Swan Defence and Heavy Industries Ltd Management Discussions

a. INDIAN MARKET OUTLOOK

India?s sustained economic momentum in FY 2024–25 reafirmed its position as the world?s fourth-largest economy, supported by structural reforms, robust domestic demand, and a conducive investment environment. With real GDP growth at 6.5% and nominal GDP reaching 331.03 lakh crore, India remains one of the fastest-growing major economies. This positive macroeconomic backdrop, along with continued emphasis on infrastructure development and industrial growth, provides a strong foundation for sectors such as shipbuilding and maritime logistics.

This economic momentum has been driven by the Government?s strategic push under the Aatmanirbhar Bharat initiative, higher public capital expenditure, and a strong focus on productivity-led growth across core sectors such as infrastructure, defence, engineering, and electronics. India?s export performance remained resilient, reaching a record USD 825 billion, with engineering goods and services exports emerging as key contributors. Foreign Direct Investment (FDI) continued to flow steadily, crossing USD 1.05 trillion cumulatively, while equity inflows rose by 27% in the first nine months of FY 2024–25, reflecting sustained global investor confidence in India?s long-term growth potential and policy stability.

Amid this growth landscape, the shipbuilding and maritime sector has gained strategic significance, aligned with the Maritime Amrit Kaal Vision 2047, which envisions India becoming a top global shipbuilding hub. The growing demand for indigenous defence platforms, port-led industrialisation, and green maritime logistics is expected to further catalyse sectoral growth. However, the global market remains sensitive to geopolitical developments, cost pressures, and trade realignments, which may influence order inflows and capacity deployment across shipyards. b. SHIPBUILDING INDUSTRY OUTLOOK: GLOBAL TRENDS AND INDIA?S GROWING ROLE

With a coastline exceeding 11,000 km and a large network of operational ports in India, including 12 major and over +200 minor ports, India holds a strategic position in global maritime trade. The shipbuilding and maritime sector has gained renewed national significance under the Government?s long-term roadmap, the Maritime Amrit Kaal Vision 2047, which aspires to position India among the world?s top five shipbuilding nations. This vision is supported by rising demand for indigenous defence platforms, port-led industrialisation, and a growing shift toward sustainable, green maritime logistics.

To strengthen domestic capabilities and global competitiveness, the Government is actively promoting policies such as the Shipbuilding Financial Assistance Policy (SBFAP) 2.0, which provides up to 20% financial support for Indian-built vessels and 30% for green-fueled or hybrid vessels. These incentives are aimed at supporting capital-intensive shipbuilding projects and encouraging the adoption of cleaner technologies. In addition, the Shipbreaking Credit Note Policy, announced in the Union Budget 2025–26, is under development and aims to formalise and incentivise eco-friendly ship recycling practices in India. Once implemented, it is expected to enhance sustainability, create local employment, and reduce reliance on imported steel. Together, these initiatives, along with India?s cost competitiveness, skilled labour base, and improving infrastructure, are positioning the country as a viable alternative to traditional shipbuilding hubs. Nevertheless, global macroeconomic uncertainties, supply chain disruptions, and pricing volatility remain key variables influencing the growth trajectory of Indian shipyards.

Globally, the shipbuilding market was valued at USD 152.72 billion in 2025 and is projected to reach USD 193.43 billion by 2030, growing at a CAGR of 4.84%. This growth is being fueled by rising demand for cargo ships, LNG carriers, and defence vessels, especially in Asia-Pacific region, which remains the dominant region with over 85% of global production concentrated in China, South Korea, and Japan. However, India is emerging as a competitive player, supported by its strategic location, growing naval fleet, and focus on defence indigenisation.

c. SDHI?S STRATEGIC EXECUTION AND MARKET READINESS

Swan Defence and Heavy Industries Limited (SDHI) has achieved significant progress in restoring and operationalising one of India?s largest integrated shipbuilding and repair facilities. The yard is now fully functional, equipped with modern infrastructure including dry docks, outfitting and fabrication bays, and heavy-duty material handling systems. During FY 2024–25, SDHI successfully executed multiple refit projects for the Indian Coast Guard and delivered ahead of schedule, demonstrating the Company?s execution capabilities and commitment to quality. Backed by a skilled leadership team, advanced production infrastructure, and supported by collaborations with domestic and international shipbuilding entities, SDHI is well-positioned to play a meaningful role in India?s shipbuilding and maritime growth journey. The Company remains committed to delivering long-term stakeholder value through timely execution, technical excellence, and a focus on scalable, sustainable operations.

d. KEY OPERATIONAL STRENGTHS

India?s Largest Dry Dock Facility: SDHI operates the largest dry dock in India, measuring 662 metres in length and 65 metres in width, enabling the simultaneous construction of large vessels.

Unmatched Fabrication Capacity: The shipyard has an annual fabrication capacity of 144,000 metric tonnes, with fabrication sheds capable of producing modular blocks weighing up to 300 tonnes.

State-of-the-Art Automation: The facility is equipped with advanced machinery, including a large-scale semi-automated TTS panel production line, supporting high-precision and efficient manufacturing.

Efficient Block Assembly: Dedicated spaces are available for pre-outfitting and megablock assembly, allowing for streamlined integration of large structural blocks.

Weather-Protected Cold Outfitting: Covered outfitting sheds enable 70 100% outfitting work to be carried out in protected conditions, ensuring minimal disruption during adverse weather.

Future Capacity Augmentation Potential: SDHI holds over 75 acres of land at Shipyard Complex Site (SCS), designated for the development of a potential vendor park or maritime cluster, offering significant scope for future expansion.

e. KEY THREATS AND INDUSTRY RISKS

• Prolonged Project Cycles and Working Capital Pressure: Shipbuilding projects typically have long execution timelines and milestone-based payments, which can result in elevated working capital requirements and cash flow mismatches.

• Global Competition from Subsidized Shipyards: International shipyards, particularly in China, South Korea, and Japan, are benefiting from significant government subsidies, making it challenging for Indian yards to compete on pricing and delivery timelines.

• Shortage of Skilled Manpower and Ageing Workforce: The industry faces a growing shortage of skilled welders, fitters, and marine engineers, with limited new entrants and a retiring workforce affecting long-term scalability.

• Volatility in Raw Material Prices: Fluctuations in the prices of steel, specialty alloys, and marine equipment can adversely impact project margins, particularly for fixed-price contracts.

• Delays in Defence or Government Orders: Any delay in the issuance or execution of government and defence contracts may lead to underutilization of yard capacity and impact revenue visibility.

• Regulatory and Environmental Compliance Risks: Increasingly stringent safety, environmental, and ESG norms may require additional investment in green technologies and waste handling infrastructure, impacting cost structures.

• Natural Disasters and Climate Risks: Operations near coastal areas are exposed to weather-related disruptions such as cyclones, flooding, or heavy monsoons, affecting project schedules.

f. KEY OPPORTUNITIES FOR THE SHIPBUILDING INDUSTRY IN INDIA

• Rising Demand for Coastal and Inland Waterway Vessels: With increasing focus on multimodal logistics and inland water transport under initiatives like Sagarmala and Jal Marg Vikas, there is a growing demand for barges, Ro-Ro vessels, and smaller cargo ships, creating long-term opportunities for domestic commercial shipbuilders.

• Expansion of Coastal Shipping: India?s push toward reducing road congestion and fuel costs is boosting coastal shipping. The government?s target to shift 10% of road and rail freight to coastal routes over the next decade presents opportunities for bulk carriers and general cargo vessel construction.

• Growing Export Potential: Several Southeast Asian, African, and Middle Eastern countries are looking to procure cost-e_ective commercial vessels from emerging markets. Indian shipbuilders have an opportunity to tap into these export markets by leveraging lower labour costs and growing technical capabilities.

• Supportive Policy Environment: Policies such as the Shipbuilding Financial Assistance Policy (SBFAP 2.0) and Right of First Refusal (RoFR) for Indian yards in government procurements provide commercial builders with greater visibility and competitiveness.

• Demand for Green and Energy-E_cient Vessels: With global maritime decarbonisation goals and IMO regulations tightening, there is an emerging market for LNG-powered, hybrid, and electric vessels offering first-mover advantage to Indian shipyards investing in clean technologies.

• Ship Repair and Life Extension Markets: Alongside new builds, the ship repair and retrofitting segment is expanding due to the ageing global fleet. This presents high-margin, recurring business opportunities for yards with integrated dry dock and repair facilities.

• Integration with Maritime Clusters and Vendor Ecosystems: The development of maritime clusters, vendor parks, and ancillary units under initiatives like Maritime India Vision 2030 creates a collaborative industrial environment, enabling faster execution and cost optimisation for shipbuilders.

g. OUTLOOK:

India?s continued focus on maritime infrastructure, coastal development, and defence indigenisation provides a strong foundation for the shipbuilding and repair industry in FY 2025–26. Your company is well-positioned to capitalise on these opportunities, supported by its modern infrastructure, operational shipyard, and growing execution track record. The government?s push through initiatives like Sagarmala, Maritime Amrit Kaal Vision 2047, and the Shipbuilding Financial Assistance Policy (SBFAP 2.0) is expected to drive demand for both commercial and defence vessels. While global uncertainties such as material cost fluctuations, workforce availability, and geopolitical tensions may pose operational challenges, SDHI?s strategic advantage is driven by its large-scale facility, skilled manpower, and vendor collaboration potential, which positions it to play a key role in India?s maritime growth. The Company remains committed to expanding its presence in domestic and export markets while pursuing long-term, sustainable value creation in the shipbuilding ecosystem.

h. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

During the fiscal year 2024–25, under the full stewardship of the new management, which assumed control on January 4, 2024, the Company made significant progress in strengthening its internal financial control framework. This effort was aligned with the Company?s expanding operational scale and increasing regulatory obligations and included a comprehensive review and formalisation of existing processes.

The management has proactively implemented targeted process improvements, introduced system automation, and enhanced documentation practices across key functions to drive greater transparency, accountability, and risk mitigation. While further improvements are ongoing, the internal financial controls in place are considered adequate and commensurate with the Company?s operational activities during the year. The Company remains committed to continuously evolving its internal control systems in line with best-in-class governance standards.

i. HUMAN RESOURCES AND SKILL DEVELOPMENT:

A skilled and well-structured workforce continues to be a cornerstone of SDHI?s operational readiness and long-term growth. In FY 2024–25, the Company significantly strengthened its human capital base, with over 400 in-house personnel and an additional 600+ vendor workforce deployed across critical functions such as project management, production, civil & plant maintenance, safety, quality, and support services.

The leadership team at SDHI, composed of senior professionals with over three decades of experience in shipbuilding, offshore operations, and defence readiness, has played a pivotal role in shaping the organisation?s HR and talent strategy. The Company has successfully retained key technical personnel from the erstwhile shipyard while simultaneously pursuing focused hiring to fill 85+ mid-management roles, ensuring that the right expertise is available for complex project execution.

To support this growth, SDHI has initiated skill development programs in key areas such as welding, erection, profiling, and specialised shipbuilding disciplines for bulkers, passenger vessels, and chemical tankers. Additionally, over 100 Standard Operating Procedures (SOPs) are being formalised in areas like commercial operations, procurement, planning, and design to standardise workflows and enhance quality control. Your company remains committed to investing in workforce development and compliance, with all quality and regulatory certifications in place, ensuring that SDHI?s talent ecosystem remains aligned with industry best practices and future operational demands. j. KEY FINANCIAL RATIOS: