MANAGEMENT'S DISCUSSION AND ANALYSIS

Management of the Company is pleased to brsent below its analysis on the performance of the Company for the financial year 2014-15 and its outlook for the future.

Overview of the Economy

India started the financial year 2014-15 with a significant improvement in market and business sentiments as the new Government ushering in some fresh ideas to resurrect the economy. Sharp fall in various commodity prices in general in the global economy and crude oil prices, in particular benefited the Indian economy.

The Economic growth picked up in the later part of the financial year. GDP grew at 7.3% for the year as against 6.9% during the brvious year.

Hon'ble Prime Minister, Shri. Narendra Modi announced a very significant initiative for Indian manufacturing viz. "Make in India" Programme to promote and encourage domestic manufacturing. The said initiative in defence industry will not only save brcious foreign exchange but also make the Nation self-reliant. Going forward, import is proposed to be the rarest of the rare option and the first opportunity would be made available to the Indian Industry to develop and manufacture local substitutes for imported products. This would boost the Indian economy.

The Company operates primarily in Defence / Commercial Shipbuilding and Ship Repairs business segment. The said segment also includes construction of Hydro-carbon E&P Assets.

I. INDUSTRY STRUCTURE AND DEVELOPMENTS

• Defence Shipbuilding and Repairs:

During the year under review, Indian defence industry continued to open up opportunities for the private players. Indigenous Construction of various strategic platforms for Indian Navy and Indian Coast Guard under the "Make in India" campaign is expected to provide significant boost for building vibrant domestic defence industrial base and reduce dependence on imports, thus making the Nation self-reliant.

Indian dream to become global economic power demands strong blue water Navy, to protect the national maritime interest and establish a secure shipping route.

The Government of India ('GoI'), had approved a ship building programme, projecting 165 warships and 400 aerial assets by 2022.

Defence PSUs, despite constraints, have done yeomen service to the Nation by building warships and submarines. In order to meet the growing requirements of the Indian Navy, utilization of capacities and capabilities in private sector is imperative in the wider contest of National interest.

To realize the dream of becoming pioneer in warship building, emphasis has been given by the GoI to develop indigenous modern shipbuilding infrastructures and capabilities. Thus, GoI as opened the doors of warship and submarine construction for the private sector companies under "Make in India" Programme. Defence Procurement Procedure - 2015 ('DPP-2015') is expected to provide better level playing field to the private sector domestic defence assets vis­a-vis Defence Public Sector Undertakings inter-alia ensure better utilisation of available modern warship building resources of the Country. The proposal to allow exchange rate variation ('ERV') for all rupee denominated contracts having imported contents in under active consideration of Gol. This is definitely a step towards providing level playing field to the private sector companies.

The Union Budget for 2015-16 has allocated Rs. 2,46,727 Crore (for 2014-15 Rs. 2,29,000 Crore) for defence rebrsenting 13.90% of the Government's expenditure during 2015-16. Within the aforesaid budget, Rs. 94,588 Crore have been assigned for the capital expenditure. The Indian Navy has been allocated Rs. 40,529 Crore, within the total defence budget for Financial Year 2015-16.

The simplified 'Buy & Make (Indian)' initiative promulgated vide DPP - 2013, extends unambiguous support to the increasing emphasis of the GoI on indigenization initiatives. Given the strong order book of various PSU Defence Companies, higher indigenization initiatives provide a lifetime opportunity for private sector companies to garner a larger share of the Indian defence pie. The Company is among a few private sector companies to have developed capabilities and capacities to tap this opportunity.

Construction, Conversion and Repairing of Commercial Vessels, Hydro-carbon E&P Assets:

Construction, conversion and repairing of commercial vessels, Hydro-carbon E&P Assets etc. is a vast and complex industry, which comprises of various diversified segments. The traditional commercial shipbuilding sector continues to reel under the tonnage glut, shrinking global trade and subsequent low ordering levels. GoI is committed to increasing India's share of the global shipbuilding market to 5% by 2020 which is currently less than 1%. India's advantages over others are well defined and include its strategic location in close proximity to the international trading routes; ready availability of skilled and economical manpower.

The Ship repair segment is a priority for the GoI. The Ministry of Shipping, GoI, has recorded in its vision document viz., 'Maritime Agenda 2010-2020', aims to develop a highly competitive domestic ship repair industry. The most strategic facility in the ship repair process is the dry-dock, and the Company's dry dock which is among the largest in the world, has given it a head start.

The financial year 2014-15 was a volatile and challenging for the maritime world. Against the backdrop of sharply reducing crude oil prices, capital expenditures were significantly cut by major oil and gas companies. Global oil and gas exploration projects of approximately US$ 150 billion were put on the back burner as plunging oil prices rendered them unviable. These challenges would affect Hydro-carbon E&P Assets construction segment.

II. OPPORTUNITIES AND OUTLOOK

• Defence Shipbuilding and Repairs:

In furtherance of the objective to make India a global manufacturing hub, the GoI through "Make in India" campaign is stressing on indigenous defence production. The GoI has cleared a Rs. 60,000 Crore plan for construction of six conventional submarines (with Air Independent Propulsion system - under the project code name P75-I). It is expected that project P75-I will be awarded to Indian private sector defence companies, in view of order book position of Defence Public Sector Undertakings ('DPSUs').

Indian Navy has planned to acquire a new generation Aircraft Carrier of 65,000 Tons which is 1.50 times than INS Vikramaditya, the brsent largest aircraft carrier of the Indian Navy. The Navy is planning to have the most advanced technology for the proposed new generation Aircraft Carrier and br-bid process is already commenced by the GoI. Considering the capacity and capability, the Company is the only yard which has capacity to undertake the construction of such complex defence platform.

I t is believed that the GoI and the Government of Russia are in dialogue for four upgraded Talwar class frigates, under the Project code name 1135.6 for building in India. This 'Make in India' naval frigate project is likely to exceed $3 billion.

In addition to these high value strategic naval platforms, following new projects are also expected during coming years:-

The Indian Naval / Coast Guard Fleet offers many opportunities in the defence ship repairing segment. Medium Refit and Life Certification of 877 EKM submarines in India, is an existing opportunity. The Company and JSC Ship Repairing Centre, Zvyozdochka Russia have entered in to an agreement for Medium Refits and Life Certification (MRLC) of 877 EKM of 1 (in Russia) + 3 Submarines in India. The Company is also qualified for dry-docking of INS Vikramaditya, currently the largest air-craft carrier of Indian Navy.

Construction, Conversion and Repairing of commercial vessels, Hydro-carbon E&P Assets:

The Company put India on the global shipbuilding industry map by exporting the largest Panamax vessels of its class ever built in India. The Indian shipbuilding industry has all required resources, skills, talent and enjoys labor arbitrage to compete in the global shipbuilding / repairs/ refit industry. Emerging demand from Indian companies including ONGC, Petronet, SCI, IWAI, DCI, GAIL, etc for OSV, PSV, LNG Carriers and Dredgers offers a significant opportunity considering the thrust on 'Make in India' mission.

Gas Authority of India Limited's ('GAIL') plan to charter hire upto 3 + 1 indigenously built LNG Carriers of 150,000 cbm to 180,000 cbm will put India and the successful bidders in the niche market of construction of LNG Carriers, FSRU, FPSO and FSU. The Company is by far the frontrunner as it has in place the required infrastructure necessary for construction of these technologically advanced vessels and access to required technology.

Hon'ble Finance Minister, Shri Arun Jaitley had announced a combrhensive policy and fiscal package for Indian shipbuilding in his maiden annual budget in July 2014. Shri Jaitley also stated intention to reserve around USD 2.5bn to facilitate cheaper funding for the

shipyards. The Ministry for Shipping, Road Transport and Highways, under the leadership of Hon'ble Shri Nitin Gadkari has brpared a scheme to offer subsidy to the shipbuilding industry and is awaiting approval of the Cabinet. Ship Repair Units (SRUs), were required to go through a highly cumbersome and time consuming process of registration with GoI. Recently, GOI removed this requirement for registration and informed all the concerned ministries to extend concessions and facilities to the SRUs without insisting on registration. The GOI emphatically stated that this action was taken with the objective to promote ease of doing business in the ship repair sector. These measures will see the domestic shipbuilding Industry returning to the growth phase it had achieved during 2002 - 07.

India has a large fleet of around 1,100 Indian registered vessels. Moreover, 41 per cent of the domestic fleet has passed 20 years of operational life. As such, there is bound to be a rapid increase in the frequency of repairs/ refurbishments. The size of Indian ship repair Industry is estimated around Rs. 3,800 Crore per annum.

III. THREATS RISKS & CONCERNS

• Defense Shipbuilding and Repairs:

Warship construction programme is purely based on threat perception by the Government, availability of resources and global military scenario in addition to country's ability to allocate funds for the defence acquisition programme. In the past, projects had been delayed due to resources crunch. Defence Public Sector Undertakings do get major defence projects on nomination basis.

• Construction, Conversion and Repairing of commercial vessels, Hydro-carbon E&P Assets:

Construction, Conversion and Repairing of commercial vessels, Hydro-carbon E&P Assets is subject to market, financial risks like cut-throat competition amongst the yards, forex rate variation, long build period.

The growth of Chinese shipbuilding industry is a threat to almost all major shipbuilding nations. As per 2015 Annual Review of Shipping and Shipbuilding markets; China had 47% global shipbuilding market share by the end of 2014 with an order book at 1.45 million DWT. Chinese shipyards are backed up by subsidy and strong domestic ancillary industry. The Company has mitigated challenges in commercial shipbuilding by concentrating its business development efforts to niche segments like building of LNG Carriers, FSRU, FPSO, FSU etc.

IV. FINANCIAL PERFORMANCE

During FY 2014-15, the Company clocked total revenue of Rs. 862.07 Crore. The Company's Earnings before Interest, Taxes, Debrciation and Amortization ('EBITDA') has been Rs. 92.86 Crore. Higher finance costs and debrciation lead to a loss amounting Rs. 369.03 Crore. Attention of the members is invited to a paragraph on Corporate Debt Restructuring forming part of the Directors' Report.

During FY 2014-15, the Company maintained focus on defence shipbuilding, which was reflected in its expanding order book. The Company has built a strong business development team and the momentum is expected to reach its peak as the GoI is geared to invite bids for few strategic naval platforms under the "Make In India" programme.

V. SEGMENT WISE FINANCIAL PERFORMANCE

During FY 2014-15 the Revenue from Construction, Conversion and Repairing of commercial vessels, Hydro­carbon E&P assets segment was Rs. 697.86 Crore, whereas revenue from steel trading was Rs. 133.85 Crore.

VI. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company believes that effective internal controls and systems are integral part of good governance and should be exercised within a framework of proper checks and balances. Accordingly, the Company has put in place to appropriate internal control systems to safeguard itself from losses, unofficial use or disposition of assets. The Audit Committee monitors and evaluates the efficacy and adequacy of internal control system in the Company. Based on the report of the internal auditors / recommendations of the Audit Committee, process owners undertake corrective actions in their respective areas and continuously strengthen the internal controls.

VII. HUMAN RESOURCE / INDUSTRIAL RELATIONS

The Human Resource function plays a key role in the overall business strategy. The Company is committed to the development and wellbeing of its employees. The Company places great emphasis on nurturing and retaining talent, providing avenues for learning and development through functional, and leadership training programs.

The Company endeav ours to continuously review Human Resources policies, including remuneration, creating a safe and healthy working environment and employee training. The Company will continue to invest in employee welfare and training and assistance programs for the betterment of the employees. The management and employees relations are cordial and industrial relations have not been subject to any unresolved industrial disputes. The Company has 604 employees on its rolls as on March 31, 2015.