India's engineering, procurement and construction (EPC) sector is likely to remain under credit stress through FY27 despite expectations of a gradual recovery, as weak profitability, strained cash flows and execution challenges continue to weigh on the industry's financial health, India Ratings and Research (Ind-Ra) has said.
The ratings agency said the sector entered FY27 from a position of weakness after a difficult FY26, when revenue growth slowed to 2.8 per cent year-on-year, EBITDA margins fell to a multi-year low of 10.2 per cent and cash flow from operations (CFO) to EBITDA conversion dropped below 30 per cent.
Although EPC companies have guided for revenue growth of nearly 13 per cent in FY27, Ind-Ra has cut its own forecast to mid-single-digit growth, citing geopolitical uncertainty, execution bottlenecks and weak momentum at the start of the year.
"The EPC sector is at a difficult inflection point, with profitability and cash flows under sustained pressure despite healthy order book visibility," Krishan Binani, Director – Corporate Ratings at Ind-Ra, said.
"While a recovery is likely in FY27, it will be gradual and contingent on normalisation in execution conditions and improvement in cash collections. Credit profiles are expected to stabilise rather than meaningfully strengthen in the near term, with clear divergence between stronger and weaker players," he added.
According to the report, sector credit metrics deteriorated further in FY26. Interest coverage declined to around 3 times from 3.2 times a year earlier, while net leverage rose to 1.2 times from 1.0 times. Total outside liabilities to EBITDA increased to 7.5 times from 6.7 times.
Cash generation remained a major concern. CFO-to-EBITDA conversion fell to about 29 per cent, significantly below the historical average of nearly 65 per cent, reflecting continued pressure from delayed receivables and working capital requirements. Both EBITDA and operating cash flows declined for a second consecutive year.
Ind-Ra expects only a modest improvement in FY27, dependent largely on better collections and smoother project execution.
The agency also highlighted a widening gap between company expectations and actual performance. Initial industry projections for double-digit revenue growth in FY25 and FY26 ultimately translated into actual growth of just 3.6 per cent and 2.8 per cent respectively.
The sector reported a 1 per cent year-on-year revenue decline in the fourth quarter of FY26, a trend that Ind-Ra said could extend into the first half of FY27 due to commodity price volatility, labour shortages, supply-chain disruptions and persistent working capital pressures.
Profitability is expected to remain subdued. Ind-Ra believes EBITDA margins have likely bottomed out but will stay around 10 per cent during FY27, with limited room for expansion. Competitive bidding, rising fixed-price contracts, incomplete pass-through of input costs and ongoing supply-side disruptions are expected to continue constraining margins.
At the same time, capital expenditure requirements are likely to remain elevated as companies invest in mechanisation to address labour shortages and support increasingly complex projects.
Despite these challenges, order books remain healthy. Sector order books stood at around Rs 5 trillion at the end of FY26, equivalent to roughly three times annual revenue and up 14 per cent from a year earlier.
However, Ind-Ra warned that project awards declined nearly 18 per cent year-on-year in FY26, particularly in roads and water infrastructure, raising concerns over future growth visibility.
The agency expects the strongest opportunities to emerge in power transmission and distribution, energy storage, urban infrastructure, energy transition projects and mining. It also sees the potential for incremental growth from reconstruction opportunities in the Middle East.
Performance across EPC sub-sectors is expected to remain uneven. Transmission and distribution was the only segment to record healthy revenue growth in FY26, expanding 17.5 per cent while also achieving margin improvement. Roads are expected to stabilise after two years of double-digit declines, while water projects continue to face payment-related risks linked to government programmes.
Ind-Ra's recent rating actions reflected the sector's mixed outlook. Of 27 rating actions between March and May 2026, negative actions outnumbered positive ones, with payment delays, working capital stress and weaker profitability driving downgrades and outlook revisions. Positive actions were largely concentrated among coal mine developers, operators and equipment suppliers. |
