Vardhman Special Steels Ltd Management Discussions

ECONOMIC STABILITY AMIDST GEOPOLITICAL VOLATILITY

Global growth stabilised in 2024 as inflation returned closer to targets. The resulting monetary easing supported activity in advanced, emerging and developing economies (EMDES).

Major economies adjusted well to changing trade trends and policies, opening doors for sustainable and inclusive growth opportunities. While the recovery path remained dynamic, these transformations paved the way for a more balanced and adaptive global economy.

Financial markets remained dynamic, with the US equities benefiting from business-friendly policies while emerging markets adapted to shifting capital flows. The strengthening of the dollar continued to influence global trade and investment patterns. Although geopolitical and trade shifts present challenges, they also create avenues for innovation and resilience, reinforcing the need for forward-thinking strategies in a rapidly evolving global landscape.

The global economic outlook demonstrates resilience and opportunity. Global output is anticipated to grow steadily by 3.3% in 2025 and 2026, with the US maintaining strong momentum and emerging economies exhibiting significant growth potential. Advanced economies, particularly in Europe, are expected to experience moderate growth.

(Sources: IMF)

INDIAN ECONOMY

SOLID. STABLE. STEADY

The Indian economy made progress despite persistent challenges.

Indias GDP grew by an estimated 6.5% in FY25 on top of a 9.2% growth in the previous year, which was primarily driven by positive consumption trends and a rebound in rural demand, growth in services, an increasing share of high-value manufacturing in exports, among other factors.

The agricultural sector experienced a 3.8% increase, the industry sector grew by 6.2%, the service sector expanded by 7.2% and the core

sector increased by 4.6% as of January 2025. Indias manufacturing sector demonstrated healthy growth as the Purchasing Managers Index (PMI) climbed to 58.1 in March 2025, surpassing the flash estimate of 57.6 and representing the highest level since July 2024. Furthermore, new orders and output exhibited their most significant increase in eight months, while purchasing levels attained a seven-month peak.

The Indian economy is expected to demonstrate moderate growth compared to the previous financial

year, with a projected real GDP growth estimated at 6.3-6.8% in FY26, albeit from a high base. With that, India is poised to strengthen its position as one of the fastest- growing major economies, making a significant contribution to global GDP growth.

(Sources: Reuters, The Hindu, The economic times, Times of India, IBEF, Statista, live mint, Fortune India)

ADAPTING TO A DYNAMIC WORLD

The global steel sector navigated a complex landscape of regional disparities, evolving demand and geopolitical uncertainties. While some regions faced headwinds, others witnessed growth, underscoring the industrys resilience and adaptability in a dynamic global environment.

In 2024, global crude steel production declined by 0.9% compared to 2023, with total steel production reaching approximately 1.839 billion tonnes. China maintained its position as the dominant steel producer, with production levels stabilising, supported by government-led measures aimed at boosting infrastructure and manufacturing activity. India emerged as a key player, with rising domestic demand

from construction and infrastructure projects fuelling a steady increase in production.

In contrast, the European Union experienced a slowdown, largely due to reduced demand from key user sectors, resulting in a 2.7% drop in 2024. Meanwhile, the United States prioritised revitalising its steel production capacity through significant investments in modernisation.

While the global steel industry is expected to show signs of recovery in 2025, it continues to face challenges from overcapacity, regional disparities and geopolitical uncertainties. Furthermore,

Chinas surplus steel production is prompting several nations to implement protectionist measures

to counter a potential influx of low-cost imports. Additionally, with escalating trade tensions and the United States imposing tariffs on steel imports, concerns are growing about potential disruptions to the global supply chain. Additionally, the urgent call for the decarbonisation of steel on a global scale is encouraging countries to prioritise environmentally friendly technologies. To navigate this dynamic landscape effectively, the global steel industry will need to reinvent itself to achieve resilience and sustainability.

(Sources: World Steel, Globenewswire, Eurofer)

RECALIBRATING TO ALIGN WITH

A DYNAMIC ECOSYSTEM

In 2024-25, the Indian steel sector witnessed strong momentum, largely supported by continued investments in infrastructure, rapid urbanisation and expanding industrial activity. Crude steel output saw a 6% rise, reaching 149 million tonnes, due to the rollout of expanded steelmaking facilities.

India experienced a significant shift in its steel trade landscape, primarily influenced by increased low-cost steel imports, especially flat products from China, further intensifying market competition.

Indias steel sector is poised for continued growth in steel consumption, with an expected rise of 8-9% in 2025, primarily driven by domestic demand and government measures aimed at reducing cheap imports. Despite this positive trajectory, the industry remains cautious due to

evolving global trade conditions.

Moreover, the Indian steel industry is actively focused on reducing carbon emissions and adopting cleaner steelmaking technologies. This shift aligns with global trends toward decarbonisation and environmentally responsible production practices, demonstrating the industrys commitment to long-term viability.

(Source: GMK centre)

CREATING A REMARKABLE IMPACT ON STEEL CONSUMPTION

GAINING SIGNIFICANT MOMENTUM

The secondary steel sector in India makes a significant contribution to overall steel production, particularly in rural and semi-urban markets. It plays a pivotal role in fulfilling domestic demand in a cost-effective manner.

The secondary steel sector in India is witnessing remarkable growth, propelled by robust domestic demand, government investment in infrastructure and housing and an increasing emphasis on the principles of the circular economy. Secondary steel manufacturers are projected to experience a 7% revenue increase in

the fiscal year 2025. This sector is vital for providing affordable housing, developing infrastructure and fostering a more sustainable steel industry. With this momentum, the secondary steel segment plays a crucial role in addressing the demand gap through environmentally friendly and energy-efficient production methods.

Indias automotive industry serves as a crucial component of the economy, contributing 7.1% to the national Gross Domestic Product (GDP) and approximately 49% to the manufacturing GDP The Indian automobile sector experienced a 7.3% increase in domestic sales and witnessed a substantial 19.2% rise in exports. This growth is attributed to strong customer demand, government assistance, infrastructure investments and an increasing emphasis on sustainable mobility. Favourable economic policies and positive market sentiment have also contributed to sustaining this growth. The Indian automotive sector is anticipated to maintain its growth momentum through 2026, supported by ongoing economic expansion, supportive policies and a growing

consumer base with evolving mobility preferences.

4-wheeler segment: Passenger vehicle sales in India reached an all-time high of 4.3 million units in the financial year 2024-25. This marks a 2% increase compared to the previous year. Utility Vehicles (UVS) remained the key growth driver in the passenger vehicle segment. Their share in overall sales rose to 65% in FY 2024-25, up from around 60% in the previous year. The new model launches with modern designs and advanced features, attracting a wider range of buyers. Additionally, attractive discounts and promotional offers helped sustain demand.

(Sources: Economic Times, Hindustan Times, IBEF)

GOVERNMENT INITIATIVES FOR SUPPORTING GROWTH

PLI for Automobile and Auto Components: Aims to boost domestic manufacturing, attract investments and promote advanced automotive technologies (EVs, hydrogen fuel, etc.).

Green Mobility and Sustainability Goals: Policies aligned with Indias COP26 commitments and net-zero targets promote research and development (R&D) in clean mobility solutions, such as hydrogen fuel cells and biofuels.

Infrastructure Development: Massive investments in road networks, smart cities and urban mobility have directly supported auto demand, especially in the passenger and commercial vehicle segments.

FAME India Scheme: Promotes EV adoption through subsidies for electric 2-wheelers, 3-wheelers, e-buses and charging infrastructure.

(Source: IBEF)

(Source: Steelorbis)

WE CONTINUE TO SURPRISE OURSELVES AS WE SCALE NEW PEAKS EVERY YEAR.

FY25 WAS A YEAR OF DECENT PROGRESS

Given the landscape of the steel and automotive sectors, more particularly the passenger vehicle space, we reported a stable performance. Our production volume of billet products stood at 247,635 tonnes, largely driven by operational efficiencies. Our sales volumes have crossed the 215,000 tonne mark, despite the volatility in the global landscape.

OUR OPERATIONS SCALED NEW HEIGHTS

We reported our highest billet production of 25,000 tonnes in December 2024, affirming our capability to produce 3 lac tonnes in a year. This milestone was achieved through enhancements to the number of heats per day.

INCREASING PRODUCTIVITY WAS NOT EASY

Easier said than done. The productivity improvement resulted from several changes that are expected to have a lasting impact on our plant operations.

• We altered our raw material mix to use a higher proportion of stamping scrap from OEMs in our feed to the Furnace. This helped improve the production yield in every heat. We did this to facilitate the concept of a Circular Economy, despite the higher cost, which is mitigated by the increased productivity.

• We extended the usable life of our refractories through targeted measures and a disciplined focus on preventive maintenance, which reduced the frequency of shutdowns and improved equipment availability.

WE WORKED ON INSTALLING ADDITIONAL EQUIPMENT

We installed the Re-Sizing Block from Kocks in April 2025. This unit will enable the production of a wide range of sizes, offering precision in size while increasing our inhouse production capacity for rolled products, thereby enhancing product quality and operating margins. Concurrently, we have focused on implementing the Reheating Furnace project, which is currently underway. This unit is projected to be operational in the second half of the current year, further augmenting the capacity of our Rolling Mill. More significantly, it will ensure the alignment of the capacities between the SMS and the Rolling Mill. Additionally, we plan to expand our testing capacity by installing a second Non-Destructive Testing (NDT) line. This project is also expected to be realised by Q1 of FY27.

THERE WERE OTHER INFRASTRUCTURAL IMPROVEMENTS TOO.

We recently installed a new transformer at our SMS unit, which has improved operational efficiency by reducing heat cycle times. This advancement leads to measurable time savings per heat, resulting in a significant increase in overall output.

WE SECURED INTERESTING BUSINESS OPPORTUNITIES

In fiscal year 2025, two notable achievements were recorded. Firstly, in the domestic market, we initiated mass production of gear steel for Maruti Suzuki, a product that was previously imported. This initiative represents our modest contribution to Indias Atmanirbharta. Secondly, in the international arena, we obtained product approval from a European auto major, a significant endorsement of our commitment to quality. We anticipate beginning mass production to fulfil their requirements within 18 to 24 months. This approval further reinforces our standing in the global special steel sector. In addition to these, we have received approval from several other global customers. For some of the approvals, we anticipate commencing mass production within the next 12 to 18 months. Setting a firm base to more than double our export volumes over the next 3-4 years.

WE STRENGTHENED OUR R&D CAPABILITIES

This was a good year for the R&D team, as several special steel variants received approvals from domestic and international customers. To strengthen our capabilities, we installed a gas analyser and an eddy current tester, which will enable us to develop special steel that meets

the exacting standards of automotive OEMs in India and worldwide.

WE ARE MAKING THE ORGANISATION MORE DIGITAL

As our operational scale expands and our customer profile becomes increasingly demanding, upgrading our IT systems to align with global standards has become necessary. We are implementing the most contemporary version of an ERP solution, specifically SAP S/4HANA, on 1st July 2025. At the plant operations level, we are upgrading our automation to Level 2 and will go live in a phased manner between 2026 and 2027

WE HAVE OUR HANDS FULL FOR THE CURRENT YEAR

In FY26, our efforts will be directed towards operationalising and seamlessly integrating our new assets with the existing operations. Furthermore, our new IT solution will have a significant impact on our everyday operations, which will require some time to adapt to. Our team will also focus on increasing production and sales volume to drive business growth.

FINANCIAL PERFORMANCE

We registered a stable performance in an uncertain external business environment. Our revenue from operations stood at Rs.1,764 crore in FY25, up from Rs.1,661 crore in the previous year, driven by an increase in sales volume. The EBITDA at Rs.177 crore in FY25 was marginally above the previous years level. The Net Profit for the year stood at Rs.93 crore, compared to Rs.92 crore in FY24.

Shareholders Fund increased from Rs.719 crore as on March 31, 2024, to T798 crore as on March 31, 2025, owing to the addition of business surplus. The Cash Flow from operations decreased from Rs.142 crore in FY24 to Rs.127 crore in FY25, owing to an increase in financial resources for working capital. The total debt (borrowing plus other financial liabilities) also increased from CL08 crore as of March 31, 2024, to CL58 crore as of March 31, 2025, due to capital investments made during the year and increased working capital requirements in keeping with the growing scale of business operations. The Net Debt-to-Equity ratio stood at 0.14x against 0.12x in the previous fiscal year.

KEY FINANCIAL RATIOS

	UOM	FY25	FY24	Change (%)
Trade Receivables ratio	(x)	6.74	6.34	6.31
Inventory Turnover ratio	(x)	5.11	4.62	10.61
Interest Coverage ratio	(X)	7.81	7.67	1.83
Current ratio	(X)	2.11	2.38	-11.34
Net Debt-Equity ratio	(X)	0.14	0.12	16.67
Operating margin	(%)	8.39	8.57	-2.10
Net margin	(%)	5.28	5.52	-4.35
Return on Net worth	(%)	12.27	13.46	-8.84

INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY

Your Company has regularly reviewed and updated its internal controls by benchmarking against industry standards. Dynamics of changing business requirements, statutory compliances and corporate governance are incorporated into existing systems following a careful review to ensure alignment with compliance requirements and the expectations of key business partners, including customers and institutions. Senior management reviews the recommendations of internal audits to ensure continuous system updates and improvements. The IT system infrastructure is regularly updated to support informed business decision-making and enhanced controls.

Vardhman understands the power of its people. These individuals have elevated the Company from just another special steel manufacturer into a globally respected player in the special steel industry Their passion has helped the company obtain approval for some of its steel variants from its global partner. This achievement has further stoked their desire to raise their efficiency and quality a few notches higher.

This urge has been supported by an intensive training calendar that comprises knowledge sharing on technical, operational and behavioural topics. The Companys Japanese partner focuses their training on safety, operational discipline and timeliness. The combination of the training intensity has only strengthened the teams professional fabric.

Additionally, the Company fostered team bonding through various on- and off-the-job engagement initiatives. This bonding helped them function better as a cohesive team with a singular objective: improving the companys performance.

During the year, the Company recruited new staff to train them to manage its growing operations. The HR team also focused on developing the leadership pipeline.

The Company has 1,363 members (permanent) on its rolls as of March 31, 2025.

OUR PEOPLE ARE THE PRIMARY REASON VARDHMAN HAS EARNED GLOBAL RESPECT.

BUSINESS IS PRIMARILY ABOUT DEFTLY NAVIGATING PAST PROBABLE RISKS. GROWTH IS A NATURAL OUTCOME.

Vardhman prioritises the effective and proactive management of enterprise-wide risks to drive its strategic business objectives forward. The Company has crafted a resilient Enterprise Risk Management (ERM) Framework, drawing on the foundational principles of leading risk management. The risk management framework emphasises the importance of a synchronised and integrated approach to mitigating risks and capitalising on opportunities throughout our organisation, fostering a culture of independent, proactive and systematic risk management.

flnfln A decline in the automotive sectors

performance could negatively impact the Companys performance.

Mitigation measures

• Increasing per capita income, growing aspiration and better roads continue to drive the demand for passenger vehicles, resulting in higher offtake of special steel

• Increased part approvals from existing customers, along with the addition of new customers, will drive up demand for the Companys products.

CAPACITY RISK

/n\ The capacity shortfall could stunt business growth.

Mitigation measures

• The steel melting capacity is sufficient for the next fev years and process improvements have significantly increased steel output.

• The rolling mill capacity is being increased to align with the steel melting capacity, which will also enhance value addition

• The Board has approved the Greenfield expansion with an installed capacity of 5 lakh TPA for billet making, along with commensurate capacity for the Rolling Mill and testing lines.

QUALITY RISK

Maintaining a consistently high quality could be a challenge.

Mitigation measures

• Collaboration with Aichi has embedded the quality culture in Vardhmans foundation.

• SOPs have been created for every process; teams are trained to follow their SOPs and deviations are thoroughly analysed to ensure errors are not repeated.

• Significant investments have been made in upgrading the quality control labs and testing equipment to ensure quality standards are maintained.

• Approvals from marquee global brands underscore the Companys unwavering commitment to quality.

CUSTOMER ATTRITION RISK

Losing customers could impact the

CtA Companys growth ambitions.

Mitigation measures

• Special steel is a complex business where switching

vendors is not frequent, due to the lengthy product development and approval process

• Collaboration with Aichi Steel and the continuous improvement programme with their guidance has opened doors to large global and Indian automobile OEMs, derisking the business from dependence on a few customers.

q/\ people risk

[ v— People engagement is critical for sustaining

business growth.

Mitigation measures

• Expansion in the authority-responsibility equation of the Leadership team, supported by ESOPs, keeps them motivated to drive business strategies

• Policies that prioritise the welfare of individuals, coupled with continuous efforts to enhance their knowledge capital and career progress, guarantee that individuals remain committed to the Companys vision and objectives.

• Regular team engagement initiatives ensure team bonding at periodic intervals, which is essential to building a cohesive team.

?3 FINANCE RISK

The ability to secure adequate financial resources will be key to sustaining growth.

Mitigation measures

• Growing business volumes are expected to steadily increase cash flow from operations.

• A strong cash flow from operations of Rs.126.91 crore provides resources to partly fund capex programs through internal accruals.

• A significantly deleveraged Balance Sheet, with a debt- equity ratio of 0.14x and a debt-EBlTDA ratio of 0.74x (as of March 31, 2025), provides the runway to secure funds.

ENVIRONMENT RISK

V A focus on environmental management is

critical for business continuity.

Mitigation measures

• Continue monitoring energy and water consumption closely; work with our Japanese partners on strategies and initiatives to optimise their consumption.

• Strictly focus on eliminating wastage from the system.

• Made investments to source 40-45% of our power requirement from renewable sources.