Earnings Call Transcript - XNSE:SCODATUBES 2026-11-13

Operator

Ladies and gentlemen, good day and welcome to SCODA Tubes Ltd. Q2-FI27 Earnings Conference Call. Before we begin, a brief disclaimer. This conference call may contain forward-looking statements about the company which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantee of future performance of the company and it may involve risks and uncertainties that are difficult to predict. As a reminder, all participant clients will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need any assistance during this conference, please signal for an operator by pressing star followed by zero on your touch-door telephones. Please note that this conference call is being recorded. I now add a conference over to Mr. Samart Patel, Chairman and Executive Director, Skoda Tubes Limited. Thank you and over to you, sir.

Samar Patel, Chairman

Thank you. Good afternoon, everyone, and thank you for joining us today for the Q2 and H1 F527 conference call of Skolajis Limited. I hope all of you have this opportunity to review the financial reserves and investor presentation, which have been uploaded to the stock exchanges and our company website. Joining me on the call today are Mr. Ravid Bhair, our CFO, Mr. Raj and Mr. Rishit Kodharif from Capital Bridge Advisors, our Investor Relations Consultant. FY27 continues to be a year of transition and strategic execution of stakeholders. As we navigate a dynamic operating environment characterized by evolving demand conditions, intensifying competition from private players, and elevated input costs, particularly power, fuel, and freight. Additionally, higher crude oil prices and the deferment of capital expenditure across certain segments of the oil and gas industry have contributed to a slower-than-anticipated recovery in demand. Against this backdrop, our revenue remained largely flat on a year-on-year basis during Q2 efforts. Reflecting the prevailing industry conditions, nevertheless, we continue to make meaningful progress in strengthening our manufacturing capabilities, improving operational efficiencies, and expanding our regressible market, which we believe will position the company favorably for its next phase of growth. Despite the near-term challenges, we remain confident of achieving our previously communicated revenue growth guidance of 20% to 25% for FY27. This confidence is supported by a healthy order pipeline, anticipated improvement in demand conditions, expanding manufacturing capabilities, and continued focus on execution. We expect the specters to support the improvement in business momentum during the second half of the financial year. On the profitability front, elevated power, fuel, freight, and other operating costs continue to exert pressure on margins. While we refrain from providing specific margin guidance at this stage, our priority remains to protect our existing profitability level and progressively strengthen margins for operational efficiencies, cost optimization, improved capacity utilization, and operating leverage as volumes recover. During the quarter, we maintained relatively... Elevated production levels in anticipation of customer demand. However, intensified competition, particularly from private players, resulted in a slower conversion of production into sales, leading to a higher inventory level. We believe these inventory providers with the flexibility to respond promptly to customer requirements and capitalize on opportunities as demand conditions improve. Simultaneously, we remain focused on optimizing production, planning, improving inventory turnover, and maintaining prudent working capital management. Turning to our capacity expansion initiatives, we continue to make encouraging progress in strengthening our welded manufacturing capacity. Our ongoing Wilded expansion will extend our technical capabilities to manufacture pipes of up to 16 inches in diameter, enabling us to participate in larger and more comprehensive turnkey packages. We are already witnessing encouraging commercial intervention inquiries from emerging end-user segments, particularly data centers, cooling infrastructure, HVACs, industrial water treatment, and desalination projects. These opportunities are expected to diversify our end-market exposure and strengthen our long-term growth potential. We remain on track to commence trial production at our expanded-wilded facility during Q4FY27. In parallel, our additional brownfield-wilded expansion of 8,000 metric tons per annum, involving a capital outlay of approximately 40 crores funded through a combination of internal accruals and long-term borrowings, is progressing as stated. Civil construction is underway, while procurement of long-leaf equipment remains on track. We expect this additional capacity to be commissioned during H1 FY28, taking our aggregate weld-in manufacturing capacity to 21,000 metric tons per m. On the sustainability and operational efficiency front, we have achieved an important milestone with the commissioning of our captive solar capacity. The first phase of 4.99 MW DC, dedicated to our seamless manufacturing operations, was successfully energized and synchronized with the grid in August 2026. The facility is already contributing towards reducing energy costs, particularly across our energy initiative hot-piercing and solution-analysis operations. Furthermore, we remain on track to commission the dedicated solar power capacity for our welded operations during Q4 F527, reinforcing our focus on improving cost-competitive nets and building a more sustainable manufacturing platform. On the business development front, we achieved another significant milestone by securing the RENA Marine Certification in July 2026. This certification transcends our technical credentials and provides access to new opportunities in the European marine engineering and shipbuilding industry. We believe it will support our efforts to diversify our customer base, expand our international presence, and participate in higher-value applications over the medium to long term. Looking ahead, while the near-term operating environment remains challenging, we are encouraged by the progress across our strategic initiatives. Our priorities remain firmly focused on improving capacity utilization across our seamless operations, successfully commissioning and commercializing our welded expansion, expanding our presence across new end-user industries and export markets, and strengthening operational efficiency. We believe the combination of our expanded manufacturing capabilities, growing addressable market, improving cost structure, and continued emphasis on execution will provide a strong foundation for sustainable growth as industry-conditioned normally. We remain confident in the long-term prospects of SCODA teams and committed to creating sustainable value for all our stakeholders. With that, I would now like to end over the call to our CFO, Mr. Ravi Patel, to take you through our financial performance for the quarter and half year. Thank you. Thank you, Samadurai.

Ravi Patel, CFO

Good afternoon to all participants. Let me present the financial performance of Skoda 2 military for the second quarter in half year in the September 30th. Revenue from operations for Q2FY27 stood at Rs. 148.9 crores compared to 145.3 crores in Q2FY27, representing a year-on-year growth of 2.5%. For H1 F527, aggregate revenue from operations reached Rs. 273.3 crores, up 12.6% year-on-year from Rs. 242.7 crores reported in H1 F526. Our geographic revenue mix continues to reflect balanced market penetration. In Q2F27, domestic sales contributed 63%, that is Rs. 93.8 crores, while export sales accounted for 37%, that is Rs. 55.1 crores. EBITDA for Q2FY27 stood at Rs. 15.8 crores as against Rs. 23.3 crores in Q2FY26. Our operating EBITDA margin for the quarter was 10.6%, contracting by 479 basis points year-on-year from 15.38% in Q2FY26. Similarly, driven by higher power and fuel expenses, coupled with increased waste costs. For H1 FY27, total EBITDA came in at Rs. 31.8 crores, replacing an EBITDA margin of 11.6%. For H1 FY27, FAT stood at Rs. 10 crores, delivering a FAT margin of 3.7%. CapEx incurred between S1 and F227 was approximately Rs.40 crores, primarily directed towards mercenary settlements for the well-get security and solar power plant. Net block of fixed assets aired on September 30, food at Rs.217.2 crores, with capital worth in progress at Rs.45.4 crores. Total gross borrowings as of September 30, were set 229.2 gross. Thank you very much. With this overview, we would now like to open the floor to moderator for the questions and answers.

Operator

Thank you very much, sir. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may enter star followed by one on their touchstone telephones. If you wish to remove yourself from the question queue, you may enter star followed by two. Participants are requested to please use only their handsets while asking a question. We will wait for a moment while the question queue assembles. To ask questions, please enter star and one. The first question is from the line of Aryan Bhatia from Inved. Please go ahead.

Aryan Bhatia, Analyst — Inved

Hi, thanks for the opportunity. My first question is on the delay in the welded line. So previously, we were expecting the line to be commissioned by H1, and now we are expecting in Q4, the trial production to begin in Q4. So I just wanted to know what led to this delay, and taken on the 8000 metric second line of welded, when are we expecting that line to be commissioned?

Samar Patel, Chairman

Yeah, thank you for the question. So, the delay in the welded project was purely because of the delay in the construction. If you remember, we had some disruptions in the month of March and April this year because of the gas issue. So, the civil contractors and the labor were not able to, you know, cope up with that issue, and because of that, the construction was a little bit delayed for two or three months purely because of that. And that is the reason that now we are starting it from U4. So the commissioning and the trial runs are already going on as we speak, and we'll be commencing the production in terms of revenue from January this financial year. And regarding the 8,000 tons of capacity, we are expecting that we start that from S1, to be more specific around, you know, April or June next.

Aryan Bhatia, Analyst — Inved

Got it. And second, on the EBITDA margin decline, so we have said that there were two or three reasons, like power costs has increased, trade costs has increased, and also due to the increase in competition from the private buyers. So, I just wanted to know, let's say, as these costs normalize, so do we expect the margins to go back to the... 15-16% level we were posting in the earlier financial year, or are we expecting the margins to be structurally in the rate of 12% to 13% due to the increase in competition from the private players? And on second, continue to this, and we have said that we were having some emerging inquiries from the sunrise sectors like data centers. So just wanted to know what we are planning to do based on the demand, especially from these sectors.

Ravi Patel, CFO

So, the margin pressure was driven by higher power and fuel costs, which increased from 3% to 4.9% of revenue, as well as the freight expenses, which also rose from 1.4% to 2.9% of revenue. So, that was the main reason for the EBITDA margin level, and despite this cost increase, Intense competition from private players limited our ability to pass on the additional cost through price hikes, resulting in largely stable realizations and consequent pressure on operating margins.

Aryan Bhatia, Analyst — Inved

So, are we expecting the margins to be in the range of 11-12% or are we expecting some increase in price so that our margins stabilise in the upcoming quarters?

Samar Patel, Chairman

So, given the ongoing geopolitical uncertainty and the limited visibility on how the situation may evolve, we believe it could be premature to provide specific margin guidance at this stage. However, our immediate priority is to protect and sustain the EBITDA margins achieved in Q2 effect management, while continuing to focus on operational efficiencies and cost of the market.

Aryan Bhatia, Analyst — Inved

Okay, so we are also putting some power plants, solar power plants. So do we expect that cost savings to come in in this financial year and also on the seamless plant? So what is the current capacity utilization for the 20,000 metric term?

Samar Patel, Chairman

So, for the solar power plants, for Seamless, it has already been capitalized. We are already utilizing the solar generation from the 4.99 Watt DC plant in Seamless-5 production. And for Vended also, we have already done the CAPEX. And when we start the production in January, we'll start utilizing the solar power capacity for Vended as well. So, yes, that will help us in saving, you know, on the side of power utilization, not on the gas one. Thank you very much.

Aryan Bhatia, Analyst — Inved

Okay, and on the capacity utilization for the C?

Samar Patel, Chairman

Sorry, for the, yes, for the utilization. See, so, basically due to competitive sensiveness in the market right now, we are unable to disclose the capacity utilization for HY-F527. However, we remain confident of achieving approximately 70% capacity utilization for seamless product for HY-F527.

Aryan Bhatia, Analyst — Inved

And sir, what is our current order book for the current financial year? And if you can please provide the revenue button or a beta button for the same for the both the products? Because as we see, some of the competitors are also providing the same.

Samar Patel, Chairman

I know, as I mentioned, that this is a very fragile situation in the market. Because of that, we will not disclose those kind of numbers. But yes, our order book stands at around 185 crores right now. And that is all from Seamless.

Aryan Bhatia, Analyst — Inved

Okay, and you said you had some inquiries from the emerging sectors like data centers. So, are we looking to have some orders or there are some inquiries which we are expecting from sectors like data centers and all?

Samar Patel, Chairman

Yes, so our marketing activities is already growing. Our salespeople are meeting, you know, people in the data center field, and yes, we are really sure that we would have some orders before we start our Vilded production. We will be utilizing our Vilded production capacity for data centers in this year as well.

Aryan Bhatia, Analyst — Inved

So, are we looking to get into things like schooling, or most of it would be from the welded side only?

Samar Patel, Chairman

No, most of it would be from the welded side only.

Aryan Bhatia, Analyst — Inved

Okay, and last question is on the debt. So, our long-term debt has increased from 40 to almost 100 crores. So, what is the reason and what should be the peak debt we should expect in this financial year? Because our debt has increased quite significantly, and there has no... No such growth in our top-line. So, just wanted to know.

Ravi Patel, CFO

So, now we recently added this 8000 metric tons of welded capacity, as well as we did approximately 9 megawatts of ground-mounted solar capacity. That is also to the debt. And regarding the peak debt, it could reach at 250 crores.

Aryan Bhatia, Analyst — Inved

What's the plan for reducing the debt? Is this the peak debt management is expecting? This is the peak debt. Okay. Thank you. Thank you. That's on my side.

Samar Patel, Chairman

Thank you.

Operator

Thank you. To ask questions, you may enter star and one. The next question is from the line of Shreyan's Jain from 3A Capital Services. Please go ahead.

Shreyans Jain, Analyst — 3A Capital Services

Hello, am I audible?

Operator

Yes, sir.

Shreyans Jain, Analyst — 3A Capital Services

Yes, bye.

Operator

Yes, sir, please ask your question. We will also line for the current participant. We will move on to the next. The line is from Bhavya Shah from 3A Capital Services. Please go ahead.

Bhavya Shah, Analyst — 3A Capital Services

Hello, am I audible?

Operator

Yes, sir, you are. Please proceed.

Bhavya Shah, Analyst — 3A Capital Services

So, my first question is, what size of pipes are we going to make in our expanded heritage segment?

Samar Patel, Chairman

So, we'll be producing up to 16 inches of welded pipes.

Bhavya Shah, Analyst — 3A Capital Services

Okay. And my second question is on data center front. What products are we looking to make? Are we going into spooling and other products, and what kind of certifications are required to enter this segment?

Samar Patel, Chairman

So, we'll not be changing our product. Spool will be a very different product. We'll be only focusing on selling welded pipes, which are used by spool manufacturers as well as the HVAC manufacturers, which are basically the cooling systems used in those kinds of data centers.

Bhavya Shah, Analyst — 3A Capital Services

Okay. And my other question is, post 100% utilization of mother hollow pipes. For captive purpose or for seamless purpose, what kind of margins can we achieve in seamless segment? Post peak utilization of well-dead, what margin we can achieve in that segment?

Samar Patel, Chairman

Sir, as I mentioned earlier, you know, because of this ongoing uncertainties and a lot of competition from the private players, we are not yet ready to provide specific margin guidance at this stage. But still, our immediate priority will be to protect and sustain the EBITDA margins which are achieved in Q2 FY27. While we continue to focus on operational efficiency and cost optimization.

Bhavya Shah, Analyst — 3A Capital Services

Okay, got it. So, other question is, recently, few players have announced capacity expansions in seamless pipes. So, what's your take on that industry-specific macro? How would this affect our company? Okay.

Samar Patel, Chairman

So, basically, Currently, we are already planning to be on the 70% utilization of our capacity, which we expect to ramp up in next year to 100%. So, I don't think those new additions will be a problem in terms of sales. The only pressure where we will get from this competition will be on the margins, we are expecting. Okay, got it. The industry has witnessed additional seamless capacities of approximately 60,000 to 70,000 metric tons per unit, you know, which leads to an increased competitive intensity, but the industry has increased pricing pressure, yeah, limiting our ability to pass on higher input to our customers.

Bhavya Shah, Analyst — 3A Capital Services

Got it, got it. And my other question is, could you throw some light on working capital days in welded segments? Is it better than seamless or how can we compare both of that? Working capital days for welded and seamless segments?

Ravi Patel, CFO

Yes, the capital cycle is lower in weldage compared to shieldage. So, in general, vintage has a total cycle of around 130 to 140 days, whereas seamless has around 180 to 185 days.

Bhavya Shah, Analyst — 3A Capital Services

Okay. Okay. Okay. Got it. And my last question is, for H1R cash flow has been excellent. What are the initiatives being taken and how these cash flows could improve going forward?

Ravi Patel, CFO

Going forward, when the Weldget production starts, our revenue will boost up, increasing the cash flow further, and it will be helpful for us to utilize the working capital cycle of the upcoming Weldget project. And if any free cash flow is there, we can go for reducing some debt.

Bhavya Shah, Analyst — 3A Capital Services

Okay. Could you give some more, some quantify some numbers around that for cash flows?

Samar Patel, Chairman

Not yet. We don't feel like this is the correct time. Once we start the welded production, maybe we'll be able to share those numbers.

Bhavya Shah, Analyst — 3A Capital Services

Okay. Thank you so much, sir.

Operator

Thank you. The next question is from Shreyans Jain from 3A Capital Services. Please go ahead.

Shreyans Jain, Analyst — 3A Capital Services

Hello. Am I audible now?

Operator

Yes, sir. You are. Please proceed.

Shreyans Jain, Analyst — 3A Capital Services

Yes, sir. A couple of questions. First, we have mentioned in a presentation that we remain confident to achieve top-line growth of 20% to 25%. So that translates around 30% to 35% growth in H2 on a Y-on-Y basis. So what gives us the confidence to achieve this growth? And could you please highlight any end-user industry where you are seeing such growth?

Samar Patel, Chairman

So, our revenue growth guidance of 22-25% factor will be expected contribution from our upcoming welded tube manufacturing facilities, which is on track to commence commercial operations in Q4 FY27. We expect H2 FY27 to deliver strong revenue growth compared to H1, supported by improved operating conditions, higher sales volume, and commissioning of our new welded equipment.

Shreyans Jain, Analyst — 3A Capital Services

Okay, and do you expect the seamless to observe the same growth as well?

Samar Patel, Chairman

Yes, so basically, including seamless as well as welded, we are expecting 20 to 25.

Shreyans Jain, Analyst — 3A Capital Services

Okay, and the 185 crore order book you mentioned, could you please bifurcate between the industry, end-user industry if you could?

Samar Patel, Chairman

Basically, end-user industry, currently we are seeing little bit low sales from oil and gas sectors. Out of 184, almost 40 percent is from the exports, which is basically our customers are major stockholders in the United States and Europe. Some of them are from automotive sectors, some of them are spooling manufacturers, who manufactures seamless spools for different applications. So, yeah. But oil and gas, we are seeing a little bit low tight right now, but from other sectors, we are seeing low.

Shreyans Jain, Analyst — 3A Capital Services

And, sir, we were expecting few tenders or orders from Bale. So, could you please throw some light on that?

Samar Patel, Chairman

Yes, sure. So, the timeline for new BHEL tenders remain uncertain. We expect the tendering process to take some time because we also don't have any timeline from the end customers and BHEL both. However, we continue to have order opportunities in the domestic market with orders from customers other than NTPC already in hand, providing continuous visibility for our domestic customers.

Shreyans Jain, Analyst — 3A Capital Services

For grants, a 185-coder order we've mentioned, could you please mention the execution timeline? Will it take three to four months from here?

Samar Patel, Chairman

It's almost between four to five months.

Shreyans Jain, Analyst — 3A Capital Services

Okay, okay. And sir, you mentioned about the competition from private players you were facing. So, could you mention which is more on seamless means on welded? Are the players expanding the capacity on welded front or seamless front?

Samar Patel, Chairman

Everything is for seamless front, sir. Around 60 to 70,000 tons of new capacity we have witnessed.

Shreyans Jain, Analyst — 3A Capital Services

Okay, and sir, one concern was that our competitors were growing on their top-line front. Margins, everyone was facing pressure, but our company would have also faced some pressure on top-line front as well. So what are the reasons for that? Because all other players are growing on top-line front, but our company didn't grow this quarter.

Samar Patel, Chairman

Sir, I already mentioned earlier regarding margin and revenue pressure because of the competition. I cannot comment on my competitors. But yeah, for us, primarily, as we mentioned, The revenue has been made in volumes, not in terms of value. The reason is because the selling prices, we are not able to cope with the new selling prices. And this is all because of the competition. So that is the reason you cannot see the revenue growth in terms of volume. However, we are not even giving volumes as well, but in terms of value. So that is the whole thing.

Shreyans Jain, Analyst — 3A Capital Services

And one last question, sir, as you mentioned to the previous participant that you can't mention about the margins in short term, but over the long term, could you please highlight what kind of margins can we do once peak utilizations are achieved for both seamless and welded?

Samar Patel, Chairman

Sir, again, but we will not be able to give you the margin guidelines in this time, at least not this time. But in action, we can sure give you some guidance once the situation is taken. Okay, sir.

Shreyans Jain, Analyst — 3A Capital Services

Thank you so much.

Randeep, Analyst — InvestShire Capital

Thank you.

Operator

Thank you. The next question is from the line of Rohit Suresh from Samatwa Investments. Please go ahead.

Rohit Suresh, Analyst — Samatwa Investments

Good evening, sir. Thank you for the opportunity. So, my first question would be in the past on the seamless pipes you had said with the anti-dumping duty on the mother hollow pipes. It doesn't make financial sense for a lot of players, you know, to import mother hollow and, you know, make the pipe here in India. So, has there been any change in the duty structure which has actually led to an increase in competition domestically?

Samar Patel, Chairman

No, sir, there has not been any change in the policies and core policies. The new capacities which we are talking about, which we have witnessed, 60,000, 70,000, all of those capacities are for both hot production and less cold production. So, everyone has came up with their own what we are seeing.

Rohit Suresh, Analyst — Samatwa Investments

Got it. So, but, uh, I just want to understand, uh, in a presentation, there's a slide where you say there's something called as a sustainable moat, right? So, so when you say a lot of smaller private players are, uh, coming in and increasing their competition, so where, I just want to know where exactly is our moat, right? In the seamless price, because, uh, if, if larger players are growing, uh, and you're facing competition from smaller players, so where Why does Koda actually lie, right? Because. Something is not working out in terms of the numbers. Uh, so what would be your take on the sustainable mode part which you mentioned in the PPT?

Samar Patel, Chairman

Thank you. Coming back to your answer. So, basically, in the TTT, sustainable mode, we have mentioned around 7 points in it, starting from one specialized production of SS5C, customer diversification, international presence. So, all of these things which we have mentioned are already there in the company. Right? Good morning, everyone. It's something that where we see Soda as a different company from our competition is our presence, approval, and accreditation. We have been a very, you know, brand, encouraging company since a very long time in the industry. The competition which we are facing is affecting our margins, no doubt, affecting our realizations, no doubt, but it does not affect our values and our customer base. You know, where we are able to sell our products, we don't see that we are declining on the revenue or on the volume utilization. In fact, we are doing good entering new markets, entering new regions. We are more focused on utilization of our production and exports as well. As you can see, we are growing our presence in exports. So that is our sustainable goal. This is a bad type, I can understand, but this is a rough patch which we have seen since the last 10 years. And the only thing which we can do right now is just face it, work on it, and just maintain what it is there right now. I think we see that there will be a bright future again after January. This is a rough patch which is temporarily affecting everything.

Rohit Suresh, Analyst — Samatwa Investments

Sir, but this oversupply situation that I get it, we'll do specialized production and all that. But if there's an oversupply in the market, and you also said you have higher inventory, high cost inventory with you. So how are we going to, in terms of, you know, passing on the prices in terms of volume growth, right? And even in terms of margins at the end of the day, don't you think it's going to be difficult for us to actually achieve growth in the seamless types?

Ravi Patel, CFO

See, there is a demand in terms of power sector, a huge demand in power sector. So even though these private players, when they start their production strategy, this power sector is demanding as well as imports from China are reducing to a very much extent. Even if there was anti-dumping duty, then also imports were there. But now what we see, the imports are reducing to almost negligible for the ordinary grades. So there won't be any challenge. Yes, challenge will be there on the margin side. Not on the revenue side.

Rohit Suresh, Analyst — Samatwa Investments

Got it. So, my second question would be on the exports part. So, I see US has done well for us. But in terms of Europe, right, there was a quota system which came up six months back. So, what is the response that's coming from your customers in Europe? Effectively, I guess, it's reduced, the quota has increased by 50%. And so then What's exactly happening in Europe right now?

Samar Patel, Chairman

In Europe, the business, yes, it has affected, it has been slow. But whatever customers are doing is they are just trying their best to, you know, resolve the situation with their government. Other than that, on the business part, they have also set a buying cycle where they are able to do it every quarterly. So, their part of purchase now comes on a quarterly basis. Plus, what they have done is they have invested into bonded warehouses and other stuff where they are able to store and keep the material, where they can clear the material at a low average of the NDT. The whole system of the European Union is not that once the quota of 4,000 tons is full, you cannot import it, or you have to pay 60%. The whole setting which the government has done is the total number of tonnages, for example, if there is the import of 6,000 tons next this quarter, then the duty will be shared among all the 6,000 tons of import among all customers, which will come to near, for example, 15%. So, every quarter, there is the slab of anti-dumping duty, which can differ from 5% up to 20% or 25%. The maximum until now, here, paid is 25%. Which has to be paid, not only those who have imported above 4,000 Dams of Kutta, which has to be paid and shared among all the imported, which includes the total volume of 6,000 Dams. So, it is not something that the imports are banned or they have to pay flat 50% on what they are buying above the quota rate. So, yes, the business has been affected, no doubt, but customers have to invest in some things which I mentioned right now. They have to pay higher duty, which means they have to sell at a higher price. They have to pay the rents and everything on the custom-bounded warehouse, which is, again, their part of the cost. So, I think this will take a routine system within few more quarters in Europe as well. So, the customers will also, you know, will also be, what you can say, they will also know that now they have to adapt this new system. Other than that, business cannot stop, they don't have any other option to buy from, not even the local manufacturing capacity are enough to fulfill the demand.

Rohit Suresh, Analyst — Samatwa Investments

So, my last question would be on the gross margins on the welded part. So, right now on the seamless part, our gross margins are around 32 to 33%. So, on the welded part, is it like 2 to 3% lower than the seamless in terms of gross margins?

Ravi Patel, CFO

No, gross margins of well-led are lower, around 25 to 30 percent, compared to seamless.

Rohit Suresh, Analyst — Samatwa Investments

Okay, you got it, sir. Thank you so much, and all the very best. Thank you.

Operator

Thank you. The next question is from the line of Randeep from InvestShire Capital. Please go ahead.

Randeep, Analyst — InvestShire Capital

My thanks to Dr. Charity. Sir, my question regarding the fuel cost. You mentioned that in this quarter, our fuel cost rose from 3% to 4.9%. So I'm assuming a lot of fuel cost has been reversed as of now. In case we come back to original cost of 3%, are we comfortable going back to a 15% margin?

Ravi Patel, CFO

Hello. Yes, I already told earlier that despite this cost increases, intense competition from private players also limited our ability to pass on additional cost through price highs. So that has made a pressure on the operating margins.

Randeep, Analyst — InvestShire Capital

Sir, you have very specific certification which these private players don't have. So, doesn't that give you the advantage of, I mean, commanding a better price?

Ravi Patel, CFO

Yes, we have that advantage. So, we can assume that if this power and fuel cost pressure was not there, then obviously the margins would be 2-3% higher. Okay.

Randeep, Analyst — InvestShire Capital

As of now, the prices have cooled down. So, assuming this price remains through December, so what could be the cost of fuel for this third quarter?

Samar Patel, Chairman

No, sir. The prices still haven't cooled down. We are still paying the same which we have paid earlier for the gas cost. Okay.

Randeep, Analyst — InvestShire Capital

And, sir, closely on this welded pipe, so whatever this expansion takes is, F528, what could be the maximum revenue potential for your company?

Samar Patel, Chairman

Sir, we are not sharing future numbers until S2, until unless we are starting the production in January, commencing the production. After that, we can depend on the numbers for some of the times.

Randeep, Analyst — InvestShire Capital

Okay, sir. Thank you so much, sir. Thank you.

Operator

Thank you. Thank you. Participants, if you have any questions at this time, you may enter star followed by one. The next question is from the line of Sai Kiran from Family Office. Please go ahead.

Sai Kiran, Analyst — SS Family Office

Hello, I'm audible?

Operator

Yes, sir. Yes.

Sai Kiran, Analyst — SS Family Office

Yeah, thank you, sir, for the opportunity. So, I just wanted to understand, other questions of mine have been answered. I have just one question on the working capital front. So, I have been observing that our working capital, it has been on the higher side, like, because of which our cash flow conversion has been impacted. Around more than 60-70% of one gets stuck in working capital. So, what are the hindrances we are facing on that front?

Ravi Patel, CFO

So, inventory days have increased during the period, primarily due to higher collection levels, because it has lowered and anticipated conversion of inventory into sales. Amid intense competition from private players. However, management expects inventory levels to gradually normalize during H2, supported by improved sales conversion, better alignment of production with market demand, and reduction in inventory or holding pace.

Sai Kiran, Analyst — SS Family Office

Okay, because since FI23, we have been facing, FI24 actually, we have been facing higher working capital issue. So, has the competition been high since FI24?

Ravi Patel, CFO

So, generally, seamless has a lengthy production cycle. So, even if these... To the peers, 180 to 180 days is the industry standard for the seamless manufacturing process, but when the welded production comes, welded has a lower cycle, so that will help us to reduce the overall inventory. Got it, got it.

Randeep, Analyst — InvestShire Capital

And are we taking any actions to reduce the working capital intensity of a more seamless business?

Ravi Patel, CFO

Yes, sir. We told that we will manage the inventory levels to normalize during S2.

Rohit Suresh, Analyst — Samatwa Investments

Got it, got it. Thank you.

Operator

Thank you. The next question is from the line of Bhavik Shah from Invexa MK Ventures. Please go ahead.

Bhavik Shah, Analyst — Invexa MK Ventures

Hello, sir. My question is regarding the capex. Sir, what is the capex spending? How much is to be spent right on the plant? And, sir, what is generally your thought process when, say, putting in a capex? What kind of return ratios or, say, payback periods do we have in mind when we are putting up a new capacity?

Ravi Patel, CFO

So, the capex you are talking about welded?

Bhavik Shah, Analyst — Invexa MK Ventures

Yeah, the 20,000 tons of new capacity which we are going to put in.

Ravi Patel, CFO

So the total budgeted capex stands at approximately 45 crores. We expect to utilize this remaining investment during FQI 28.

Bhavik Shah, Analyst — Invexa MK Ventures

And sir, what kind of, say, return ratios do we have in mind when we put in a CAPEX? And is there any other CAPEX which we are doing apart from these 45 crores?

Ravi Patel, CFO

No, there is no other CAPEX other than this as of now. And regarding the guidance for return on capital, At this geopolitical uncertainty, we go different from providing specific ROC guidance. But we remain confident that 15-20% ROC is a sustainable long-term target as our newly created capacity ramp-up.

Bhavik Shah, Analyst — Invexa MK Ventures

Okay, and so this 45 crores is for the entire 20,000 cents, right?

Ravi Patel, CFO

No, for the 8,000, at least 8,000.

Bhavik Shah, Analyst — Invexa MK Ventures

Okay, and for the 12,000 remaining, how much it will be?

Ravi Patel, CFO

That was around 40 crores, 40 to 50 crores.

Bhavik Shah, Analyst — Invexa MK Ventures

Okay, so 45 crores, which is 8,000 dollars is yet to be spent and it will be spent next year.

Operator

Thank you. To ask questions, please enter star and one. The next question is from Hemkesh Gattar from Green Portfolio. Please go ahead.

Hemkesh Gattar, Analyst — Green Portfolio

Hello, sir. Thank you for taking my question. My first question is regarding the domestic business, which has been weak for us, especially in Q2, where we see a revenue decline of almost 12%. So can you please explain why? Specifically, domestic market is performing so low for you, whereas exports are growing at such a good pace.

Samar Patel, Chairman

So, the decline in domestic revenue is because in India, currently, the oil and gas sector is running low, right? The only good demand which we are seeing in the domestic market is from the power sectors, you know, specifically, and some from the chemical sectors. So, for the power sector, we are already waiting for the BHL tender, as you know. And we have already done the process for the approval and audit has been done, everything has been done. And now when the next tender for DHL or NTPC will also be able to participate, which is the QPEX is done in a very huge amount, right? So currently we are seeing the demand. The power sector, especially DHL and MPPC, and some from the scattered markets in some chemical companies and stuff, but we are doing oil and gas in private sectors as well, but not in the PSU sectors, where we are only doing for the maintenance and the replacement jobs. Even the transportation business is running low here. Even the heat exchanger manufacturers and EPC contractors doesn't have that much job for all of us yet.

Hemkesh Gattar, Analyst — Green Portfolio

Okay, sir. And like we are already almost one and a half months in Q3. Do you see the market environment improving or is it same in the domestic? We should expect similar like revenue split between export and domestic for the entire FY27.

Samar Patel, Chairman

So, currently, our order book, as I mentioned, is of around 180-185 crores, which is almost, again, four to five months of order booking. In this order booking, we don't see anything different in domestic, but yet, for the whole year, we will see good demand from power supply as well. So, we'll be having some few orders and participations from non-antipathy customers for DHL as well.

Hemkesh Gattar, Analyst — Green Portfolio

So, the power infrastructure, we have seen H2 to be more like heavy compared to H1. So, accordingly, are you expecting the like demand and eventually revenue also improving from domestic in H2 accordingly?

Samar Patel, Chairman

Yes, sir.

Hemkesh Gattar, Analyst — Green Portfolio

Okay. And what is the current capacity utilization from the seamless capacity of yours?

Samar Patel, Chairman

So, current utilization, I mean, current capacity utilization, as we have mentioned in our earlier call, will be aligning and maintaining 70%, which we have already mentioned in our earlier call.

Hemkesh Gattar, Analyst — Green Portfolio

70%, and, like, you expect the same utilization level for, like, the entire FI27?

Ravi Patel, CFO

Yes, sir.

Hemkesh Gattar, Analyst — Green Portfolio

Okay, and is there any, like, is this running at optimum levels, or do you expect this to improve, maybe, next financial year?

Samar Patel, Chairman

Obviously, sir, next financial year will be, will be having plans to rent up at optimum, which is not optimum.

Hemkesh Gattar, Analyst — Green Portfolio

And, sir, what, like, what is the optimum level? Can you please give some color on that?

Samar Patel, Chairman

For utilization? Yes. For the finished goods, the optimum we can do is 80 to 85%.

Hemkesh Gattar, Analyst — Green Portfolio

80 to 85%. Okay, sir. And the last question regarding the European business. So, we have seen a healthy growth right now, 42% in this quarter. Overall, also H1, the revenue rate is also improving. What kind of tailwinds are you exactly seeing from the European market? And do you expect them to sustain beyond FY27, like in the long run also?

Samar Patel, Chairman

Yeah, despite the challenges in Europe, we are firmly on track to achieve our 25% annual growth guidance. To offset European slowdowns, we are actively expanding our footprint in the U.S. market, where we have established strong bed recognition. Additionally, other than that, securing the RENA Marine Certification in this quarter opens direct vendor access to European marine engineering and shipbuilding industry, specifically in the regions of Italy, providing a new high-margin revenue channel, where we are expecting some orders we will be executing in December or January.

Operator

Okay. Thank you. Thank you, Sobhata.

Samar Patel, Chairman

Thank you.

Operator

Thank you. As there are no further questions from participants, I now hand the floor over to the management for closing comments.

Samar Patel, Chairman

Thank you, everyone, for joining us. Have a good evening.

Operator

Thank you very much, Sam. On behalf of SCORA Tubes Limited and Capital Bridge Advisor, that concludes this conference call. Thank you all for joining us, and you may now just connect your lines. Thank you.