Sika Interplant Systems Ltd Management Discussions

COMPANY OVERVIEW

Sika Interplant Systems Limited (SIKA) is actively involved in four main areas, namely, engineering (design and development); manufacturing, assembly and testing; projects and systems integration; and maintenance, repair and overhaul (MRO). Additionally, your Companys in-house capabilities in technology development and production are complemented by tie-ups with international partners. The majority of our Companys business is catered to serving the Aerospace, Defence & Space (AD&S) and Automotive sectors.

Building on its established expertise in systems integration, documentation and certification, your Company continues to work on a number of prestigious Indian projects within the AD&S sector. Under these typically long gestation programs, SIKA offers its customers a combination of one or more of design, development, manufacturing, assembly, testing, certification, supply and integration of systems, and implementation of the projects. In addition, the Company has set up facilities to provide MRO for its own products and, with the backing of its customers, with foreign partners to provide MRO services for their AD&S products in India.

Your Company is one of the select private enterprises to have held design approvals from the Centre for Military Airworthiness and Certification (CEMILAC) continuously from 1999 through 2020. SIKA has also been granted an Industrial License for Defence production from the Government of India, which enables it to undertake these projects. Additionally, the company also holds approval from the Directorate General of Aeronautical Quality Assurance (DGAQA).

The Company has a professional and experienced team comprised of a variety of backgrounds to ensure that we focus on ensuring that products delivered are of the highest quality, matched by strong after-sales support. In line with this, during the last Financial Year your Company successfully maintained its AS9100 certification, which is a widely adopted and standardised quality management system for the aerospace industry globally.

In the past year, your Company has received recognition on multiple fronts. Your Company has been recognised by The Financial Times, the globally renowned business news publication, in the 2026 edition of its ‘High-Growth Companies Asia-Pacific, marking the fourth time the Company has been featured in the last nine years. Separately, SIKA has also been recognised by TIME, the iconic American news magazine, in the 2026 edition of its ‘Indias Fastest Growing Companies. Separately, your Company was awarded as the ‘Listed SME of the Year at the Economic Times MSME Awards 2025 held in New Delhi in March 2026.

In recent years your Company has been focused on building advanced facilities to expand its operational base to keep pace with the fast-paced development of the AD&S sector in India, and SIKA is well positioned to meet the requirements of both potential international partners and domestic projects.

THE ECONOMY

Calendar 2025 was shaped above all by a sharp escalation in trade protectionism. The United States announcement of sweeping "reciprocal" tariffs in April 2025 unsettled global trade, supply chains and financial markets, and set the tone for the year. Even so, the global economy proved more resilient than feared: according to the International Monetary Fund (IMF), it is estimated to have grown by around 3.3% in 2025, broadly matching the previous year, as continuing geopolitical tensions and divergent monetary policies were offset by steady labour markets and easing inflation. Growth, however, remained uneven across regions.

Supply-chain stress also re-emerged as the US-China trade conflict escalated. Most notably, Chinas export controls on rare-earth elements and permanent magnets first imposed in April 2025, widened in October, and then paused under a late-2025 truce, though the earlier restrictions and licensing regime remained in place disrupted supply to the automotive, electronics, semiconductor and defence industries worldwide, driving up prices and lengthening lead times for these critical inputs.

The United States remained relatively resilient on the back of a firm labour market and domestic demand, though momentum softened over the year as the weight of its own tariff regime and policy uncertainty began to tell; the US Federal Reserve resumed cutting interest rates in the latter part of 2025. The Euro area stayed subdued Germany was close to stagnation but a modest recovery took hold, aided by European Central Bank (ECB) easing and Germanys shift towards higher defence and infrastructure spending. China grew moderately at around 4.8%, weighed down by a prolonged property downturn and deflationary pressure, and leaned on fresh stimulus and a surge in exports to support activity.

Global disinflation continued through 2025, with headline inflation estimated to have eased to around 4.2%, down from about 5.0% in 2024 and well below the 2022 peak of 8.7%, supported by stabilised commodity prices and the lagged effect of earlier monetary tightening. The new tariff regime, however, introduced a fresh upside risk to goods prices, keeping central banks cautious. Having held rates elevated through 2024, most major central banks eased over the course of 2025 the ECB continuing its cutting cycle and the US Federal Reserve resuming cuts in the second half while signalling a measured, data-dependent approach given the uncertain trade backdrop.

Against this backdrop, India stood out as the worlds fastest-growing major economy. The Indian economy grew by an estimated 7.4% in FY 2025-26 (First Advance Estimates, National Statistics Office), up from 6.5% in FY 2024-25, with momentum building through the year second-quarter growth reached a multi-quarter high on the strength of resilient private consumption, a sustained government push on capital expenditure and a gradual revival in private investment. In a notable milestone, India overtook Japan during 2025 to become the worlds fourth-largest economy, at around USD 4.2 trillion, and is widely projected to move to third within a few years.

Indias macroeconomic fundamentals stayed firm, and inflation fell markedly. CPI inflation averaged around 2.5% well below the prior year and, for several months, at multi-year lows as a broad-based decline in food prices, rather than the food-price spikes of earlier years, became the dominant driver. With inflation comfortably within target, the Reserve Bank of India (RBI) front-loaded monetary easing, cutting the repo rate by around 100 basis points during FY 2025-26 (to 5.25%) alongside a reduction in the cash reserve ratio to support growth. Domestic demand received a further boost from a wide-ranging rationalisation of GST rates in September 2025. The rupee, however, came under pressure, weakening by roughly 5% against the US dollar over 2025 amid trade-deal uncertainty.

One of the most significant external developments for India during the year was the sharp deterioration in trade access to the United States. From August 2025, Indian exports faced US tariffs of up to 50% a 25% "reciprocal" duty and a further 25% penalty linked to Indias continued imports of Russian crude among the steepest rates applied to any US trading partner, pressuring export-oriented sectors such as textiles, gems and jewellery, and auto components. Following several rounds of negotiation, an interim India US trade understanding in early February 2026 reduced the effective tariff to around 18%, easing though not fully removing the strain. Other external risks, including energy-market volatility, capital-flow swings and geopolitical spillovers, remained on the watch-list.

West Asia was a further source of volatility. The June 2025 conflict between Israel and Iran which drew in direct US strikes and prompted Iranian threats to close the Strait of Hormuz briefly pushed oil prices around 20% higher, though a rapid ceasefire and well-supplied markets saw prices retreat, limiting the impact on India during the year. A renewed and more serious escalation in early 2026, with disruption to Hormuz shipping, drove oil sharply higher again towards the year-end. For India which imports close to 85-90% of its crude, a significant share of it sourced from the Gulf and transiting the Strait such episodes are a key channel of risk to inflation, the current account and the rupee, and remain a live concern into FY 2026-27.

Looking ahead, India appears well placed to sustain its growth trajectory. A supportive fiscal monetary mix, continued public capital expenditure, structural reforms GST rationalisation, Production-Linked Incentive (PLI) schemes and digital public infrastructure and favourable demographics have collectively improved productivity, deepened formalisation and lifted investor confidence. The principal swing factors remain the eventual shape of US trade policy towards India, global energy prices particularly given continuing West Asia tensions and the associated risk to Strait of Hormuz shipping and any broader escalation in geopolitical tensions.

INDUSTRY STRUCTURE AND DEVELOPMENT

Indias geopolitical scenario and compulsions, real or perceived, are continuing to drive the development of its A&D industry. The stand-offs seen in recent years on the Indo-China and Indo-Pakistan borders most recently Operation Sindoor in May 2025, Indias cross-border military response following the Pahalgam terror attack have renewed the urgency to build capability and capacity for Indias defence industry, while also serving as a live demonstration of indigenous systems under combat conditions. The geopolitical situation in South Asia and the Indian Ocean region, as well as the wider theatre of Southeast Asia and the South China Sea, has important implications for the defence sector.

The last decade has seen India emerge as one of the most attractive A&D markets in the world given the Ministry of Defences

(MoD) continued emphasis on modernisation of the armed forces, which is expected to result in capital expenditure of about USD 250 billion over the next 10 years. There is a broad acknowledgement that while the man behind the machine remains motivated, some machines being manned need an upgrade.

With one of the worlds largest armed forces by personnel strength, the Government of Indias (GoI) allocation to the defence budget for FY 2026-27 has risen to a record 7.85 lakh crore (~USD 82.6 billion) the highest-ever outlay and the largest of any ministry. India is also among the worlds largest defence spenders ranked fifth globally in calendar 2024 by the Stockholm International Peace Research Institute (SIPRI), behind the US, China, Russia and Germany. The allocation amounts to nearly 2% of GDP and about 14.7% of the Union Budget, with defence consistently accounting for around 13-15% of the Central

Governments annual expenditure.

The overall defence allocation has increased by about 1.04 lakh crore (~USD 10.9 billion), a rise of 15.2% over the Budget

Estimates of FY 2025-26 the sharpest increase in recent years, reflecting in part the emergency procurements undertaken in the wake of Operation Sindoor.

The MoDs capital budget which caters for equipment acquisition and modernisation constitutes about 28% of the defence allocation. Of this amount, the bulk is earmarked for equipment modernisation, with the remainder directed towards research & development (R&D), the creation of border infrastructural assets, and Coast Guard modernisation.

Notably, FY 2025-26 saw the capital budget fully utilised: the capital outlay was raised from a Budget Estimate of 1.80 lakh crore to 1.86 lakh crore at the Revised Estimate stage (~USD 19.6 billion), with overall defence budget utilisation of close to 99.6% a marked improvement on the utilisation shortfalls seen in earlier years, driven partly by post-Operation Sindoor procurement.

Of note, the Aircraft and Aero Engines segment was allocated 63,734 crore (~USD 6.7 billion) for FY 2026-27, up from 48,614 crore in the FY 2025-26 Budget Estimate a ~31% increase that reflects the priority placed on air power and standoff capability following Operation Sindoor. These allocations support ongoing procurement of platforms such as the Tejas (LCA) fighter aircraft, C-295 transport aircraft, and rotary-wing assets including Apache and Prachand helicopters, alongside sustainment of the Rafale fleet.

The FY 2026-27 defence budget underscores the governments continued emphasis on strengthening indigenous R&D and fostering innovation within the domestic defence ecosystem. A marked increase in funding for design-led initiatives, prototype development, and localisation efforts reflects a broader strategic shift toward self-reliance in critical technologies.

The capital outlay for defence R&D has been increased to 17,250 crore (~USD 1.8 billion), about 15.6% higher than the FY

2025-26 Budget Estimate, while the overall allocation to the Defence Research and Development Organisation (DRDO) has risen to 29,100 crore. This signals the governments intent to back indigenous technology development through sustained fiscal support.

Funding for Make category programmes has grown, further evidencing a stronger thrust on accelerating the development of locally designed systems through early-stage development and collaboration with Indian industry.

Further, revenue allocations for the military amount to about 47% of the total defence allocation. Defence pensions account for around 21.8% ( 1.71 lakh crore) and support approximately 34 lakh defence pensioners.

The Agnipath scheme, launched to reform military recruitment and the long-term personnel cost structure, has continued to receive increased allocation in FY 2026-27, reflecting both the scaling of the programme and its deeper integration within the tri-services recruitment framework.

Although resources allocations for national defence may appear somewhat deficient, a larger picture of cumulative resources devoted toward meeting all spectrum security challenges paints a different story. Resources for national defence (MoD), internal security (Ministry of Home Affairs), resources for military and security dimensions for atomic energy and space together account for a quarter of central government expenditure. Allocations for Jammu & Kashmir and Ladakh in recent years have added new dimensions as a reasonable amount of these will be spent for security purposes.

As India continues to be one of the top defence spending countries in the world, a dire need to reduce import dependency and enhance domestic production has been made a priority by the GoI. Moreover, India has one of the highest numbers of active military personnel in the world. Equipping such a large force with the latest technology is one of the key challenges that the military planners face today.

The GoI, over the past few years, has demonstrated its commitment towards the development of indigenous defence manufacturing capabilities by launching and promoting the ‘Make in India initiative in the defence sector. These efforts are bearing fruit: domestic defence production reached a record 1.54 lakh crore in FY 2024-25 (up from 1.27 lakh crore a year earlier), with the Government targeting 3 lakh crore of production by 2029. It has been highly encouraging to see the strides being made towards this goal through a series of policy amendments and reforms that on one side lower entry barriers and ease the process of teaming between foreign OEMs and Indian entities, and promote Indigenously Designed, Developed and Manufactured (IDDM) products and marching towards level playing field across segments of Indian Industry.

OPPORTUNITIES AND THREATS

The countrys Defence expenditure has been punctuated by big-ticket deals and modernisation programs, the latter in response to the urgent need to enhance the deterrent and operational capabilities of the armed forces through upgradation/modernization of existing equipment, as well as additional acquisitions of ‘state of the art equipment. The large scale of the market provides a significant opportunity for foreign original equipment manufacturers (OEMs), Indian industries and SMEs.

The need for a self-reliant Defence sector and a sharp focus on minimising dependence on imports is seeing the continued opening up of the sector for private participation. In 2001, the government opened this sector to private and foreign investors and set a challenging target of achieving 70% indigenisation. This focus on indigenisation should continue to gather pace, with the current government continually re-emphasising the importance of this endeavour, including with respect to the bigger picture of

‘Make in India.

In line with this, the defence sector has continued to witness several policy reforms over the last few years. Building on the Prime Ministers call to build an Aatmanirbhar Bharat, has resulted in several initiatives from the GoI / MoD:

Defence Acquisition Procedure (DAP) 2020, effective since October 2020, provided a comprehensive overhaul of the procurement policy framework, increasing the share of local purchases through prioritisation of categories like Buy IDDM, Buy Indian, Buy & Make (Indian), and Strategic Partnerships (SP) ahead of global procurement options.

Building on this, the MoD released the draft Defence Acquisition Procedure (DAP) 2026 in February 2026 for industry and stakeholder consultation; once notified, it will replace DAP 2020 and further sharpen the Make-in-India thrust reducing the procurement categories from five to four, institutionalising preference for Buy (Indian-IDDM), raising indigenous-content thresholds, introducing technology-readiness-based and long-term bulk acquisition routes, and shifting emphasis from Made in India towards Owned in India through indigenous design and IP ownership.

The sequential "positive indigenisation" lists, announced in successive phases five each by the Department of Military Affairs and the Department of Defence Production, together covering several thousand items pertaining to import of both equipment/platforms as well as systems/sub-systems has underlined the ‘Atmanirbhar goal of the government as the cornerstone of defence procurement policy.

Implementation of important policies such as restriction on global tenders for government procurement up to INR 200 Cr, separate budget for domestic capital procurement, liberalisation of foreign direct investment procedures, and rationalisation of General Staff Qualitative Requirements and testing requirements will add further fillip to the participation of the Indian industry including MSMEs.

Earmarking of roughly 75% of the modernisation (capital acquisition) budget for the domestic industry about 1.39 lakh crore for FY 2026-27 along with 25% of the defence R&D budget for private industry, start-ups and academia.

Private industry is also being encouraged for design and development of defence platforms and equipment in collaboration with government-owned defence organisations through the SPV (special purpose vehicle) route.

To spur innovation and development of next-generation technologies, the MoD has established the iDEX, or Innovation for Defence Excellence, program.

It is estimated that over the next decade India will procure close to USD 250 billion worth of fighter aircraft, radars, missiles, warships and allied systems. Historically, the associated offset obligations were viewed as a significant opportunity for Indian industry; however, the policy emphasis has shifted, and the draft DAP 2026 is expected to further de-emphasise the offset route in favour of direct indigenisation, co-development and indigenous content reflecting the progression within Indias domestic defence industrial base.

Most of the threats to the domestic A&D industry are rooted on the policy front. These include slippages on the fiscal front, lengthy procurement and evaluation processes, controversies related to corruption and disputes over shortlisting in competitive bids. These will serve to delay acquisition plans of the armed forces and impact timing of execution of already long-dated projects.

For example, on the fiscal front, with respect to the allocation for capital expenditure in the budget, a significant proportion of that is devoted to existing obligations and committed liabilities, leaving little room for new procurements. A Business Standard analysis of defence capital allocations during the preceding decade reveals that defence capex has risen by barely 5% annually in real terms; this rise is further eroded when accounting for inflation and currency fluctuations.

Similarly, while the draft DAP 2026 seeks to simplify procurement categories and accelerate timelines, its eventual impact will depend on execution historically, models such as the Strategic Partnership route and Make-I have seen limited maturation, and the phasing-down of offsets removes one avenue that had previously been available to domestic industry.

Further, given the nature of the A&D business, the products and systems involved are typically of complex advanced technologies, often resulting in the approval and certification cycle extending for materially longer than originally planned. This can result in delays in production orders and consequent deliveries, affecting the timing of revenues.

OUTLOOK

The overall outlook for the next Financial Year (2026-27) is optimistic, even allowing for the aforementioned uncertainties in the global economy. As discussed above, we expect that the combination of a continued increase in domestic defence spending, the reservation of a large share of the capital procurement budget for Indian industry, and the heightened demand signals following Operation Sindoor coupled with the balancing investments made in expanding your Companys operating base will provide a solid platform for sustained and consistent growth in our business over the medium term.

RISKS AND CONCERNS

Any delays from the MoD in the execution of AD&S projects associated with it, shortfalls in planned Defence outlays, adverse changes to government policy, etc. could directly have a direct impact on the activities of the Company and consequently on its revenues. Further, as many of these projects are initiated by the MoD driven by its own policies and priorities, the continued progression of these into long-term programs with a definitive quantum of orders depends largely on the governments decisions. This results in an uneven and skewed pattern of sales for the Company, which is beyond the control of the Company.

Similarly, any material rejig of the governments spending priorities could have a knock-on effect on the activities of the Company and consequently on its revenues.

Also, your Companys increasing exposure to international markets brings with it inherent risks like Foreign Currency Risk and Interest Rate risk. In addition, there are various external risk factors like a prolonged slowdown in India and/or the global economy, change or delay in domestic economic reforms, political instability, hostilities, disruptions to global supply chains and cross-border trade (including tariff and export-control measures), natural disasters, pandemics, terrorist attacks, civil unrest and other acts of violence could adversely affect the financial markets and our business.

INTERNAL CONTROL SYSTEMS AND ADEQUACY

We believe the Company has a proper and adequate internal control system commensurate with the size and scale of its operations to in place to ensure that all activities and transactions are monitored, authorized, recorded and reported correctly. An Internal Audit system is in place to conduct a regular check and review of accounting methodologies with a view to improving the control systems. The Audit Committee of the Board of Directors has appraised the adequacy of internal controls.

SEGMENT WISE PERFORMANCE

The Company is primarily engaged in the business of manufacturing and rendering of services in engineering products, engineering projects/systems, and services. (Core-Business).

Over the years, the management has evaluated proposals for engaging in other businesses, not necessarily being an extension of the Core Business. The Company owns undeveloped/partially developed land in Indiranagar and Bommasandra, the latter partly being used for its Core Business. To enable focused growth of its Core Business, the Company is continuing to evaluate segregation of its Non-Core Business.

HUMAN RESOURCES

Human Resources (HR) remained a key focus area for your Company during the year under review. Various HR initiatives are taken to align the HR policies to the requirement of the business. The Company provides employees with a fair and equitable work environment and support to develop their capabilities. We are also focused on bringing in new talent and competencies to aid the Companys growth strategy.

COMPANY PERFORMANCE

As can be seen from the financial results forming part of this report, both the Company‘s turnover and net profit increased year on year. Your Companys continued robust growth was driven by the positive returns from a continued sharp focus on customers combined with strong program management resulting in the timely execution of major orders.

DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

1. Debtors turnover ratio of the Company improved to 9.80 times (FY 2024-25: 10.97 times) on account largely due to the combination of an increase in turnover together with a continued focus on recovering trade receivables.

2. Inventory turnover ratio of the Company improved to 46.22 times (FY 2023-24: 39.23 times) primarily due to the combination of a relatively higher execution of short-dated projects combined with completion of some projects that had in the previous year(s) experienced execution delays driven by slower-than-expected customer / regulatory authority project-specific approvals.

3. The debt equity ratio of the Company declined slightly to 0.13 times (FY 2023-24: 0.23 times), driven mainly by dispatches made by suppliers towards the end of the financial year resulting in a significant increase in total outstanding dues of creditors.

4. Return on Net Worth of the Company improved slightly to 23.57% (FY 2023-24: 20.32%) on account of an increase in the profitability and overall improvement in performance of the company that resulted in a higher return on net worth.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, figures, expectations and predictions may constitute "forward-looking statements" within the meaning of applicable laws and regulations.

Actual results might differ materially from those expressed or implied.

The company assumes no responsibility in respect of forward-looking statements herein which may undergo changes in future on the basis of subsequent developments, information or events.