Construction industry expected to grow by 8-10% in FY26, says Icra

India's construction industry's operating income is expected to grow by 8–10 per cent in the ongoing financial year ending March 2026 (FY26), on the back of adequate order books and a low base of FY25, ICRA said on Wednesday.

 

However, this marks a moderation from the long-term compound annual growth rate (CAGR) of 15 per cent for the FY18–FY24 period.

 

ICRA estimates the aggregate order book to operating income ratio for construction entities at 3.5 times as on March 31, 2025, reflecting healthy growth prospects and revenue visibility. The operating margin of the players is expected to be steady at 10.5–11 per cent for FY25 and FY26.

 

The model code of conduct in Q1FY25, an elongated monsoon period, and a shift to milestone-based billing in Q2FY25 significantly impacted construction activities, especially for road projects.

 

After witnessing a muted 1.5 per cent year-on-year (Y-o-Y) growth during the first half of FY25, the execution pace gained momentum in the third quarter and continued in the fourth quarter, but the operating income remained between 1 and 3 per cent.

 

Suprio Banerjee, vice-president and co-group head, corporate ratings, ICRA, said: “Although the order inflows in FY25 are likely to trail those seen in FY24, the pick-up in order awarding activity from Q3FY25 onwards is expected to result in a satisfactory order book position. The contractors, focused largely on the road segment, are likely to underperform compared to broader trends owing to a slowdown in order-awarding activity from the Ministry of Road Transport and Highways (MoRTH)/National Highways Authority of India (NHAI). Several mid-sized road construction entities have an order book to revenue ratio of less than 2.0 times, indicating imminent stress on their revenue prospects in FY26.”

 

Diversified players, particularly those focusing on urban infrastructure, renewable, and water-related projects, are anticipated to perform relatively better in FY25.

 

Sub-segments like railways, roads, and urban infrastructure have reported stiff competition in recent years. The majority of the road projects under the MoRTH/NHAI were awarded at a sizable discount compared to the authority’s base price. Competition in other sectors (metro, railways, and water supply and sanitation) has also intensified, with new entrants trying to diversify their order books, ICRA stated.

 

The ratings agency expects the operating margin of the players to remain range-bound within 10.5–11.0 per cent for FY25 and FY26, supported by relatively stable input prices and operating leverage benefits. However, the operating profit margin (OPM) has gradually moderated from 13–14 per cent levels in FY21 owing to increasing competition.

 

“The cash conversion cycle is expected to sustain at the current levels, given that the expiry of the Atmanirbhar Bharat relief measures has already elongated the working capital cycle for players in FY25. 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 3.6–3.9 times in FY26. Given the moderate leverage and satisfactory debt coverage metrics, ICRA maintains a stable outlook on the construction sector,” Banerjee added.