Rising costs, competition to dent margins for construction firms in FY26

Crisil says emerging construction companies will see slower growth and flat profits in FY26 despite strong order books due to cost pressures and intensified competition

Emerging diversified construction companies’ revenues in FY26 are estimated to grow by 9–11 per cent — slower, compared with a 15 per cent compounded annual growth rate reported in the five financial years till 2025, according to a report by Crisil.

 

The moderated growth is backed by growing order books and the timely execution of projects, supporting their credentials. However, limited ability to pass on the impact of sharp commodity price fluctuations and stronger competition will limit the operating margins to 10–11 per cent, the report said.

 

Also, aggressive bidding and increasing competition have already kept profitability rangebound for these companies over the past two fiscals.

 

Emerging corporates in the diversified construction industry refer to companies with a revenue profile of ₹200–2,000 crore for FY25, with a presence mainly in sectors such as roads, civil construction and urban infrastructure, railways and water.

 

While the working capital requirements of emerging construction companies will be higher year-on-year, it will be funded mainly by better cash flows and risk management practices, thus limiting fund-based working capital bank borrowings.

 

Timely execution of a sizeable order book will also entail debt-funded capex for equipment purchases. Nevertheless, strong cash flows will ensure leverage levels are under control, thereby supporting the credit profiles of companies.

 

Revenue visibility for the segment remains adequate, with the order book at around two times FY25 revenues, the report noted. Moreover, the order book is diversified, with 40 per cent exposure to civil construction and urban infrastructure, 34 per cent to roads, 12 per cent to railways and 10 per cent to water-related projects.

 

In the roads segment, these companies have increased exposure to both engineering, procurement and construction (EPC) and hybrid annuity model (HAM) projects over the past two fiscals. Also, increased spending on railways, buildings and other government-funded infrastructure projects has helped further diversify order books, thereby partially insulating the segment from a slowdown in the roads segment, as reflected in lower awarding of contracts in FY24 and FY25.

 

Rahul Guha, Senior Director, Crisil Ratings, said, “The government’s thrust on infrastructure and better access to funding continue to support growth of emerging corporates in the diversified construction industry. Diversity in order book should enable these players to log another year of steady revenue growth. However, profitability will remain flat on-year as competition within the segment intensifies and subcontracting charges remain in check.”

 

Going ahead, improving risk management practices is expected to support profitability and cash flows.

 

The balanced project mix may ensure a steady working capital cycle, while dependence on creditors continues to reduce. But timely funding availability, both fund- and non-fund-based, along with incremental deposit requirements, remains critical for continued growth, Crisil stated.