Source Industries India Ltd Management Discussions

1. CORPORATE BACKGROUND

Arka Defence & Locomotives Limited ("ADLL" or "the Company"), formerly Source Industries (India) Limited, is a company listed on BSE Limited (CIN: L45400TG1984PLC004777) with a 42-year operating history. During FY 2025-26, the Company underwent a change in control, followed by a comprehensive redefinition of its business purpose, corporate name, and registered office. These changes were effected through due shareholder and regulatory approvals, and the Registrar of Companies, Hyderabad, issued a fresh Certificate confirming the Companys name change to Arka Defence & Locomotives Limited. The registered office was subsequently relocated to 1B, Meenakshi Tech Park, 11th Floor, Block C, Phase 2, Gachibowli, Hyderabad, to support the Companys engineering and administrative operations.

The controlling stake in the Company was acquired progressively through FY 2024-25 and FY 2025-26 by Mr. Sudhir Reddy Posireddy, Mr. Naraharisetty Mohan Krishna, Mrs. Ramreddy Swathi and Arka Defence Private Limited, with formal Board appointments effected on 28 July 2025 and regularised by shareholders at the 41st Annual General Meeting held on 27^th September 2025.

2. STRATEGIC REPOSITIONING

The Companys incoming promoters - Mr. Sudhir Reddy Posireddy, Mr. Naraharisetty Mohan Krishna and Mrs. Ramreddy Swathi, together with Arka Defence Private Limited - bring established, multi-year execution experience in railway signalling, safety systems and defence engineering, developed through affiliated group companies operating in these sectors. This pre-existing sectoral track record forms the basis for the Companys new strategic direction.

The incoming promoters have accordingly chosen to build and grow this business through the Company, with a clear focus on the railways and defence sectors, which they view as high-potential areas for longterm growth, following the discontinuation of the Companys erstwhile textile manufacturing business in conjunction with the change in control.

Accordingly, the objects clause of the Memorandum of Association was amended, with the approval of shareholders and regulators, to reflect the Companys business as one centred on railway and defence technology, and the Companys name was correspondingly changed to Arka Defence & Locomotives Limited.

3. STRATEGIC FOCUS AREAS

The Companys stated technology and business focus is organised around two verticals:

Railway Technologies: Rail Safety and Critical Sub-systems; design-automation for RFID and Kavach; application tools for signalling and rolling-stock engineering; yard management and yard safety systems; safety-critical systems engineering; high-speed rail technologies; and the application of artificial intelligence and machine learning to design, verification and validation processes in railway engineering.

Defence Technologies: Tactical systems and military applications, with a primary emphasis on indigenisation and the development of homegrown defence technologies. Building on the promoter groups

prior work in target simulation and mortar systems engineering and drawing on the promoters combined experience of over 15 years in this domain, the Company is currently engaged in exploring and packaging products for evaluation by the Indian Army, with the objective of establishing a portfolio of indigenised defence products over the coming years.

The Companys ambition is to establish itself as an intellectual-property-driven technology enterprise within these two sectors, rather than operate solely as a project-execution contractor.

4. LEADERSHIP AND MANAGEMENT EXPERIENCE

Mr. Sudhir Reddy Posireddy, Chairman and Managing Director: Holds a Masters degree from Florida International University, USA, in mechanical engineering with a specialisation extending into robotics. He has over 15 years of experience in the design, development and deployment of robotics and automation systems across the defence, railway and educational-robotics sectors, over a technology career spanning close to two decades. His experience spans the commercialisation of railway and defence technologies, including working within the certification and regulatory frameworks applicable to safety-critical railway systems and defence-grade equipment, and he has built and led technology development teams responsible for taking these systems from design through to field deployment. His role on the Board is centred on technology strategy and research and development leadership. Holds a 26.15% shareholding in the Company.

Mr. Naraharisetty Mohan Krishna, Whole-Time Director: A multi-venture entrepreneur with experience founding and scaling technology-led businesses across the education, railway and defence sectors. Holds a Bachelors degree in Electrical and Electronics Engineering from SASTRA University, with approximately two decades of experience in technology-led business development, with particular emphasis on the commercialisation of railway and defence technologies — translating engineering capability into biddable, certifiable and field-ready programmes. His experience includes working within the certification and regulatory frameworks governing railway safety systems and defence procurement, and building and leading technology development teams engaged in the design, development and deployment of robotics and automation systems across railway, defence and educational applications. His mandate on the Board covers technology commercialisation, market alignment and business development. Holds a 9.03% shareholding in the Company.

Mrs. Ramreddy Swathi, Whole-Time Director: Holds a Bachelors degree in Computer Science and Engineering from Jawaharlal Nehru Technological University, Hyderabad, and is an enrolled Advocate with experience in legal consulting and administration. Also serves as director of Arka Defence Private Limited and Sterling Corporate Consultants Private Limited. Holds a 23.59% shareholding in the Company.

The Board is further supported by independent oversight through Mr. Raja Suman Karingula and Mr. Raju Koyyala (Independent Directors) and Mr. Venkata Srinivasan Kodakalla, together with a dedicated Chief Financial Officer, Mr. Vishweshwara Rao Kothapalli.

5. BUSINESS MODEL

The Companys business model is structured around five components:

• Technology and IP development — creation and ownership of proprietary tools, software, hardware and intellectual property in railway and defence engineering.

• Project acquisition — competitive bidding for railway and defence technology contracts, the Integrated Infantry Mortar System, and the Multi-Mode Target Simulator.

• Services to railway administrations and OEMs — provision of engineering and technology services to railway operators and original equipment manufacturers, both domestically and internationally.

• Bottleneck-resolution positioning — establishing the Company as a preferred technology partner for solutions that address specific, recurring operational and engineering constraints within railway and defence programmes.

• Recurring revenue development — sustained investment in incremental research and design intended to convert project-based engagements into longer-duration, annuity-like revenue streams.

6. FIVE-YEAR STRATEGIC VISION (FY 2026-27 TO FY 2029-30)

The Companys vision over the five-year period to FY 2029-30 is to evolve into a technology-led railway and defence enterprise with a growing international footprint, anchored around the following areas:

Foreign Partnerships and Global Presence: The Company intends to pursue strategic partnerships, technology-licensing arrangements and joint ventures with international railway signalling and defence technology companies, with the objective of accessing global best practices, co-developing technologies, and establishing a presence in select international railway and defence markets over time.

Digital Twin Systems: The Company intends to build digital-twin capability for railway assets, signalling networks and safety-critical systems, enabling simulation-based design validation, predictive maintenance and lifecycle management — extending and reinforcing the design-automation and AI/ML capability referred to elsewhere in this Report.

High-Speed Rail Technology: As Indias high-speed rail programme advances, the Company intends to build engineering and technology capability relevant to high-speed rail signalling, safety and control systems, with a view to participating in this segment as opportunities emerge.

Agentic AI Applications: The Company intends to extend its AI/ML capability toward agentic AI applications — autonomous, decision-capable software systems — for use in railway design verification, safety monitoring, defect detection and operational decision support, building on the foundational AI/ML tools being developed for design, verification and validation.

Across this period, the Companys acquisition strategy is expected to remain an important lever for accelerating capability development in these areas, consistent with its objective of consolidating complementary technologies within the railway and defence technology space. This five-year vision reflects the Companys current strategic intent and remains subject to the availability of capital, regulatory approvals, technology readiness and commercial viability, as set out in the Cautionary Statement to this Report.

7. MARKET OPPORTUNITY

Railways Safety: The Railways Safety Critical Systems mandate covers the entire Indian Railways broad- gauge network of approximately 81,000 route-km, together with a further 3,300 route-km on the Dedicated Freight Corridor, taking the total addressable network to approximately 84,300 route-km. As of FY26, orders covering approximately 24,000 route-km had been awarded across the network — under 30% of the total addressable base — of which only around 2,569 route-km had actually been commissioned, indicating that a substantial share of execution remains pending even on contracts already placed. A further approximately 41,000 route-km of new turnkey (EPC) Railways Safety Critical Systems tenders are expected to be floated over FY27-29 (approximately 10,000 km in FY27, 15,000 km in FY28 and 16,000 km in FY29), with a residual opportunity of approximately 16,000 route-km projected beyond FY29.

Defence. Indias domestic defence production reached a record 1.78 lakh crore in FY 2025-26, representing 15.6% growth over the prior year, while defence exports rose 62.66% to a record 38,424 crore over the same period. The Government of India has articulated a target of 3 lakh crore in annual defence production by 2029, with a substantial associated increase in the exports component, under its broader defence indigenisation (Atmanirbhar Bharat) policy framework. This policy environment continues to favour domestic developers of tactical systems, simulation and training equipment, and specialised military applications.

These figures describe the Railway Safety and defence opportunities at an industry and national-network level, sourced from the Indian Railways website and government disclosures cited in Annexure I; they are general market data, not specific to any single vendor, and are not projections of the Companys own future revenue, market share or valuation. ADLLs own participation in, and revenue from, these opportunities will depend on its technology qualification, certification status (including RDSO approval) and competitive positioning.

8. FINANCIAL PERFORMANCE

(Standalone financials as per the Audited Financial Statements of the Company for the year ended 31 March 2026, forming part of the 42nd Annual Report)

The Company reported a net profit of 12.18 lakhs for FY 2025-26, against a Profit of 0.78 Lakhs in the preceding year, with revenue increasing approximately four-fold over the prior year. Standalone net worth increased to 442.22 lakhs as at 31 March 2026, from 430.00 lakhs as at 31 March 2025. The Companys paid-up share capital as at 31 March 2026 stood at 11,40,31,100, comprising 1,14,03,110 equity shares of 10 each, against an authorised share capital of 12,00,00,000. In view of the early stage of the Companys return to profitability, the Board has not recommended a dividend for the year, and no amount has been transferred to reserves.

The financial results for FY 2025-26 substantially reflect the residual operations of the Companys legacy business and the initial phase of the strategic transition described in this Report. The railway- and defence- focused business lines are expected to contribute more meaningfully to reported financial performance from FY 2026-27 onward, contingent on contract execution and capital deployment.

9. OPPORTUNITIES AND RISK FACTORS

Opportunities

• An estimated 41,000 route-km of new railway safety EPC tenders expected over FY27-29, against an awarded book of only ~24,000 route-km to date — a large pipeline for subsystems development is required.

• A recurring, non-discretionary on-board railway safety requirement created by the ~1,900 new locomotives Indian Railways commissions each year, independent of the pace of trackside rollout.

• Early-stage adoption of moving-block signalling and Yard Safety Management Systems on Indian Railways, where deployment is still limited relative to the scale of the network.

• Use of the Companys listed equity as currency to acquire niche, RDSO-qualified railway-technology companies, shortening the time to a certified, field-proven product portfolio.

• Government indigenisation targets for defence production creating sustained demand for homegrown tactical and simulation systems, an area where the promoter group has prior product experience.

• Multi-decadal recurring revenue potential from AMCs, software upgrades and modification mandates on railway safety systems once initial installations are commissioned.

Risk Factors

• RDSO approval and other certification processes for new products can take considerable time; delays would directly affect the pace at which the Company can bid for and execute railway technologies.

• Large railway and defence contracts are typically awarded to a limited panel of pre-qualified vendors; as a newly repositioned entrant, the Company will need to build a completed-project track record before it can bid competitively for the largest tenders.

• EPC and turnkey execution is working-capital intensive and often requires performance bank guarantees; the Companys ability to scale delivery will depend on continued access to growth and working capital.

• Acquisitions undertaken to build technology capability carry integration risk and require careful commercial and technical due diligence before completion.

• Revenue from newer initiatives — indigenised defence products, digital twin systems, high-speed rail technology and agentic AI applications — depends on successful technology development and customer or government acceptance and may take longer to materialise than currently anticipated.

• Dependence on the Companys ability to raise growth capital on acceptable terms to execute its stated strategy.

10. RISK MANAGEMENT FRAMEWORK

The Board has updated the Companys risk matrix to address engineering-specific; regulatory-compliance and extended-approval-cycle risks associated with the transition into defence and locomotive-component engineering. Risk-mitigation protocols are reviewed periodically by the reconstituted Audit Committee. As the business scales, the Companys risk-management framework is expected to evolve toward greater programme- and contract-level specificity, incorporating counterparty evaluation, technology-readiness assessment, certification timelines and capital-allocation discipline.

11. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has in place internal financial control policies governing financial reporting, fraud prevention and detection, and the integrity of accounting records, with M/s. MMRS & Co, Chartered Accountants engaged in this regard. Given the Companys transition into engineering-intensive and safety-critical domains, management intends to progressively strengthen internal controls relating to technology procurement, intellectual-property protection, contract and programme management, and capital allocation, in line with the scale of operations envisaged.

12. HUMAN CAPITAL

The Companys transition requires the progressive build-out of engineering, systems-design, programme- management and business-development capability commensurate with its stated technology strategy. Leadership responsibility under the current management structure is divided between technology and research and development, and business development and commercial execution, and the Company intends to expand its operating team in line with contract wins and the pace of technology development.

13. OUTLOOK

FY 2025-26 represents the year in which the Companys control, name, registered office and stated business purpose were formally changed, and in which the Company returned to profitability on a substantially expanded revenue base. The principal objective for FY 2026-27 is execution: pursuing Railway Safety Technologies, moving-block signalling and Yard Safety Management System opportunities, evaluating and, where appropriate, completing acquisitions of complementary railway-technology companies, and developing AI/ML-based design, verification and validation capability. The pace and scale of this execution will depend on the Companys ability to secure growth capital, win qualifying contracts, and integrate any acquisitions on commercially sound terms.

14. CAUTIONARY STATEMENT

Statements in this Management Discussion & Analysis relating to the Companys objectives, strategies, expectations, proposed initiatives, potential acquisitions and outlook may constitute forward-looking statements within the meaning of applicable securities laws and regulations. Such statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially, including the pace and outcome of government and defence-sector procurement processes, availability and cost of capital, execution risk associated with the Companys business transition, technology-development timelines, competitive conditions, and regulatory or policy changes affecting the railways and defence sectors. Nothing in this Report should be construed as a projection, forecast, or assurance regarding the Companys future financial performance, market capitalisation or share value. The Company undertakes no obligation to publicly update or revise any forward-looking statement, except as required under applicable law.

15. Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanation are described in notes to financial statements in this report.

ANNEXURE I - SOURCES FOR MARKET-OPPORTUNITY DATA

• Railway Safety network coverage, orders awarded, commissioning status and EPC pipeline (FY27- 29) - Indian Railways website and industry disclosures

• Locomotive addition rate and 100% on-board Railway Safety fitment mandate for newly manufactured rolling stock - Indian Railways/industry disclosures

• Estimated value of the Railway safety opportunity across Indian Railways and the Dedicated Freight Corridor - industry investor disclosures

• Defence production reaches record 1.78 lakh crore in FY 2025-26 - Press Information Bureau, Government of India

• Defence exports reach record 38,424 crore in FY 2025-26 - Press Information Bureau, Government of India

• Government target of 3 lakh crore in annual defence production by 2029 - currentaffairs.adda247.com