Key Points

However, the report highlights that despite these hurdles, a recovery is expected compared to the flat performance recorded in FY2025, driven by ramp-ups in urban infrastructure and irrigation segments.

The rating agency expects profitability in the sector to remain constrained, forecasting operating margins in the narrow range of 10.25-10.75 per cent for FY2026, marginally lower than 10.6 per cent in FY2025. This is a significant drop from the peak margin range of 13.0-14.0 per cent seen in FY2021, primarily due to rising competition and aggressive bidding practices.

According to Suprio Banerjee, Vice President & Co-Group Head, Corporate Ratings at ICRA, "The order inflows in FY2025 registered a YoY decline of 19 per cent, primarily impacted by the General Elections during H1 FY2025. The contractors, focussed largely on the road segment, are likely to under-perform, compared to broader trends owing to the slowdown in order-awarding activity from the MoRTH/NHAI."

"Several mid-sized road construction entities have order book/revenue of less than 2.0 times, indicating imminent stress on their revenue prospects in FY2026, far below the industry average of around 3.5 times," he added.

As new players are diversifying, competitive pressures are mounting across sectors, with many contracts being awarded below base prices, especially in MoRTH and NHAI road projects. This trend has now extended to metro and water supply segments as well. Nonetheless, stable commodity prices and operating leverage are expected to lend partial support to the profitability of these companies.

However, ICRA projects that due to operational scale advantages interest coverage ratios will remain adequate at 3.5-3.8 times in FY2026.

- ANI