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 Center 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 and also qualifies the Company for offset programs. A number of international OEMs have significant offset obligations outstanding, and so the opportunity from offsets in the coming years is expected to continue to be considerable, with avenues likely to be available both in manufacturing and services.

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. Additionally, the company also holds approval from the Directorate General of Aeronautical Quality Assurance (DGAQA).

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.

Within the automotive sector, your Company continues to undertake projects to supply critical capital equipment to a significant number of the major automobile manufacturers across the country.

THE ECONOMY

After a year of relative stabilisation, the global economy in 2024 displayed mixed signals resilience in key markets was tempered by continuing geopolitical tensions, climate-related shocks, and divergent monetary policies. According to the International Monetary Fund (IMF), the global economy is estimated to have grown by 3.2% in 2024, maintaining the same pace as the previous year. While inflation moderated globally, growth remained uneven across countries and regions.

Advanced economies (AEs) such as the US remained relatively resilient, buoyed by a strong labour market and sustained domestic demand. However, Eurozone growth continued to be sluggish, weighed down by tighter monetary policy and structural challenges in economies like Germany and Italy. China implemented additional fiscal and monetary stimulus to counter its housing market slowdown and deflationary pressures, but growth remained moderate.

Inflation declined further in 2024 across most economies. Global headline inflation is estimated to have moderated to 5.0%, down from 6.3% in 2023 and the peak of 8.7% in 2022. The decline was supported by improved supply chain efficiency, stabilised commodity prices, and tight monetary policy. However, core inflation particularly in services remained sticky, underpinned by a strong labour market in several economies. Central banks in AEs largely kept interest rates elevated through much of 2024, though the European Central Bank (ECB) initiated rate cuts mid-year, becoming the first major central bank to do so after five years.

In contrast to many global peers, India continued to stand out as a major growth engine, defying global uncertainties. The Indian economy recorded 8.2% GDP growth in FY 2023 24, as per the Ministry of Finances Economic Survey, and is expected to grow at around 7.6% in FY 2024 25, driven by strong domestic consumption, rising private sector investment, and continued government push on capital expenditure.

Despite global headwinds, Indias macroeconomic fundamentals remained resilient. Inflation remained broadly contained, with

CPI averaging around 5.4%, although food price spikes due to erratic monsoon patterns and climate effects led to temporary surges. The Reserve Bank of India (RBI) maintained a cautious monetary stance, keeping repo rates unchanged through most of FY25 while anchoring inflation expectations and managing liquidity.

The governments continued push on public capex, manufacturing via Production-Linked Incentive (PLI) schemes, and digital infrastructure has positioned India as a major growth engine among emerging markets. However, external risks including global trade disruptions, energy market volatility, and geopolitical spillovers remain key watchpoints.

Looking ahead, the governments commitment to infrastructure development, the Production-Linked Incentive (PLI) schemes, and digital public infrastructure have collectively contributed to formalisation, improved productivity, and increased investor confidence, providing strong tailwinds for India to sustain its growth trajectory. However, risks from volatile global oil prices, external capital flows, and any escalation in geopolitical tensions remain key watch areas.

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 have renewed the urgency to build capability and capacity for Indias defence industry. 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 the worlds third largest armed forces, the Government of Indias (GoI) increase in the defence budget for 2024-25 to ~USD 78.8 billion also makes India the worlds third largest defence spender, behind the US and China. This amounts to nearly 2% of GDP, or 13% of government spending. Defence spending has remained between 13-14% of the Central Governments annual expenditure for six years running.

The overall defence allocation has increased by ~USD 6.85 billion, with an increase of 10% in the overall defence budget of FY 2025-26 as compared to the original budget of FY 2024-25, while the increase when compared to revised estimate of FY 2024-25 is ~6%.

The MoDs capital budget which caters for equipment acquisition and modernisation constitutes 27% of the defence allocation. Of this amount, approximately 80% is earmarked for equipment modernisation. The remaining amounts are earmarked for research & development (R&D), the creation of border infrastructural assets, and Coast Guard modernisation.

Relevant to note is that FY 2024-25s capital budget reflected a 7% shortfall in utilisation, with Revised Estimates at ~USD 18.4 billion versus a Budget Estimate of ~USD 19.88 billion. This underscores persistent implementation bottlenecks.

Of note, the Aircraft and Aero Engines segment received 27% of the total capital budget, with allocations growing from ~USD 4.66 billion to ~USD 5.62 billion a 21% year-on-year increase and a more modest ~4% increase over the FY25 Revised Estimates. These allocations likely support ongoing procurement of platforms such as the Tejas fighter aircraft, C-295 transport aircraft, and rotary-wing assets including Apache and Prachand helicopters.

The FY 2025-26 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 R&D has been increased to ~USD 1.73 billion a 13% rise over the FY 2024-25 Budget Estimate of INR

~USD 1.53 billion, and approximately 9% higher than the Revised Estimate of ~USD 1.58 billion. This signals the governments intent to back indigenous technology development through sustained fiscal support.

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

Further, revenue allocations for the military amount to 45% of the total defence allocation. Defence pensions add up to 23.60%. The pension budget supports approximately 34 lakh defence pensioners

The Agnipath scheme, launched to reform military recruitment and long-term personnel cost structure, has seen a notable increase in allocation. For FY 2025 26, total funding stands at ~USD 1.28 billion), reflecting an 85% increase over the previous years budget and 48% higher than the revised estimates. This increase signals both scaling of the program and 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 paint 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 defence sector. 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, released and made effective since October 2020, provided a comprehensive overhaul of the existing procurement policy framework. DAP 2020 has overhauled a number of procedural aspects with a view to improving the procurement cycle time while continuing to provide for significantly increasing the share of local purchases through prioritisation of clauses like "Buy IDDM," "Buy Indian," "Buy & Make (Indian)," and "Strategic Partnerships" (SP) ahead of global procurement options.

The sequential "positive indigenisation" lists, announced in ten phases thus far, 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 75% of the capital procurement budget for the domestic industry, as well as 25% of the defence R&D budget for private industry.

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 during the next decade India will buy close to USD 250 billion worth of fighter aircraft, radars, missiles and warships. Though it is difficult to reach a clear estimate on the value of offsets which will be involved with this huge Defence Import, nevertheless the offsets figures could well be above USD 30 billion. The implementation of this value of offsets is both a challenge and an opportunity for the Indian Defence industry.

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, three surprising aspects of the revamped offset policy as in the draft DAP 2020 are the exemption of procurements under the intergovernmental agreements (IGAs) from the application of the offset provisions and omission of offset banking, even as the list of eligible offsets avenues appears truncated, all of which are likely to have a negative impact on future opportunities through offsets.

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 next Financial Year (2025-26) is optimistic even considering the impact of the aforementioned uncertainties in the global economy. As discussed above, we expect that the combination of a continued increase in domestic defence spending and the opportunity from offsets aided by the 1.5x multiplier made available for MSMEs coupled with the balancing investments made in expanding your Companys operating base will provide us with 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, 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 10.97 times (FY 2023-24: 9.05 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 39.23 times (FY 2023-24: 22.43 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 0.23 times (FY 2023-24: 0.18 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 20.32% (FY 2023-24: 18.92%) 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.