India’s highway sector is at a turning point, with subdued central government award activity over the past two years reshaping industry dynamics and pushing states into a more prominent role, according to India Ratings and Research (Ind-Ra). While rising state-level project awards have helped sustain execution momentum, the shift has intensified competition, complicated financing, and weighed on profitability, even as overall EPC sector revenue growth is expected to remain modest at 6–8% in FY26 amid continued pressure on highway segment revenues and margins.

Moreover, the sector is likely to witness a higher number of build-operate-transfer (BOT) projects both on center and state levels, necessitating increased private capital. Ind-Ra projects modest 6% to 8% yoy revenue growth for the overall engineering, procurement and construction (EPC) sector in FY26, largely due to flat-to-negative growth in the highways sector, after a significant revenue decline in FY25. Margins are expected to bottom out in FY26, after decreasing about 500bp over FY21-FY26. However, working capital cycles may start rising, as the project mix shifts towards more state awards.

Lull in Central Awards Likely to be End; Continued Stiff Competition: Ind-Ra expects national highways construction of 9,000-9,500km in FY26, down 10%-15% yoy (FY25: 10,660km, FY24: 12,349km, FY23: 10,331km), marking the lowest level since FY18. This decline is driven by a flat capex allocation of INR2.72 trillion for FY26, after just a 3% yoy increase in FY25. This is a marked slowdown from a robust 19% CAGR during FY21–FY24. Internal and Extra Budgetary Resources (IEBR) has fallen to negligible levels recently as National Highway Authority of India (NHAI; ‘IND AAA’/Stable) focuses on debt reduction, shifting towards budget-supported capex and monetisation.

Awarding activity has remained weak since FY24, with annual awards stagnating at 8,500km per year, compared to construction activity exceeding 10,500km, leading to reduced order backlogs. The Ministry of Road Transport and Highway (MoRTH) and NHAI have changed focus to corridor-based development and more access-controlled highways and expressways, planning 11,000km by FY27 and 15,000km by FY32, up from nearly 3,000km currently, moving away from the Bharatmala project. Ind-Ra expects ordering activity to revive in FY26, in view of the likely 10,500-11,000km awards from the central government. Project awards from MoRTH/NHAI have not yet picked up, although there has been some activity resumption with NHAI disclosing clearance status for projects worth INR1.15 trillion, where bids have been invited. Earlier, NHAI announced a project pipeline worth INR3.5 trillion to be awarded in FY26, indicating significant awarding potential.

State Awards to the Rescue: Ind-Ra expects continued momentum in state awards in FY26, after a significant spike in FY25, led by Maharashtra state projects worth over INR1.1 trillion, which bolstered EPC companies’ order books. In fact, prior to FY15, state road construction activity consistently outpaced central road activity, a trend expected to return in the coming years. State highway activity is likely to remain strong across states of Maharashtra, Uttar Pradesh, Bihar, Gujarat, Karnataka, Andhra Pradesh, Telangana, Punjab, and West Bengal, where several projects have been announced and awarded, with states increasingly opting for hybrid annuity model (HAM)/BOT model. Yet, the appetite of EPC players for state BOT projects remains uncertain, as recent projects have attracted a muted response.