India’s construction sector is poised for a steady growth of 7.0–7.5% in the financial year 2026, according to recent projections by credit rating agency ICRA. This optimistic outlook follows nearly a decade of consistent expansion, with the sector growing at an average annual rate of 6.9% between FY2016 and FY2025.
Growth Drivers: Infrastructure, Capex, and Urban Push
ICRA has reaffirmed a “Stable” outlook for the sector, supported by:
- A robust pipeline of infrastructure projects
- Strong order book visibility
- Continued momentum in public capital expenditure (capex)
Segments such as urban infrastructure and irrigation are expected to outperform, helping offset slower execution in other areas.
Despite this positive trajectory, the sector continues to face structural headwinds. Competitive pressures and project execution delays are expected to limit profitability growth, even as revenue gradually recovers from the subdued levels seen in FY2025.
Revenue Growth Revised Downward
ICRA has revised its revenue growth projection for the construction sector to 6–8%, down from the earlier estimate of 8–10%. The downgrade is attributed to:
- Sluggish progress in road project awarding, especially under MoRTH and NHAI
- Execution delays in projects linked to the Jal Jeevan Mission
However, the sector’s order book-to-operating income (OB/OI) ratio remains strong, estimated at 3.5x as of March 31, 2026—a slight improvement over 3.4x in the previous fiscal—providing a solid medium-term revenue cushion.
Segment-Wise Outlook: Winners and Laggards
According to Suprio Banerjee, Vice President and Co-Group Head, Corporate Ratings at ICRA, order inflows declined by 19% year-on-year in FY2025, mainly due to the impact of General Elections in the first half.
Contractors focused heavily on road infrastructure are expected to underperform due to a slowdown in fresh orders and increased competition. In fact, several mid-sized players have an OB/OI ratio below 2.0x, indicating potential revenue stress.
In contrast, companies operating in urban infrastructure and the energy sector are better positioned to sustain double-digit revenue growth in FY2026, driven by strong demand and diversified project portfolios.
Competitive Pressures and Margin Outlook
The bidding landscape has become increasingly aggressive:
- MoRTH/NHAI projects are being awarded at significant discounts
- Sectors like metro rail, water supply, and sanitation are witnessing heightened competition due to new entrants diversifying into these areas
This intense bidding environment is expected to compress operating margins, even as stable commodity prices and economies of scale provide partial relief.
Financial Health and Profitability
The expiry of Atmanirbhar Bharat relief measures and delayed payments—particularly in Jal Jeevan Mission-linked contracts—have elongated the cash conversion cycle in FY2025. As a result, companies are likely to take on more debt to meet working capital needs.
However, the interest coverage ratio is projected to remain healthy at 3.5–3.8x in FY2026, supported by operational leverage.
Operating profitability is forecast to remain within the 10.25–10.75% range—broadly flat compared to FY2025 (10.6%) but below the peak levels of 13–14% seen in FY2021.
While road contractors may face continued stress, diversified EPC players engaged in urban development and energy projects are expected to fare better, with greater resilience to current market dynamics.
Final Word: Resilience Amidst Challenges
Despite ongoing challenges, ICRA notes a stable credit quality trend across its rated construction entities. Rating upgrades continue to outnumber downgrades, signaling resilience and adaptability in the face of macroeconomic and execution-related pressures.
