Highway Sector Faces Headwinds: States Take Control as Central Awards Stall

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AuthorVihaan Mehta|Published at:
Highway Sector Faces Headwinds: States Take Control as Central Awards Stall
Overview

India Ratings and Research reports challenges in the highway sector due to two years of muted central award activity. Increased competition and execution issues persist, with states now driving project awards. This shift is expected to result in subdued revenue and margins, though overall EPC sector revenue growth is projected at 6-8% for FY26.

Highway Sector Dynamics Shift

India's highway sector is navigating significant challenges, marked by a two-year lull in central government project awards. This slowdown has intensified competition and exacerbated persistent issues with project execution. India Ratings and Research (Ind-Ra) highlighted these concerns in a report released Monday.

States Assume Project Leadership

The absence of robust central project pipelines has effectively placed state governments in the driver's seat for highway development. While this decentralization ensures project continuity, it introduces new complexities related to execution strategies and financing mechanisms. Krishan Binani, Director at Ind-Ra's Corporate Ratings, noted this critical shift in sector dynamics.

Increased Reliance on Private Capital

The sector anticipates a higher frequency of Build-Operate-Transfer (BOT) projects, both at the central and state levels. This trend necessitates a greater infusion of private capital to fund these infrastructure endeavors.

Financial Outlook Under Pressure

Ind-Ra forecasts a modest year-on-year revenue growth of 6% to 8% for the broader engineering, procurement, and construction (EPC) sector in fiscal year 2026. However, this projection is tempered by expectations of flat-to-negative revenue growth within the highways segment itself, following a substantial decline anticipated in FY25. Margins are predicted to reach their lowest point in FY26, having already decreased by approximately 500 basis points between FY21 and FY26. Furthermore, working capital cycles may lengthen as the project portfolio increasingly comprises state-awarded projects.

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