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Highway focused companies reported weak earnings

Execution was a mixed bag in 1QFY26, with diversified EPC players such as Kalpataru Projects, KEC International and L&T delivering strong growth while highway companies like KNR Constructions, PNC Infratech and Ashoka Buildcon registered a sharp YoY decline due to lower executable backlogs and delayed payments. Execution is likely to remain weak across the board in 2QFY26 as well due to the heavy monsoon and, for highway companies, also due to weak executable backlogs as appointed dates for several projects are likely to come in end-2Q or in 3Q. Order inflows have been robust for diversified companies but relatively weaker for highway developers. Despite this, order backlogs remain moderate to strong for most companies, with book-to-bill ratios ranging from 2.5x to 4x TTM revenue for most players. EBITDA margins improved for diversified companies while being weak for highway companies. Gross debt and working capital stretched for most companies in 1QFY26 amid seasonality. Asset monetisation plans remain under progress for highway developers like PNC Infratech, HG Infra, Ashoka Buildcon and KNR Constructions, which will release significant growth capital. PNC Infratech and Ahluwalia Contracts are our top picks.

* Execution a mixed bag: In 1QFY26, execution was a mixed bag, with diversified EPC (Engineering, Procurement and Construction) players such as KPIL, KEC and L&T delivering strong growth led by robust order backlogs. KPIL/L&T/KEC saw revenue growth of 35%/16%/11% YoY during the quarter. However, highway companies like KNR, Ashoka and PNC saw a sharp YoY revenue decline of 42%/30%/13% due to lower executable order backlogs, delayed payments in JJM projects for PNC and in irrigation projects for KNR.

* EBITDA margin improved or remained stable for diversified companies while highway companies reported weak margins: EBITDA margins improved or remained stable for most diversified companies in 1QFY26. KEC International saw margin expansion of 100bps YoY to 7% while KPIL’s margin was stable at 8.5% (up 10bps YoY). Margins have been impacted for most highway companies due to poor revenue mix and operating deleverage. Among the highways pack, EBITDA margins of KNR/HG/Ceigall contracted sharply by 370bps/240bps/210bps YoY during the quarter. Gross debt and working capital stretched for most companies in 1QFY26 amid seasonality.

* Ordering activity strong for diversified companies, muted for highway companies: Among our coverage companies, order inflows for diversified names such as L&T, Ahluwalia Contracts, NCC and KPIL have been strong in YTDFY26 while being weak for most highway companies such as Ceigall and HG Infra. Despite this, order backlogs remain moderate to strong for most companies, with book-to-bill ratios ranging from 2.5x to 4x TTM revenue for most players.

* Highways bid pipeline at INR 683bn in Aug’25; expect improved awarding in FY26E: Highways bid pipeline stands at INR 683bn in Aug’25 (vs. INR 664bn in July-25). Of this, NHAI’s bid pipeline stands at INR 572bn with HAM/EPC/BOT projects accounting for 48%/28%/24% share. Order inflows for highway companies are likely to pick up in 2HFY26 after muted awarding in the last 2 years with c.INR 3.45tn (total capital cost; EPC cost: c.INR 2tn) worth of projects in the NHAI award pipeline for FY26E.

* L&T reports strong earnings in 1QFY26 - order inflows robust; adjusted PAT rises by 30% YoY: Consolidated/P&M business order inflows grew by 33%/41% YoY to INR 945bn/INR 766bn. Order backlog grew by 24% YoY to INR 6.1tn (3.1x TTM P&M revenue). P&M business revenue/EBITDA grew by 19% YoY to INR 458bn/INR 35bn while P&M margin was flat YoY. Consolidated revenue grew by 16% YoY to INR 637bn (JMFe: INR 629bn) led by strong execution in hydrocarbon (+50% YoY). Consolidated EBITDA grew by 13% YoY to INR 63bn. Adjusted PAT grew by 30% YoY to INR 36bn led by strong revenue growth and higher other income.

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