.0% in the prior year. This margin improvement reflects the benefits of operating leverage, an improving product mix toward higher-value assemblies and SFN products, and continued cost discipline across the organisation. Profit before tax stood at 774.08 crore. Profit after tax was 755.53 crore, a 5.8% increase over the prior year, moderated by higher depreciation charges arising from significant capital expenditure undertaken during the year. Cash profit, a more accurate reflection of the businesss cash earnings capacity, grew 27.9% to 781.60 crore, with a cash profit margin of 18.4%.

The Board of Directors has declared a final dividend of 20%, amounting to TO.40 per equity share of 72 face value each, for FY26. This reflects the Boards confidence in the Companys financial position, the quality of its earnings and its continued cash generation.

Balance sheet and capital efficiency

The Company maintained a robust, debt-free balance sheet as of 31 March 2026, with total equity of 7447.27 crore. Cash and bank balances (including fixed I deposits) stood at approximately 770 crore, providing ample liquidity to fund ongoing capacity expansion and working capital requirements without recourse to external debt. Total assets grew to 7565.02 crore from 7426.55 crore in the prior year, reflecting the capital expenditure I programme undertaken during FY26.

Net cash from operating activities grew strongly to 765.84 crore in FY26 from 726.58 crore in FY25, reflecting the operating profit improvement and disciplined working capital management. Net cash outflow from investing activities of 7119.98 crore reflect the Companys significant investment in capacity expansion across hoses, assemblies and other products. The Companys cashflow from financing activities was 746.83 crore during the year.

Key financial ratios (standalone)

Ratio	Numerator / Denominator	FY26	FY25	Change %	Remarks
Current Ratio	Current Assets / Current Liabilities	2.93	2.89	1.44	-
Debt-Equity Ratio	Total Debt / Total Equity	0.0024	0.0017	40.14	Company remains effectively debt-free
Debt Service Coverage Ratio	EBITDA / (Interest + Prinicpal Repaid)	202.54	283.24	(28.49)	Reflects negligible debt burden
Return on Equity	PAT / Avg. Shareholders Equity x 100	14.02%	16.34%	(14.19)	-
Inventory Turnover	Sales / Average Inventory	5.95	6.31	(5.64)	-
Trade Receivables Turnover	Net Credit Sales / Avg. Receivables	3.36	3.46	(2.94)	-
Trade Payables Turnover	Net Credit Purchases / Avg. Payables	3.78	3.98	(5.25)	-
Net Capital Turnover*	Revenue from Operations / Avg. Working Capital	2.87	3.18	(9.51)	-
Net Profit Ratio	(PAT / Total Income) x 100	13.35%	13.83%	(3.44)	-
Return on Capital Employed*	EBIT / Avg. (Equity + Long-Term Debt) x 100	20.40%	28.43%	(28.26)	Impacted by deployment of funds in capex and long- term working capital

*Excludes the impact of unutilised proceeds from the fund raise

Human resource development and industrial relations

Our people remain central to our growth journey. We continue to focus on attracting, developing and retaining talent through progressive people practices, capability- building initiatives and a culture that encourages learning, collaboration and innovation. During FY26, the Company strengthened its workforce to support growth across both established and emerging business segments, while investing in employee development through training and skill-enhancement programmes aligned to the technical demands of our expanding product portfolio.

Employee wellbeing, engagement and safety are our key priorities. We promote safe working practices, preventive healthcare initiatives and a positive workplace culture.

Our on-premise medical centre staffed by qualified nurses, equipped with dedicated examination and physiotherapy facilities, and supported by affiliations with Medicover Hospitals ensures that employees have access to quality healthcare. Regular mental health sessions, body composition monitoring, and a 24x7 standby ambulance further reflect the depth of our commitment to employee welfare.

The Company has been recognised as a Great Place to Work by the Great Place to Work Institute during the year, a recognition that affirms the quality of the workplace culture we are building. The Company also operates a Child Care Centre at its manufacturing campus to support employees with childcare and creche services.

Corporate social responsibility

Aeroflex views Corporate Social Responsibility as a core expression of its values as a responsible listed company. The Company administers its CSR activities through the SAT Foundation, the Aeroflex Groups CSR arm.

The Company fully discharged its CSR obligation for FY26 with no amount remaining unspent. Key initiatives undertaken during the year included nutritional support for abandoned and rescued children through Bal Asha Trust, distribution of school kits and educational supplies to tribal children in Vangao, provision of daily essentials to children in need through St. Anthony Home, and continued support for the reconstruction of Ashadham, a care facility for the elderly and differently challenged.

Cautionary statement

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied due to risks and uncertainties including fluctuations in earnings, our ability to manage growth, competition (both domestic and international), economic growth in India and abroad, ability to attract and retain highly skilled professionals, time and cost over-runs, government policies and regulations, interest rates, and other fiscal costs. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.