Road developers look beyond highways to shore up order books and revenue
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Road developers are diversifying beyond national highways (NH) to revive growth after a prolonged slowdown in project awards. However, the shift towards newer infrastructure segments is bringing fresh execution and funding challenges, even as a stronger order book is expected to stabilise revenue this fiscal, according to a report by Crisil.
Non-road segments, including state highways, power transmission, water supply, and sanitation, mining and irrigation, accounted for around 70% of the aggregate order book of road developers as of March 2026, nearly four times their share in March 2020, the report said.
An analysis of 23 large road developers, accounting for around half of the sector's revenue, shows that diversification is helping companies offset the slowdown in national highway projects. However, continued margin compression, higher equity commitments, and longer working capital cycles are likely to put pressure on their financial performance.
The slowdown in NH project awards has been a key challenge for the sector. Annual awards declined to 7,000-8,000 km during FY24-FY26, compared with 11,000-12,000 km in the preceding three fiscals. The moderation in order inflows led to a 9% annual decline in revenue over the past two fiscals.
With developers increasingly securing projects across other infrastructure segments, revenue is expected to stabilise this fiscal despite subdued execution of NH projects. However, the focus is now shifting from order book availability to execution quality, profitability and funding requirements.
Margins to remain under pressure
Profitability is likely to face further pressure, with operating margins expected to decline by 50-100 basis points this fiscal to around 11%, Crisil Ratings Director Anand Kulkarni said.
"Profitability of developers will likely remain under pressure, with a further decline of 50-100 bps this fiscal to ~11% as the current NH order book comprises competitively bid projects, the execution of which will compress margins," Kulkarni said.
Expansion into newer segments could also initially dilute profitability as companies invest in building capabilities and achieving scale. Margins in these segments are generally comparable to or lower than those in NH projects. Additionally, an increase in key input prices due to the West Asia conflict could add to cost pressures, he said.
Higher equity commitments, working capital needs
Diversification is also expected to strain cash flows through higher equity commitments and longer working capital cycles.
Most non-road public-private partnership projects require higher equity investments than road projects, particularly those executed under the hybrid annuity model (HAM). For instance, power transmission and renewable energy projects require equity commitments of at least 20% of project costs, compared with 10-12% for HAM projects.
Consequently, investments by road developers in projects are estimated to increase to around 80% of their net worth over the next couple of fiscals, from approximately 70% currently. Working capital cycles are also expected to remain elevated, as some newer segments involve greater counterparty risks and longer payment cycles than NH projects.
The pressure on cash flows is expected to moderate debt protection metrics. Interest coverage, a measure of a company's ability to service its interest obligations, is projected at around four times this fiscal, compared with an average of five times during fiscals 2024-2026.
"Given the emerging risks for the developers, debt protection metrics are likely to moderate with interest coverage expected at 4 times this fiscal compared with an average of ~5 times during fiscals 2024-2026. Nevertheless, credit profiles should remain resilient, as leverage is expected to stay under control," said Parth Shah, Associate Director, Crisil Ratings.
Developers are expected to continue monetising completed road assets to preserve balance sheet strength. Proceeds from such monetisation will help them recycle capital, meet working capital requirements and fund equity investments in new projects without materially increasing debt, Shah added.