Highness Microelectronics Ltd Management Discussions

1. Economy and Industry Overview

1.1 Macroeconomic Backdrop

India continued to be among the fastest-growing major economies during FY 2025-26, supported by resilient domestic consumption, sustained public capital expenditure, and a policy environment favouring manufacturing localisation. The Governments continued emphasis on the Atmanirbhar Bharat¹ (self-reliant India) initiative, defence indigenisation, and Make in India programmes provided strong tailwinds for domestic electronics manufacturing services (EMS) companies such as Highness Microelectronics Limited ("HML" or "the Company").

The Production Linked Incentive (PLI) scheme for electronics manufacturing, the Electronics Component Manufacturing Scheme (ECMS), and enhanced defence indigenisation mandates (including revised positive indigenisation lists issued by the Ministry of Defence) have collectively expanded the addressable opportunity for domestic precision electronics manufacturers catering to strategic sectors.

1.2 Electronics Manufacturing Services (EMS) Industry

The Indian EMS industry has continued its multi-year growth trajectory, driven by global supply-chain diversification away from single-country dependence, rising domestic demand for electronics across defence, railways, healthcare, and industrial automation, and increasing outsourcing of manufacturing by Original Equipment Manufacturers (OEMs) to specialised contract manufacturers. Indias EMS sector benefits from a large pool of engineering talent, improving component ecosystem depth, and government incentives that reduce the cost disability historically faced relative to South-East Asian and Chinese manufacturing hubs.

• Defence electronics : Continued push for indigenisation, higher indigenous content mandates in defence procurement, and increased private-sector participation in previously PSU-dominated segments.

• Railways and transportation : Modernisation of rolling stock, signalling systems, and the Vande Bharat / Kavach programmes have expanded demand for ruggedised electronics and control systems.

• Healthcare electronics: Rising domestic medical device manufacturing, supported by PLI for medical devices, and growing demand for indigenous diagnostic and monitoring equipment.

• Industrial electronics : Steady demand from automation, power, and general industrial capital expenditure cycles.

1.3 Opportunities and Threats

Opportunities:

• Expanding defence indigenisation and higher domestic sourcing mandates for electronics sub-systems.

• Government incentives under ECMS/PLI for component and sub-assembly manufacturing, including the Companys proposed green field facility in Goa.

• Import substitution opportunities as OEMs seek to de- risksupply chains previouslydependenton imports.

• Growing railways modernisation capex supporting demand for ruggedised and safety-critical electronics.

Threats:

• Elongated receivable cycles typical of government and quasi-government procurement, increasing working capital intensity.

• Volatility in prices and availability of critical electronic components and semiconductors sourced globally.

• Competitive intensity from larger, better-capitalised EMS players and potential new entrants attracted by policy incentives.

• Currencyand geopolitical risks affecting import content of raw materials and components.

2. Company and Business Overview

Highness Microelectronics Limited is a precision electronics manufacturing company headquartered at Mumbai, with manufacturing operations spread across its Unit I and Unit II facilities. The Company designs and manufactures electronic sub-systems, assemblies, and components for four principal end-markets : Defence, Railways/Transportation, Healthcare, and Industrial. HMLs shares are listed on the BSE SME platform.

The Companys business model combines build-to-print and build-to-specification manufacturing with in-house design and engineering support, enabling it to serve mission-critical and safety-critical applications that demand stringent quality, traceability, and reliability standards. HMLs customer base includes established players in the defence and railways ecosystem, reflecting the Companys positioning as a trusted precision manufacturing partner rather than a purely transactional contract manufacturer.

2.1 Business Segments

• Defence & Aerospace : Precision electronic sub- assemblies and systems for defence platforms, benefiting from indigenisation-led demand.

• Railways & Transportation : Ruggedised electronics and control systems supporting rolling-stock modernisation and signalling upgrades.

• Healthcare : Electronic assemblies for diagnostic, monitoring, and medical device applications.

• Industrial: General-purpose industrial electronics and automation-related assemblies.

Segment	FY26 Revenue Share	% of Sales	FY25 Revenue Share	% of Sales
Defense & Aerospace	63,795.09	39.58%	42,202.50	29.99%
Railways &Transportation	43,649.09	27.08%	4,178.26	2.99%
Healthcare	42,985.96	26.67%	24,431.67	17.57%
Industrial	10,761.74	6.68%	69,471.24	49.45%

3. Financial Performance Review

3.1 Standalone Financial Highlights

HML delivered a strong financial performance in FY 2025-26, with revenue from operations rising 14.5% year- on-year to T1 ,611.92 lakh from an estimated T1,407.79 lakh in FY 2024-25, and profit after tax growing 67.0% year-on-year to ^410.40 lakh, reflecting operating leverage, a favourable product/segment mix, and disciplined cost management. The disproportionate growth in PAT relative to revenue indicates margin expansion during the year, aided by improved capacity utilisation at the Rabale units and a richer mix of higher- value defence and railways orders.

Segment	FY26 Revenue Share	% of Sales	FY25 Revenue Share	% of Sales
Defense & Aerospace	63,795.09	39.58%	42,202.50	29.99%
Railways &Transportation	43,649.09	27.08%	4,178.26	2.99%
Healthcare	42,985.96	26.67%	24,431.67	17.57%
Industrial	10,761.74	6.68%	69,471.24	49.45%

3.2 Working Capital and Cash Conversion Cycle

The Companys Days Sales Outstanding (DSO) stood at approximately 235 days during FY 2025-26, and the net cash conversion cycle stood at approximately 323 days. These metrics reflect the elongated payment cycles characteristic of the Companys defence, railways, and government-linked customer base, where procurement processes, inspection protocols, and payment approvals typically extend the collection period well beyond that seen in commercial/industriaI electronics manufacturing.

Management recognises the receivables position as the primary operational focus area going into FY 2026-27. Elongated receivables tie up working capital and increase reliance on external financing to fund the operating cycle, which in turn has a bearing on finance costs and net margins. The Company is undertaking the following measures to address this:

• Structured follow-up and escalation mechanisms with key defence and railways customers, supported by bi weekly sales review frameworks introduced during the year.

• Evaluation of supply-chain financing / bill discounting facilities to bridge the gap between execution and collection.

• Closer coordination with customers inspection and billing cycles to reduce documentation-related delays.

• Selective evaluation of customer concentration and credit terms in new order acceptance.

3.3 Capital Structure and Funding

During the year, the Company continued to evaluate its capital structure to support its growth and capacity expansion plans, including consideration of preference share issuance and structured debt instruments (including non-convertible debentures) as potential funding avenues alongside internal accruals. The objective is to maintain an optimal mix of equity and debt that supports the Companys working-capital- intensive operating model while preserving return on equity for shareholders.

4. Operational Highlights

4.1 Manufacturing Infrastructure

The Companys manufacturing operations are based at Rabale, Navi Mumbai, comprising Unit I and Unit II. During the year, the Company expanded insurance coverage for machinery and equipment across both units, reflecting the growing asset base and managements continued focus on risk mitigation for critical manufacturing infrastructure.

4.2Goa Greenfield Facility and ECMS Application

The Company has initiated steps toward establishing a greenfield electronics manufacturing facility in Goa under the Electronics Component Manufacturing Scheme (ECMS) of the Government of India. HML engaged Edgrise Consultants (Delhi) to represent the Company before the Ministry in connection with Section D eligibility under the scheme. This facility, if approved and commissioned, is expected to expand the Companys manufacturing capacity and strengthen its positioning in the component and sub-assembly manufacturing value chain, consistent with the broader policy push toward electronics component indigenisation.

In parallel, the Company assessed its eligibility under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme to evaluate collateral-free credit support for its expansion plans.

4.3 Commercial Contracts and Governance

During the year, the Company undertook a structured review of its commercial purchase and sales terms and conditions, benchmarking these against applicable Indian contract law and GST provisions, with a gap analysis to strengthen contractual risk management, particularly around liability caps, indemnities, and tax pass-through clauses in customer and vendor agreements.

5. Human Resources

HML continues to invest in building a skilled workforce capable of meeting the stringent quality, traceability, and reliability requirements of defence, railways, and healthcare customers. The Companys employee relations remained cordial during the year, and management continued to focus on strengthening internal sales and operational review cadences, including the introduction of bi-weekly sales review frameworks to improve accountability and forecasting discipline.

6. Internal Control Systems and Their Adequacy

The Company has in place internal control systems commensurate with the size, scale, and nature of its operations, covering financial reporting, procurement, inventory management, and statutory compliance. These controls are periodically reviewed to ensure they remain adequate for the Companys growing scale of operations, including the increasing complexity introduced by defence and government contracting requirements. The Audit Committee of the Board periodically reviews the internal control framework, along with the internal audit functions findings and managements remedial actions.

7. Risks and Concerns

• Working capital days stood at 90 during the year, the elongated DSO of 235 days is a function of the payment cycles inherent to the companys government, defence and railways customer base, and is offset through active management of inventory and payables, keeping overall working capital efficiency within a manageable range.

• Customer concentration : Reliance on a limited set of large defence and railways customers/OEMs exposes the Company to order timing and concentration risk.

• Component supply and pricing risk : Dependence on globally sourced electronic components exposes the Company to price volatility, allocation constraints, and lead-time risk.

• Execution risk on capacity expansion : Timely receipt of ECMS approval and execution of the proposed Goa greenfield facility carries regulatory and project- execution risk.

• Regulatory and compliance risk : Operating in defence and railways segments subjects the Company to stringent quality certifications, security clearances, and regulatory compliance requirements.

• Interest rate and funding risk : Working-capital- intensive operations make the Company sensitive to interest rate movements and availability of bank/NBFC credit lines.

• Competition risk : Increasing policy-driven interest in EMS/defence electronics manufacturing may attract larger and better-capitalised competitors.

8. Outlook

Management remains cautiously optimistic about the Companys growth prospects, underpinned by continuing defence indigenisation, railways modernisation, and healthcare electronics demand, alongside the potential capacity expansion through the proposed Goa facility under the ECMS scheme. The immediate priority for FY 2026-27 is to improve working capital efficiency and reduce the cash conversion cycle, while continuing to grow the order book across all four business segments. The Company will continue to evaluate its capital structure to ensure it has adequate, cost-effective funding to support both working capital needsand capacity expansion plans.

9. Cautionary Statement

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations, or predictions may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include raw material and component availability and prices, changes in Government regulations, tax laws, economic developments, and other incidental factors. The Company assumes no obligation to publicly update or revise any forward- looking statements, whether as a result of new information,future events, or otherwise.

MATERIAL ORDERS OF JUDICIAL BODIES / REGULATORS

No significant or material order has been passed by any Regulator, Court or Tribunal during the financial year ended 31st March 2026 which could impact the going concern status and companys operations in future.

IBC CODE & ONE-TIME SETTLEMENT

There is no proceeding pending against the company underthe Insolvency and Bankruptcy code, 2016 (IBC Code). There has not been any instance of one-time settlement of the company with any bank or financial institution.

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION & REDRESSAL) ACT, 2013:

Companys commitment towards creating a respectful workplace that is free from any form of harassment and discrimination is exemplified by its zero-tolerance approach towards any act of sexual harassment. The Company has a comprehensive policy which is in compliance with the provisions of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 which is available atthe website of the Company

https://hiahnessmicro.com/. A group level Internal Complaints Committee ("ICC") has been constituted as per procedure prescribed in the law. All such investigations are conducted as per the tenets of the law and the Companys policy. The list of ICC members has been prominently displayed in the office. Following are the details of sexual harassment cases for financial year 2025-26:

Number of complaints filed during the Financial Year	NIL
Number of complaints disposed off during the Financial Year	NIL
Number of complaints pending as at the end of the Financial Year	NIL

We also hereby confirm that during the year under review the Company has duly complied with the provisions of the Maternity Benefit Actl961.

ADEQUACY OF INTERNAL FINANCIAL CONTROL

The Internal Financial Controls with reference to financial statements as designed and implemented by the Company are adequate as per the nature of the business and the size of its operation.

During the year under review, no material or serious observation has been received from the Internal Auditors of the Company for inefficiency or inadequacy of such controls.

COMPLIANCE WITH SECRETARIAL STANDARDS

The Company has Compiled with the applicable requirements as prescribed under the Secretarial Standards on Meetings of the Board of Directors (SS- 1) and General Meetings (SS-2) read with the relevant provisions of the Companies Act, 2013 and Circu la rs/N otifications issued by Ministry of Corporate Affairs in this regard.

ACKNOWLEDGEMENT

Your Directors take this opportunity to express and place on record their appreciation for the continued support, cooperation, trust and assistance extended by shareholders, employees, customers, principals, vendors, agents, bankers, financial institutions, suppliers, distributors and other stakeholders of the Company.