Samvardhana Motherson International Ltd Management Discussions

Continued technological innovation, policy support, and private- sector adaptability are expected to partially offset the impact of geopolitical uncertainties and structural shifts in the global economy.

India economic environment

India continues to distinguish itself as one of the fastest-growing major economies globally, supported by strong domestic fundamentals and a stable macroeconomic framework.

According to projections from the International Monetary Fund, Indias economy is expected to expand by around 6.5%, while the Reserve Bank of India projects a slightly higher real GDP growth of 6.6% in FY27, moderating from 7.7% in FY26, as outlined in its latest monetary policy communication.

Despite an uncertain global environment characterised by geopolitical developments, shifting trade dynamics and periodic energy and commodity price volatility, Indias growth outlook remains constructive. The countrys economic resilience continues to be underpinned by a large domestic market and favourable demographic trends, reinforcing its increasing significance within the global economic landscape. Domestic consumption has remained a key pillar of economic expansion, supported by rising income levels and the brought in rationalisation of indirect taxes under the Goods and Services Tax framework, including selective rate reductions and simplification across sectors, which has contributed to improving affordability and supporting consumption growth.

At the same time, investment activities, supported by high capacity utilisation, conducive financial conditions, healthy balance sheets of financial institutions and corporates, robust credit growth and the Governments continued thrust on capital expenditure, are expected to maintain their momentum. While services exports are expected to remain strong, the recent trade deals should also help diversify exports and strengthen the manufacturing sector. In parallel, global supply chain diversification is creating opportunities for India to further strengthen its role as a competitive production hub across sectors, including electronics, automotive components and industrial manufacturing.

Escalating geopolitical tensions in the Middle East have created near-term uncertainties for the global economy, primarily through potential volatility in energy prices, trade flows and financial markets. The Reserve Bank of India has highlighted that sustained increases in crude oil prices could exert pressure on inflation and external balances. However, Indias strong domestic demand, improving investment cycle and resilient macroeconomic fundamentals are expected to help cushion the impact and support continued economic growth.

Business environment

Macroeconomic factors and industry indicators

Our financial performance remains closely tied to sales of automotive components to global OEM customers across diverse sectors, including passenger and commercial vehicles, rail transport, off-highway machinery, and agricultural equipment. Our production levels are inherently linked to the vehicle production volumes of our OEM clients, and, as such, our operational and financial outcomes are influenced by broader economic and industry-specific factors.

Key macroeconomic drivers, including interest rate trends, commodity price movements, geopolitical risks, and fluctuations in material and labour costs, continue to shape the operating landscape. These factors not only impact our input costs and working capital requirements, but also the demand environment - especially in price-sensitive end-markets where vehicle affordability plays a crucial role in influencing buying decisions.

FY26 has been one of the most challenging and consequential years for the global automotive industry in recent memory. The year was shaped not by a single disruptive event but by a

convergence of structural forces and acute shocks " ^

- US trade tariffs that fundamentally reordered

global supply chains, a major geopolitical conflict in

the Middle East that disrupted energy and logistics

markets, persistent commodity cost pressure, and

the continued - if uneven - march of vehicle

electrification.

US Trade Tariffs: A structural realignment of the supply chain

The single most consequential development for the global automotive supply chain for the majority of FY26 has been the imposition of sweeping US trade tariffs under Section 232 of the Trade Expansion Act. Beginning 03 April 2025, a 25% tariff took effect on imported automobiles and a broad set of automotive parts - including engines, transmissions, powertrain components, and electrical systems. A separate 25% tariff on steel and aluminium imports also came into force. A baseline tariff of 10% on goods from all countries, with higher reciprocal levies on select markets, added further layering to the cost environment. The tariff regime was subsequently extended in October 2025 to cover medium and heavy-duty vehicles (25%) and buses (10%), with USMCA-compliant imports receiving partial or conditional relief. An import adjustment offset of 3.75% of aggregate vehicle MSRP was made available to US-assembling OEMs for a transitional period, declining to 2.5% from May 2026.

The financial toll on the global automotive industry has been significant. OEMs globally have collectively absorbed billions of dollars in tariff-related costs, with several announcing meaningful earnings downgrades. For Tier-1 suppliers and component manufacturers, the impact has been two- directional: direct cost escalation for goods exported to the US market, and indirect pressure through OEM production adjustments, sourcing realignments, and the accelerated reshoring of assembly activities to the United States. The tariff structure has also introduced the concept of stacking - where components crossing multiple borders accumulate cumulative duty exposure - increasing complexity in cost modelling and customer pricing negotiations. We are relatively well placed to

weather this storm, having always believed in and worked through our globally local strategy - setting up our plant in the vicinity of our customers. For whatever small impact we have on our supply, we have been actively working with our customers to assess product-level exposure, adapt our supply and pricing strategies, and identify tariff mitigation opportunities, including USMCA compliance optimisation and supply base localisation where economically viable.

The Iran conflict: An acute geopolitical and energy shock

In late February 2026, US-Israeli military operations against Iran triggered a sharp escalation in geopolitical risk with direct and immediate consequences for global energy markets, logistics, and automotive supply chains. Oil prices surged by more than 25% in the weeks following the outbreak of hostilities, exceeding USD 115 per barrel, as Iran targeted shipping in the Strait of Hormuz - a critical waterway through which approximately 20 million barrels per day of crude oil and oil products, along with a significant share of global LNG,

normally transit. The near closure of the strait disrupted supply from major Gulf exporters, including Saudi Arabia, the UAE, Iraq, and Kuwait, suspending shipments equivalent to over 100 million barrels of crude oil.

For the automotive industry, the conflict has created pressure across multiple dimensions. Energy costs for manufacturing operations have risen sharply, particularly in Europe, where natural gas prices nearly doubled after attacks on Qatari LNG infrastructure and where gas storage levels were historically low entering the conflict. Aluminium supply has been materially affected: Alba, the worlds largest single-site aluminium smelter located in Bahrain, declared force majeure on deliveries and curtailed output by approximately 19% after being unable to load shipments through the Strait of Hormuz. Shipping insurance premiums have risen, and logistics rerouting has extended transit times. The Middle East vehicle market - approximately 1.3 million units in FY25 - faces a meaningful near-term contraction, with regional light vehicle sales projected to decline to approximately

0.9 million units in FY27, with Irans domestic market particularly affected. Our operations are closely monitoring the conflicts evolution and actively managing energy procurement, supply chain rerouting, and customer communication to minimise disruption to our deliveries.

Commodity input costs: Structurally elevated, tariff-distorted

Commodity markets in FY26 have been characterised by structurally elevated prices, significantly compounded by both tariff-driven distortions and, in the latter part of the year, supply disruptions arising from the Iran conflict. Aluminium prices, which began FY26 at around mid-USD 2,500s per tonne, trended higher throughout the year, approaching USD 2,900 per tonne by year-end, driven by Chinas maintained production capacity ceiling, shrinking global inventories, and strong demand from the automotive, solar, and grid sectors. The Iran conflict has added a new and acute dimension, with Gulf-based aluminium capacity curtailed and European manufacturers facing surging energy input costs. Copper prices have similarly trended toward record nominal highs, with analysts expecting average prices between USD 11,000 - USD 14,000 per tonne in CY 2026, supported by persistent supply-demand imbalances, depleted exchange inventories, and the structural pull of electrification on demand.

The tariff environment has further distorted commodity trade flows, creating local price spikes and procurement complexity. Early in the fiscal year, the threat of US Section 232 tariffs on copper imports triggered a sharp premium of COMEX prices over the LME, drawing physical copper inventories into the US and creating temporary shortages elsewhere. The 25% US tariff on steel and aluminium has increased effective input costs for US-sourced materials and incentivised inventory prepositioning. We continue to pursue cost pass-through arrangements with our customers, deepen procurement diversification, and explore product-level engineering optimisation to manage the impact of elevated and volatile input costs.

Macroeconomic and monetary policy environment

The macroeconomic backdrop for FY26 has been shaped by a significant divergence in trajectory across our major operating regions, with the Iran conflict emerging as a late-year complication to central bank policy in several economies.

India has been a standout performer. Real GDP grew 7.7% in FY26 - among the fastest in recent years - driven by resilient domestic consumption, a healthy monsoon, fiscal stimulus through frontloaded capital expenditure, and the disinflationary benefit of food price correction and GST rationalisation. The Reserve Bank of India reduced the policy repo rate by a cumulative 100 basis points through the year, bringing it to 5.25% by December 2025, and held it at that level at the April and June 2026 meetings, assessing the impact of earlier cuts in a context of improving growth and benign inflation. Full-year CPI inflation for FY26 stood at 2.1%, a historic low, with FY27 CPI inflation projected upwards at 5.1% in the wake of commodity and energy inflation, still and well within the RBIs medium-term target band of 2%-6%. The RBI has revised Indias FY27 GDP growth forecast to 6.6%. This environment is supportive of domestic vehicle demand, consumer financing, and investment activity, though the Iran conflict introduces some upward risk to energy prices and the current account.

In the United States, the Federal Reserve cut rates three times in the second half of calendar year 2025, reducing the federal funds rate to a range of 3.50%-3.75% by December 2025 - a cumulative reduction of 175 basis points from the September 2024 peak. The Fed held rates steady at its January, March and April 2026 meetings, adopting a wait-and-see stance as it assessed the inflationary impact of rising oil prices following the conflict in Iran. Core PCE inflation is now expected to be 2.7% in CY 2026, above the 2% target.

In the European Union, the ECB completed eight rate cuts from June 2024 to June 2025, bringing the deposit rate to 2.0%. However, at its June 2026 meeting, the ECB raised rates by 25 bps to 2.25% citing renewed inflationary pressures due to the Middle East conflict. The ECB has reiterated a data-dependent and meeting-by-meeting approach as it assesses the evolving inflation and growth trajectories across the Eurozone.

Vehicle electrification: Consistent growth, powertrain pluralism

The trajectory of vehicle electrification continued to evolve in FY26, with consistent growth, though powertrain strategies became more pluralistic across OEMs and geographies. Global BEV sales grew approximately 18% year-on-year to about 13.9 million units in financial year 2025, reaching a 15.4% share of global light vehicle sales. For financial year 2026, BEV sales grew by approximately 22% to around 16.9 million units, representing close to 18.4% of global sales - an improvement in the rate of growth,

despite a maturing incentive structure in key markets, affordability constraints, and regulatory recalibration.

Another important theme of the year has been the continued traction of hybrid electric vehicles (HEVs and PHEVs). Major OEMs have substantially expanded their hybrid portfolios as consumer acceptance strengthens in the US, Europe, and India. In South Korea, for instance, production was revised upward, driven by strong demand for hybrid SUVs. The Iran conflict is also likely to accelerate consumer consideration of HEVs and BEVs in certain

markets seeking to reduce fuel cost exposure. In Europe, BEV market share reached approximately 14.9% in financial year 2026, with the regulatory debate on 2030-2035 zero-emission targets prompting discussion of a more graduated, technology-neutral transition path. China accounted for approximately 70% of global BEV production in financial year 2026, with their overseas footprint expected to grow. For component manufacturers, the evolving powertrain mix requires flexible manufacturing capabilities and product portfolios capable of serving ICE, hybrid, and BEV customers simultaneously.

Supply chain resilience under renewed stress

The supply chain environment has deteriorated meaningfully in the second half of FY26, after a period of relative stabilisation earlier in the year. The most acute new disruption has come from the Iran conflict, which has closed or substantially restricted access to the Strait of Hormuz - a critical node in global maritime trade through which significant volumes of automotive parts, raw materials, and finished vehicles transit. Shipping insurers have increased premiums on Gulf routes, logistics companies are rerouting cargo, and freight costs on affected lanes have risen sharply. For the automotive supply chain, which relies heavily on just-in-time delivery, extended transit times and route uncertainty add meaningful inventory and cost risk.

Earlier in the year, the tariff environment introduced a different form of supply chain stress: the risk of tariff stacking on crossborder component flows, pressure on USMCA compliance and content documentation, and a strategic impetus among OEMs to accelerate US manufacturing localisation. These dynamics have prompted a structural rethink of global network design, with resilience and robustness increasingly displacing pure cost optimisation as the primary criterion. Alongside these macro disruptions, a second-order semiconductor tightness also emerged in 2025, arising from a trade standoff affecting Netherlands-based chipmakers - a reminder that electronics supply chains remain structurally fragile. In our own operations, we have continued to strengthen supplier diversification, build inventory buffers for critical materials, and deploy multi-modal logistics solutions. The conflict in Iran reinforces our commitment to maintaining supply continuity for our customers as an absolute operational priority.

OEM industry stress and supplier landscape

The financial health of the global automotive industry has diverged sharply between OEMs and suppliers in FY26. OEMs have borne the brunt of stagnant volumes, elevated input costs, tariff exposure, and the capital demands of the electrification transition, with a considerable decline in their EBITDA margins. This compression has led to OEM production adjustments, model launch deferrals, and intensified pressure on supplier pricing. Automotive supplier distress metrics have, however, shown some improvement, with the share of suppliers in financial distress declining from approximately 31% in CY 2024 to approximately 24% in CY 2025, supported by effective cost management and pricing discipline. M&A activity

in the supplier sector has rebounded after historic lows in CY 2024, with deal volume increasing - particularly in the powertrain and electronics segments - as companies seek scale, technology alignment, and portfolio rationalisation. For us, this environment requires heightened customer engagement, transparent cost discussions, and a focus on the product categories where our value proposition is most differentiated.

Climate policy and ESG mandates

Sustainability regulation and ESG disclosure requirements continued to gain ground in FY26, though the pace and certainty of regulatory transition have become more geographically uneven. In the EU, the broader political debate around the achievability of 2035 ICE phase-out timelines is prompting recalibration, with the automotive package discussion centring on a more technology-inclusive path to decarbonisation. Despite this, mandatory ESG disclosure requirements under frameworks such as CSRD are expanding the scope of sustainability reporting across the value chain, including for suppliers. The Iran conflict, paradoxically, may accelerate the momentum toward electrification in some markets as consumers and policymakers respond to energy price volatility. In India, the governments PLI scheme, green manufacturing incentives, and EV ecosystem investment are reshaping procurement strategies and influencing OEM sourcing decisions. For us, alignment with customers decarbonisation goals, ESG compliance across markets, and investment in energy efficiency and renewable sourcing remain integral to long-term competitiveness and customer relationship management.