Indian construction sector to grow by 7-7.5% in financial year 2026: ICRA

This comes after nearly a decade of steady growth, with the sector expanding at an average rate of 6.9 per cent per year between 2016 and 2025.

The credit rating agency reaffirmed a stable outlook for India's construction sector for FY2026, supported by a healthy pipeline of infrastructure projects, strong order book visibility, and continued public capex.

However, persistent competitive intensity and delays in project execution are likely to cap profitability growth, even as revenue recovery is expected from FY2025 lows.

Revenue growth, however, has been revised downward to 6-8 per cent from the earlier 8-10 per cent projection, due to continued headwinds in road-awarding activity and a slowdown in Jal Jeevan Mission-linked project execution.

Urban infrastructure and irrigation are expected to drive a relatively stronger performance in the current fiscal.

The average order book-to-operating income (OB/OI) ratio for ICRA's sample set remains strong, estimated at 3.5x as on March 31, 2026 (compared to 3.4x as on March 31, 2025), providing medium-term revenue visibility.

Giving more insights, Suprio Banerjee, Vice President and Co-Group Head, Corporate Ratings, ICRA, said, "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. However, players focussed on segments like urban infrastructure or energy sector are expected to sustain double-digit revenue growth in the current fiscal," Banerjee said.

Increased bidding pressure is visible across multiple segments. A majority of MoRTH/NHAI road projects were awarded at steep discounts to base prices, signalling elevated competition.

Metro, water supply, and sanitation segments also face similar dynamics due to new entrants diversifying their portfolios.

The rating agency added that this heightened competition is expected to keep margins in check, even as stable commodity prices and scale benefits offer some relief.

"The cash conversion cycle has elongated in FY2025 with the expiry of the Atmanirbhar Bharat relief measures and elongation in payments under the Jal Jeevan Mission. While debt levels are likely to increase to support the higher working capital requirements, the corresponding operational leverage benefits are projected to keep the interest cover adequate at 3.5-3.8 times in FY2026e. Given the moderate leverage and satisfactory debt coverage metrics, ICRA maintains a Stable outlook on the construction sector," Banerjee reiterated.

Operating profitability is forecast to remain within the 10.25-10.75 per cent range in FY2026, similar to 10.6 per cent in FY2025, but sharply lower than the 13.0-14.0 per cent levels recorded in FY2021.

Road-focused contractors are expected to face the most stress, while diversified EPC players, particularly those engaged in urban or energy infrastructure, are seen to be in a stronger position to withstand current market dynamics.

Despite sectoral challenges, ICRA notes steady credit quality across its rated construction portfolio, with rating upgrades continuing to outpace downgrades. This reflects resilience amid macro and execution-linked pressures. (ANI)