Setco Automotive Ltd Management Discussions

Financial Year 2025-26

FY26 represented a significant strategic transition for the Company. During the year, the Group continued to operate across clutch systems, fully machined castings and its international businesses while undertaking the transfer of control of Setco Auto Systems Private Limited (SASPL) to RSB Transmissions (India) Limited, an automotive-components platform backed by Bain Capital.

Following completion of the initial closing subsequent to the financial year, the Companys strategic focus has shifted materially. The principal continuing manufacturing platform is Lava Cast, supported by the operations in the United Kingdom and North America. The management agenda now moves from restructuring to performance, with emphasis on sustainable profitability, customer diversification, export development, cash generation and capital efficiency.

Industry Structure and Developments

Global economic environment

The global economy remained exposed to geopolitical tensions, trade-policy uncertainty, volatile freight and commodity markets, and uneven monetary conditions during FY26. Manufacturing supply chains continued to place greater emphasis on resilience, geographic diversification, delivery reliability and total delivered cost. These trends create both risk and opportunity for Indian engineering exporters: demand may remain cyclical, while customers increasingly seek qualified suppliers capable of providing consistent quality, traceability, engineering support and dependable supply.

Indian economy

India remained one of the faster-growing major economies, supported by public infrastructure expenditure, domestic consumption, manufacturing investment and improving logistics connectivity. These structural factors provide a constructive medium-term environment for commercial vehicles, tractors, construction equipment and auto components. Commodity prices, energy costs, interest rates, currency movements and global trade actions nevertheless remain important variables for manufacturing businesses.

Automobile and auto-component industry

The Indian automobile and auto-component industry continues to benefit from a large domestic vehicle parc, replacement demand, infrastructure-led freight activity, localisation by original equipment manufacturers (OEMs) and increasing formalisation of the aftermarket. Commercial-vehicle demand remains cyclical and is influenced by fleet utilisation, freight economics, financing availability and infrastructure activity. Suppliers are increasingly expected to combine engineering capability with cost competitiveness, quality consistency, rapid product development, traceability and dependable delivery.

The clutch and drivetrain aftermarket continued to offer recurring replacement demand during FY26. Within SALs FY26 reporting perimeter, SASPL served OEM, original-equipment-spares and independent-aftermarket channels. Following the post-year-end transfer of control to Bain Capital / RSB Transmissions (I) Ltd., the clutch platform will be developed within RSBs broader automotive-components strategy, while SALs continuing-business priorities shift toward castings and other permitted activities.

Casting industry and export landscape

Demand for fully machined cast components is linked to commercial vehicles, passenger vehicles, tractors, construction equipment, off-highway applications and industrial equipment. Global customers evaluate foundry partners on total delivered cost, metallurgical capability, machining depth, quality systems, product traceability, sustainability, energy intensity and continuity of supply. Indias engineering base and established export ecosystem support a long-term opportunity, although export programs generally involve extended customer-development, tooling, validation and production-approval cycles.

For Lava Cast, the opportunity is to move progressively from concentrated demand toward a diversified portfolio of domestic and export customers. Converting this opportunity will require sustained control over quality, yield, rejection, energy consumption, machining productivity, working capital and on-time delivery. The business will also need to build a disciplined order pipeline across customer engagement, RFQ, plant audit, tooling and development, prototype validation, production-part approval and serial supply. At LavaCast we are committed to continue to ensure our capacities are duly exhausted by the end of this FY 26-27.

Segment-wise / Product-wise Performance

Strategic portfolio transition - SASPL transaction

On 29 March 2026, SAL executed transaction documents for the proposed transfer of control of SASPL to RSB Transmissions (I) Limited, a Bain Capital-backed automotive-components platform. The transaction was designed to unlock value in the clutch business, provide SASPL with a scaled strategic platform for its next phase of growth, facilitate the exit of India Resurgence Fund from SASPL, and enable the listed company to sharpen its focus on its continuing businesses.

As at 31 March 2026, SASPL remained within the Groups FY26 reporting perimeter. Subsequent to the year-end, the initial closing was completed and Bain Capital / RSB Transmissions (I) Limited assumed control of SASPL. Accordingly, the FY26 consolidated financial and operational discussion includes SASPL for the period required under the applicable accounting framework, whereas the outlook section reflects the Companys post-transaction strategic direction. The accounting presentation, including any classification under Ind AS 105, should be read with the audited financial statements.

The transaction documents also contemplate continuing commercial arrangements between SASPL and Lava Cast, providing a base offtake relationship while Lava Cast develops external domestic and export customers. Detailed transaction terms are set out in SALs stock-exchange disclosures and the notes to the financial statements.

Clutch systems and allied products - SASPL (FY26 reporting perimeter)

During FY26, SASPL continued to serve the medium and heavy commercial vehicle market across OEM, original-equipment-spares and independent-aftermarket channels. Its portfolio included clutch assemblies and components, together with allied products distributed through its established channel network. Revenue and EBITDA for FY26 were Rs 738.96 crore and Rs 109.89 crore, respectively.

Operating priorities during the year included new-product development, market-share extension, aftermarket channel engagement, cost management, working-capital discipline and preparation for the ownership transition. Following completion of the transaction after year-end, SASPL is being integrated into RSBs broader automotive-components platform under the new controlling shareholder.

Lava Cast - continuing-business focus

Lava Cast is the principal continuing operating platform of the listed company and is engaged in manufacturing fully machined casting components. Building on the operational gains achieved in FY25, the FY26 agenda focused on equipment reliability, metallurgical and process controls, yield, rejection, energy intensity, machining productivity and development of external-customer business.

Demand across commercial vehicles, tractors, construction equipment, off-highway applications and selected industrial segments provides a meaningful addressable market for machined cast components. The Company intends to pursue this opportunity with a focus on technically qualified programmes, acceptable returns and disciplined cash conversion rather than volume alone.

For FY26, Lava Cast recorded revenue of Rs 87.78 crore and EBITDA of Rs 3.63 crore. Profitability remained below management expectations and the business reported a loss after tax.

Lava Cast export opportunity

The export strategy is centred on developing a qualified pipeline for fully machined cast components rather than pursuing volume without acceptable returns. Priority areas include commercial vehicles, tractors, off-highway equipment and selected industrial applications. The business intends to leverage its foundry infrastructure, machining capability, quality systems and export-supply experience to build long-duration customer programmes.

Key execution milestones for FY27 include expanding the target-customer funnel, progressing RFQs, completing plant audits and production approvals, converting development parts into serial orders, improving on-time delivery and ensuring that pricing reflects alloy, energy, machining, freight, tooling and working-capital economics. Export growth will be paced with quality, margin and cash-flow discipline.

Proposed merger of Lava Cast into SAL

During March 2026, SAL acquired the remaining equity interests in LCPL, making it a wholly owned subsidiary. On 23 March 2026, the Board approved a draft Scheme of Amalgamation for the merger by absorption of LCPL into SAL under Sections 230 to 232 and other applicable provisions of the Companies Act, 2013. The Scheme is subject to approval of the National Company Law Tribunal and other shareholders, creditor, lender, statutory and regulatory approvals, as applicable.

As LCPL is wholly owned by SAL, the Scheme does not contemplate issue of shares or payment of consideration and is not expected to alter the listed companys shareholding pattern. The proposed merger is intended to create a simpler listed operating structure, reduce managerial and compliance duplication, consolidate financial and operational oversight, improve capital allocation, reduce costs and present the casting business more transparently to stakeholders. Until the Scheme becomes effective, LCPL will continue to operate as a separate legal entity.

The Setco brand has been transferred pursuant to the SASPL transaction. Accordingly, Setco Automotive Limited has applied for a new name change to Shilayan Industries Limited and will operate under this name going forward post all approvals. The strategic objective is to build Shilayan as a focused engineering and manufacturing platform with Lava Cast at its core, supported by the Companys international operations.

International operations

The performance of the UK and North American subsidiaries remained below their potential during FY26. Managements objective is to improve sustainable profitability and cash generation through leaner cost structures, lower inventory, disciplined receivables, channel development and portfolio rationalisation rather than pursuing revenue growth alone.

United Kingdom subsidiary

Improving the Overseas Subsidiaries

The performance of our UK and North American subsidiaries remained below their potential during FY26, and improving their profitability and cash generation is a clear management priority. The response is centred on sustainable contribution, cash conversion and return on capital rather than revenue growth alone.

The UK subsidiary continued its transition toward a leaner, market-facing operating model. During FY26, management focused on cost rationalisation, inventory and working-capital reduction, customer continuity, distributor development and an asset-light warehousing and fulfilment model. Revenue and EBITDA for FY26 were Rs 28.42 crore and Rs (5.28) crore, respectively.

North American subsidiary

The North American subsidiary continued to develop the replacement market through distributor relationships and improvement in the hydraulics business. FY26 priorities included product availability, freight economics and contribution margins. Revenue and EBITDA for FY26 were Rs 59.60 crore and Rs (2.55) crore, respectively.

Across both overseas subsidiaries, the Companys focus is on sustainable profitability and cash generation rather than revenue growth alone. Product and brand alignment following the SASPL transaction will be managed in accordance with the transaction documents, customer requirements and applicable legal arrangements.

Outlook

SAL (till new name is applied) enters FY27 with a materially different portfolio and a clearer operating focus. The near-term priority is to complete the SASPL transition efficiently, progress the proposed LCPL merger, restore Lava Cast to sustainable profitability and build a credible pipeline of external domestic and export business. The pace of value creation will depend on execution discipline, customer qualification, plant utilisation, quality, energy efficiency, working capital and capital allocation.

Managements principal priorities for the continuing business are:

1. Complete the operational, accounting, legal, tax and stakeholder actions arising from the SASPL transaction while protecting the Companys rights under the transaction documents.

2. Drive Lava Cast toward sustainable profitability through higher utilisation, improved yield, lower rejection, better productivity, preventive maintenance, energy efficiency and disciplined procurement.

3. Diversify Lava Casts domestic customer base and convert identified export programmes through a stage-gated customer qualification and commercial process.

4. Progress the LCPL-SAL merger through the required regulatory and stakeholder approvals and prepare for orderly operational integration.

5. Improve the UK and North American subsidiaries through leaner cost structures, inventory and receivable discipline, channel productivity, portfolio rationalisation and explicit cash-generation milestones.

6. Maintain prudent liquidity, funding and capital-allocation discipline, with close monitoring of cash conversion, working capital and contingent transaction obligations.

The outlook remains subject to commercial-vehicle and industrial cycles, commodity and energy prices, currency movements, export demand, customer approvals, regulatory timelines and execution risks described below.

Risks and Concerns

The Board and management review key business risks and mitigation actions periodically. The principal risks relevant to FY26 and the continuing business are summarised below.

Internal Control Systems and Their Adequacy

The Group has a framework of internal financial and operational controls designed with reference to the nature, scale and complexity of its operations. The framework includes documented authority limits, maker-checker controls, periodic management reporting, budgeting and variance analysis, inventory and receivable controls, statutory-compliance monitoring and enterprise-system-enabled controls. The control environment is supported by internal audit and review by the Audit Committee.

During FY26, control attention included transaction-related approvals and documentation, closing and separation readiness for SASPL, inter-company balances, treasury and debt obligations, inventory accuracy, procurement, customer credit, capex, statutory compliance, and operational controls at Lava Cast. Control observations are tracked through agreed action plans and escalated based on materiality.

Based on managements assessment the internal financial controls were adequate as at 31 March 2026.

Discussion on Financial Performance with Respect to Operational Performance

FY26 consolidated results reflect the Groups operations for the year and the applicable accounting treatment of the SASPL transaction executed close to year-end. The audited financial statements should be the controlling source for all figures, classifications and explanatory commentary in this section. Management will increasingly assess the quality of future earnings through operating performance, cash conversion and capital efficiency in the continuing businesses.

Consolidated financial analysis

Rs crore, except percentages

Entity-level operational highlights Rs crore

Material Developments in Human Resources / Industrial Relations

The Groups people agenda during FY26 focused on safety, operating discipline, technical capability, quality ownership, productivity, succession, leadership continuity and communication through the SASPL ownership transition. At Lava Cast, capability building is particularly important in metallurgy, process engineering, maintenance, machining, quality assurance, energy management and export programme execution. The objective is to embed a culture of safety, accountability, quality ownership and continuous improvement.

Disclosure of Accounting Treatment

The financial statements have been prepared in accordance with Indian Accounting Standards (Ind AS) notified under the Companies (Indian Accounting Standards) Rules, 2015, as amended, and the relevant provisions of the Companies Act, 2013. The accounting treatment of the SASPL transaction, assets or disposal groups held for sale and/or discontinued operations, the proposed LCPL merger, exceptional items and transaction costs shall be as set out in the audited financial statements and notes thereto.

No treatment different from that prescribed in an applicable accounting standard has been followed, except as specifically disclosed in the financial statements together with managements explanation.

The Lava Cast debt, which was sanctioned and subsequently restructured during Financial Year 2025, was regularized and classified as a normal account during Financial Year 2026. Accordingly, the account is currently classified as a standard account in the books of the business.

Cautionary Statement

Statements in this MD&A describing the Companys objectives, projections, estimates, expectations or outlook may be forward-looking statements within the meaning of applicable securities laws and regulations. Actual results may differ materially due to economic conditions, demand cycles, commodity and energy prices, customer decisions, competition, technology, foreign exchange, financing conditions, regulatory approvals, transaction execution and other factors. The Company undertakes no obligation to update forward-looking statements except as required by law.