India Ratings and Research predicts a 10%-12% annual revenue growth for the engineering, procurement, and construction (EPC) sector in FY26, following a lower 8%-10% growth rate in FY25. This growth is weaker than the FY22-FY24 CAGR of around 20%, driven by modest central budget growth, a shift of state spending away from capex, and mixed trends on private capital spending.
The EPC sector revenue growth is linked to the growth in nominal gross fixed capital formation (GFCF) and construction gross value added (CGVA), which Ind-Ra expects to grow at 11.3% yoy and 12.5% yoy, respectively, for FY26 vs 7.2% yoy and 8.6% yoy for FY25.
However, margin growth is likely to remain challenging due to heightened competition and lower drain from legacy contracts. Credit metrics and liquidity position are likely to improve in FY26, with the interest coverage ratio potentially increasing to 3.9x and cash flow from operations to interest cover recovering to 2.5x.
India Ratings and Research (Ind-Ra) anticipates a deceleration in revenue growth for India’s Engineering, Procurement, and Construction (EPC) sector in the fiscal year 2025-26 (FY26). The agency projects revenue growth to be less than 10% for FY25, a revision from the earlier forecast of 10%-12%, with subdued growth expected to continue into FY26.
Factors Influencing the Slowdown
- Reduced Central Government Capital Expenditure (Capex): The central government’s capex growth is projected to slow to 10% in FY26, a significant decline from the 30% compound annual growth rate (CAGR) observed between FY20 and FY24. This reduction is attributed to increased allocations to states and the Production-Linked Incentive (PLI) scheme, aiming to stimulate state and private sector investments.
- State-Level Spending Constraints: While state capital spending is expected to recover by 14.5% year-on-year in FY26 (up from 5.1% in FY25), this is contingent on increased capital grants from the central government. However, heightened commitments to welfare spending at the state level may pose risks to this anticipated recovery.
- Private Sector Investment Trends: Although there has been a rebound in private sector capex, it remains concentrated in specific sectors. The sustainability of this investment pattern is uncertain and may not broadly benefit the entire EPC industry.
Implications for the EPC Sector
The anticipated slowdown in revenue growth is expected to intensify competition within the EPC sector, potentially exerting pressure on profit margins. Companies may seek to diversify their project portfolios, especially in light of reduced awards in major segments such as national highways.
Despite these challenges, the Indian economy is projected to grow by 6.6% in FY26, slightly higher than the 6.4% growth forecast for the current fiscal year. This economic expansion is expected to be driven primarily by investments, similar to trends observed in previous years.
Strategic Considerations for EPC Companies
In response to the evolving economic landscape, EPC firms may need to adapt by:
- Exploring Diversified Opportunities: Shifting focus towards sectors with sustained or increasing investment, such as renewable energy or urban infrastructure, to offset potential declines in traditional areas.
- Enhancing Operational Efficiency: Implementing cost-control measures and optimizing project execution to maintain profitability amidst tighter margins.
- Strengthening State-Level Engagements: Building robust relationships with state governments to capitalize on decentralized spending and localized projects.
By proactively addressing these factors, EPC companies can navigate the projected slowdown and position themselves for sustainable growth in the evolving market environment.
Group Media Publication
Construction, Infrastructure and Mining
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