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Slower Execution Impacted Performance; Awarding Activity and Project Execution to Pick Up in Q4FY26

Financial Performance

* Road Infra Misses Estimates: During the quarter, road infrastructure companies under our coverage reported Revenue and EBITDA declines of 13%/17%, respectively, against our expectation of 9%/1%. The performance deviation was primarily due to slow execution and delay in receiving Appointed Dates of projects. Additionally, the revenue of KNR Constructions in the previous year included arbitration claims, leading to a wider gap.

* EBITDA Margins: In Q2FY26, our road infrastructure companies reported EBITDA margins of 12.4% vs. our estimate of 13.1%. The decrease was mainly due to the higher costs and slower execution. Company-wise Performance

* Road Sector Performance: GR Infra, HG Infra, J Kumar Infra reported revenue growth on a YoY basis but below our expectation owing to slower execution on the back of the extended monsoon and non-receipt of the appointed date. The companies also witnessed a drop in margins. GR Infra reported PAT, which was higher YoY, due to dividends received from InvIT. PNC Infratech and KNR Constructions’ revenue growth fell short of expectations owing to a delay in project execution.

* Non-road Sector Performance: KEC and Kalpataru Projects delivered a positive overall performance, supported by the execution of highmargin T&D projects. Ahluwalia Contracts posted revenue growth with the robust execution of a large order book. RITES reported strong revenue owing to growth in the consultancy and export segments. PSP Projects reported revenue growth as execution improved.

Short Term Outlook

* Sluggish Project Awarding: ICRA expects the road award by MoRTH to stand at 9,000 to 9,500 km in FY26, slightly higher than the estimated 8,500 km for FY25. A recent announcement for the construction of 25 Greenfield expressways, spanning 10,000 km and costing Rs 6 Lc Cr, including BoT projects of Rs 1.3 Lc Cr. Tighter bidding norms have been introduced by MoRTH—such as performance securities—to curb the aggressive low bidding. Most new orders are now expected under developer models, favouring financially strong players.

* Drop in Construction of Highways: In Q2FY26, the road infrastructure sector reported modest performance, with projects execution remaining subdued as construction activity declined to 644 km, down from 802 km in the corresponding period last year, mainly due to very subdued project awarding activity by the authorities over the past 2-2.5 years and widespread intense and prolonged monsoon across nation this year. NHAI has set an ambitious target of awarding 6,300 km length of new projects for FY26, which is expected to generate substantial new business for the industry players going forward. An improvement in road project awarding may help fuel an uptick in construction.

* Toll Collection: Total national highway toll collections are projected to surpass Rs 80,000 Cr for the first time in FY26, up from Rs 72,900 Cr in FY25. The number of toll users increased by 16.2% in FY26. The toll rate growth is likely to remain at 3% to 4% in FY26. At the same time, the Ministry has also asked the NITI Aayog to review the 30-year-old toll collection rules for national highways, aimed at creating a fairer pricing system to make the model more acceptable to all the stakeholders.

* Focus on Diversification: Companies have strategically diversified into Railways, Metros, Solar, Power Transmission, Water Projects, and Tunnelling to mitigate dependency on road projects and enhance margin profiles. Most companies expect 25–30% of revenue contribution from these segments going forward.

* Pressure on Margins: Margins remain under pressure due to the slow execution of projects. Amidst aggressive bidding, companies with stronger balance sheets, such as GRIL, PNC, and KNR, are better placed.

* Favourable Tailwinds in T&D and Civil Business: Both KEC and KPIL continue to focus aggressively on domestic and international T&D as well as Civil segment opportunities. KEC has a tender pipeline of over Rs 65,000 Cr with an order book of over Rs 29,000 Cr in the T&D business and Rs 10,000 Cr in the Civil business. KPIL has a tender pipeline of over Rs 1,50,000 Cr with an order book of Rs 26,275 Cr in T&D business and Rs 18,758 Cr in Civil business.

Long Term Outlook

* Pace of Road Construction to Gain Momentum: As NHAI launched a huge new projects pipeline comprising over 120 projects to be implemented on EPC, HAM, DBFOT formats with an estimated capital cost of over Rs 3 Lc Cr, the whole industry is looking for speedy conversion of this pipeline into awarding, for turnaround of the sector and to create a strong execution visibility from FY27 onwards.

* Government Support through Increase in Capex: In the Union Budget 2025-26, Capex for FY25 has been revised to Rs 10.2 Lc Cr, and for FY26 it has been increased to Rs 11.2 Lc Cr. A Rs 1.5 Lc Cr outlay has been proposed for 50-year interest-free loans to states for infrastructure projects, with each infrastructure ministry required to develop a three-year pipeline of PPP projects. The government will launch a National Geospatial Mission to modernise land records and develop spatial data, enhancing land governance and planning. A new Digital Network platform will also streamline export-related documentation and trade processes.

* Road Construction Companies - Passing through Tough Terrain: Road construction companies have faced a challenging operating environment over the past 9–12 months, driven by slower project awarding by authorities, delays in the receipt of appointed dates, prolonged monsoon conditions that hampered execution, and other operational hurdles. Despite these headwinds, the project pipeline remains robust. In light of these developments, we revise our sector outlook to cautiously optimistic from positive earlier. The near-term focus now centres on the pace of new order inflows and the timely receipt of appointed dates for already awarded projects.

* Favourable Tailwinds in T&D and Civil Business: Both KEC and KPIL continue to sharply focus on both domestic and international T&D orders as they foresee notable opportunities. With the heightened government thrust on renewables and the increase in power demand, business growth is assured. Going forward, KPIL expects T&D and Civil business to be a major revenue contributor, and KEC’s management foresees the T&D business being driven by opportunities in India, Abu Dhabi, and Saudi Arabia. Additionally, the Power Transmission plan provides visibility of the massive investment opportunity of over Rs 9 Lc Cr of the transmission sector till the year 2032.

* We remain cautiously optimistic about the growth prospects of the road sector and the companies operating within it. However, faster project awarding and accelerated land acquisition could significantly improve the outlook going forward. We remain positive for nonroad infra companies from a medium to long-term perspective.

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