diff --git a/controller/binding.c b/controller/binding.c
index e79220ed5..61cdc8dbc 100644
--- a/controller/binding.c
+++ b/controller/binding.c
@@ -502,7 +502,7 @@ remove_local_lport_ids(const struct sbrec_port_binding *pb,
  * 'struct local_binding' is used. A shash of these local bindings is
  * maintained with the 'external_ids:iface-id' as the key to the shash.
  *
- * struct local_binding has 3 main fields:
+ * struct local_binding (defined in binding.h) has 3 main fields:
  *    - type
  *    - OVS interface row object
  *    - Port_Binding row object
@@ -553,21 +553,6 @@ remove_local_lport_ids(const struct sbrec_port_binding *pb,
  *   - For each 'virtual' Port Binding (of type BT_VIRTUAL) provided its parent
  *     is bound to this chassis.
  */
-enum local_binding_type {
-    BT_VIF,
-    BT_CONTAINER,
-    BT_VIRTUAL
-};
-
-struct local_binding {
-    char *name;
-    enum local_binding_type type;
-    const struct ovsrec_interface *iface;
-    const struct sbrec_port_binding *pb;
-
-    /* shash of 'struct local_binding' representing children. */
-    struct shash children;
-};
 
 static struct local_binding *
 local_binding_create(const char *name, const struct ovsrec_interface *iface,
@@ -589,12 +574,6 @@ local_binding_add(struct shash *local_bindings, struct local_binding *lbinding)
     shash_add(local_bindings, lbinding->name, lbinding);
 }
 
-static struct local_binding *
-local_binding_find(struct shash *local_bindings, const char *name)
-{
-    return shash_find_data(local_bindings, name);
-}
-
 static void
 local_binding_destroy(struct local_binding *lbinding)
 {
diff --git a/controller/binding.h b/controller/binding.h
index f10c92bf9..e3d1f07de 100644
--- a/controller/binding.h
+++ b/controller/binding.h
@@ -18,6 +18,7 @@
 #define OVN_BINDING_H 1
 
 #include <stdbool.h>
+#include "openvswitch/shash.h"
 
 struct hmap;
 struct ovsdb_idl;
@@ -32,7 +33,6 @@ struct sbrec_chassis;
 struct sbrec_port_binding_table;
 struct sset;
 struct sbrec_port_binding;
-struct shash;
 
 struct binding_ctx_in {
     struct ovsdb_idl_txn *ovnsb_idl_txn;
@@ -64,6 +64,28 @@ struct binding_ctx_out {
     struct smap *local_iface_ids;
 };
 
+enum local_binding_type {
+    BT_VIF,
+    BT_CONTAINER,
+    BT_VIRTUAL
+};
+
+struct local_binding {
+    char *name;
+    enum local_binding_type type;
+    const struct ovsrec_interface *iface;
+    const struct sbrec_port_binding *pb;
+
+    /* shash of 'struct local_binding' representing children. */
+    struct shash children;
+};
+
+static inline struct local_binding *
+local_binding_find(struct shash *local_bindings, const char *name)
+{
+    return shash_find_data(local_bindings, name);
+}
+
 void binding_register_ovs_idl(struct ovsdb_idl *);
 void binding_run(struct binding_ctx_in *, struct binding_ctx_out *);
 bool binding_cleanup(struct ovsdb_idl_txn *ovnsb_idl_txn,
diff --git a/controller/ovn-controller.c b/controller/ovn-controller.c
index bb82b15dc..a6bee1f76 100644
--- a/controller/ovn-controller.c
+++ b/controller/ovn-controller.c
@@ -1361,8 +1361,13 @@ static void init_physical_ctx(struct engine_node *node,
 
     ovs_assert(br_int && chassis);
 
+    struct ovsrec_interface_table *iface_table =
+        (struct ovsrec_interface_table *)EN_OVSDB_GET(
+            engine_get_input("OVS_interface", node));
+
     struct ed_type_ct_zones *ct_zones_data =
         engine_get_input_data("ct_zones", node);
+
     struct simap *ct_zones = &ct_zones_data->current;
 
     p_ctx->sbrec_port_binding_by_name = sbrec_port_binding_by_name;
@@ -1370,12 +1375,14 @@ static void init_physical_ctx(struct engine_node *node,
     p_ctx->mc_group_table = multicast_group_table;
     p_ctx->br_int = br_int;
     p_ctx->chassis_table = chassis_table;
+    p_ctx->iface_table = iface_table;
     p_ctx->chassis = chassis;
     p_ctx->active_tunnels = &rt_data->active_tunnels;
     p_ctx->local_datapaths = &rt_data->local_datapaths;
     p_ctx->local_lports = &rt_data->local_lports;
     p_ctx->ct_zones = ct_zones;
     p_ctx->mff_ovn_geneve = ed_mff_ovn_geneve->mff_ovn_geneve;
+    p_ctx->local_bindings = &rt_data->local_bindings;
 }
 
 static void init_lflow_ctx(struct engine_node *node,
@@ -1783,6 +1790,125 @@ flow_output_port_groups_handler(struct engine_node *node, void *data)
     return _flow_output_resource_ref_handler(node, data, REF_TYPE_PORTGROUP);
 }
 
+/* Engine node en_physical_flow_changes indicates whether
+ * there is a need to
+ *   - recompute only physical flows or
+ *   - we can incrementally process the physical flows.
+ *
+ * en_physical_flow_changes is an input to flow_output engine node.
+ * If the engine node 'en_physical_flow_changes' gets updated during
+ * engine run, it means the handler for this -
+ * flow_output_physical_flow_changes_handler() will either
+ *    - recompute the physical flows by calling 'physical_run() or
+ *    - incrementlly process some of the changes for physical flow
+ *      calculation. Right now we handle OVS interfaces changes
+ *      for physical flow computation.
+ *
+ * When ever a port binding happens, the follow up
+ * activity is the zone id allocation for that port binding.
+ * With this intermediate engine node, we avoid full recomputation.
+ * Instead we do physical flow computation (either full recomputation
+ * by calling physical_run() or handling the changes incrementally.
+ *
+ * Hence this is an intermediate engine node to indicate the
+ * flow_output engine to recomputes/compute the physical flows.
+ *
+ * TODO 1. Ideally this engine node should recompute/compute the physical
+ *      flows instead of relegating it to the flow_output node.
+ *      But this requires splitting the flow_output node to
+ *      logical_flow_output and physical_flow_output.
+ *
+ * TODO 2. We can further optimise the en_ct_zone changes to
+ *         compute the phsyical flows for changed zone ids.
+ *
+ * TODO 3: physical.c has a global simap -localvif_to_ofport which stores the
+ *         local OVS interfaces and the ofport numbers. Ideally this should be
+ *         part of the engine data.
+ */
+struct ed_type_pfc_data {
+    /* Both these variables are tracked and set in each engine run. */
+    bool recompute_physical_flows;
+    bool ovs_ifaces_changed;
+};
+
+static void
+en_physical_flow_changes_clear_tracked_data(void *data_)
+{
+    struct ed_type_pfc_data *data = data_;
+    data->recompute_physical_flows = false;
+    data->ovs_ifaces_changed = false;
+}
+
+static void *
+en_physical_flow_changes_init(struct engine_node *node OVS_UNUSED,
+                              struct engine_arg *arg OVS_UNUSED)
+{
+    struct ed_type_pfc_data *data = xzalloc(sizeof *data);
+    return data;
+}
+
+static void
+en_physical_flow_changes_cleanup(void *data OVS_UNUSED)
+{
+}
+
+/* Indicate to the flow_output engine that we need to recompute physical
+ * flows. */
+static void
+en_physical_flow_changes_run(struct engine_node *node, void *data)
+{
+    struct ed_type_pfc_data *pfc_tdata = data;
+    pfc_tdata->recompute_physical_flows = true;
+    engine_set_node_state(node, EN_UPDATED);
+}
+
+/* There are OVS interface changes. Indicate to the flow_output engine
+ * to handle these OVS interface changes for physical flow computations. */
+static bool
+physical_flow_changes_ovs_iface_handler(struct engine_node *node, void *data)
+{
+    struct ed_type_pfc_data *pfc_tdata = data;
+    pfc_tdata->ovs_ifaces_changed = true;
+    engine_set_node_state(node, EN_UPDATED);
+    return true;
+}
+
+static bool
+flow_output_physical_flow_changes_handler(struct engine_node *node, void *data)
+{
+    struct ed_type_runtime_data *rt_data =
+        engine_get_input_data("runtime_data", node);
+
+    struct ed_type_flow_output *fo = data;
+    struct physical_ctx p_ctx;
+    init_physical_ctx(node, rt_data, &p_ctx);
+
+    engine_set_node_state(node, EN_UPDATED);
+    struct ed_type_pfc_data *pfc_data =
+        engine_get_input_data("physical_flow_changes", node);
+
+    if (pfc_data->recompute_physical_flows) {
+        /* This indicates that we need to recompute the physical flows. */
+        physical_run(&p_ctx, &fo->flow_table);
+        return true;
+    }
+
+    if (pfc_data->ovs_ifaces_changed) {
+        /* There are OVS interface changes. Try to handle them
+         * incrementally. */
+        return physical_handle_ovs_iface_changes(&p_ctx, &fo->flow_table);
+    }
+
+    return true;
+}
+
+static bool
+flow_output_noop_handler(struct engine_node *node OVS_UNUSED,
+                         void *data OVS_UNUSED)
+{
+    return true;
+}
+
 struct ovn_controller_exit_args {
     bool *exiting;
     bool *restart;
@@ -1907,6 +2033,8 @@ main(int argc, char *argv[])
     ENGINE_NODE(runtime_data, "runtime_data");
     ENGINE_NODE(mff_ovn_geneve, "mff_ovn_geneve");
     ENGINE_NODE(ofctrl_is_connected, "ofctrl_is_connected");
+    ENGINE_NODE_WITH_CLEAR_TRACK_DATA(physical_flow_changes,
+                                      "physical_flow_changes");
     ENGINE_NODE(flow_output, "flow_output");
     ENGINE_NODE(addr_sets, "addr_sets");
     ENGINE_NODE(port_groups, "port_groups");
@@ -1926,13 +2054,28 @@ main(int argc, char *argv[])
     engine_add_input(&en_port_groups, &en_sb_port_group,
                      port_groups_sb_port_group_handler);
 
+    /* Engine node physical_flow_changes indicates whether
+     * we can recompute only physical flows or we can
+     * incrementally process the physical flows.
+     */
+    engine_add_input(&en_physical_flow_changes, &en_ct_zones,
+                     NULL);
+    engine_add_input(&en_physical_flow_changes, &en_ovs_interface,
+                     physical_flow_changes_ovs_iface_handler);
+
     engine_add_input(&en_flow_output, &en_addr_sets,
                      flow_output_addr_sets_handler);
     engine_add_input(&en_flow_output, &en_port_groups,
                      flow_output_port_groups_handler);
     engine_add_input(&en_flow_output, &en_runtime_data, NULL);
-    engine_add_input(&en_flow_output, &en_ct_zones, NULL);
     engine_add_input(&en_flow_output, &en_mff_ovn_geneve, NULL);
+    engine_add_input(&en_flow_output, &en_physical_flow_changes,
+                     flow_output_physical_flow_changes_handler);
+
+    /* We need this input nodes for only data. Hence the noop handler. */
+    engine_add_input(&en_flow_output, &en_ct_zones, flow_output_noop_handler);
+    engine_add_input(&en_flow_output, &en_ovs_interface,
+                     flow_output_noop_handler);
 
     engine_add_input(&en_flow_output, &en_ovs_open_vswitch, NULL);
     engine_add_input(&en_flow_output, &en_ovs_bridge, NULL);
diff --git a/controller/physical.c b/controller/physical.c
index f06313b9d..240ec158e 100644
--- a/controller/physical.c
+++ b/controller/physical.c
@@ -1780,6 +1780,57 @@ physical_run(struct physical_ctx *p_ctx,
     simap_destroy(&new_tunnel_to_ofport);
 }
 
+bool
+physical_handle_ovs_iface_changes(struct physical_ctx *p_ctx,
+                                  struct ovn_desired_flow_table *flow_table)
+{
+    const struct ovsrec_interface *iface_rec;
+    OVSREC_INTERFACE_TABLE_FOR_EACH_TRACKED (iface_rec, p_ctx->iface_table) {
+        if (!strcmp(iface_rec->type, "geneve") ||
+            !strcmp(iface_rec->type, "patch")) {
+            return false;
+        }
+    }
+
+    struct ofpbuf ofpacts;
+    ofpbuf_init(&ofpacts, 0);
+
+    OVSREC_INTERFACE_TABLE_FOR_EACH_TRACKED (iface_rec, p_ctx->iface_table) {
+        const char *iface_id = smap_get(&iface_rec->external_ids, "iface-id");
+        if (!iface_id) {
+            continue;
+        }
+
+        const struct local_binding *lb =
+            local_binding_find(p_ctx->local_bindings, iface_id);
+
+        if (!lb || !lb->pb) {
+            continue;
+        }
+
+        int64_t ofport = iface_rec->n_ofport ? *iface_rec->ofport : 0;
+        if (ovsrec_interface_is_deleted(iface_rec)) {
+            ofctrl_remove_flows(flow_table, &lb->pb->header_.uuid);
+            simap_find_and_delete(&localvif_to_ofport, iface_id);
+        } else {
+            if (!ovsrec_interface_is_new(iface_rec)) {
+                ofctrl_remove_flows(flow_table, &lb->pb->header_.uuid);
+            }
+
+            simap_put(&localvif_to_ofport, iface_id, ofport);
+            consider_port_binding(p_ctx->sbrec_port_binding_by_name,
+                                  p_ctx->mff_ovn_geneve, p_ctx->ct_zones,
+                                  p_ctx->active_tunnels,
+                                  p_ctx->local_datapaths,
+                                  lb->pb, p_ctx->chassis,
+                                  flow_table, &ofpacts);
+        }
+    }
+
+    ofpbuf_uninit(&ofpacts);
+    return true;
+}
+
 bool
 get_tunnel_ofport(const char *chassis_name, char *encap_ip, ofp_port_t *ofport)
 {
diff --git a/controller/physical.h b/controller/physical.h
index dadf84ea1..9ca34436a 100644
--- a/controller/physical.h
+++ b/controller/physical.h
@@ -49,11 +49,13 @@ struct physical_ctx {
     const struct ovsrec_bridge *br_int;
     const struct sbrec_chassis_table *chassis_table;
     const struct sbrec_chassis *chassis;
+    const struct ovsrec_interface_table *iface_table;
     const struct sset *active_tunnels;
     struct hmap *local_datapaths;
     struct sset *local_lports;
     const struct simap *ct_zones;
     enum mf_field_id mff_ovn_geneve;
+    struct shash *local_bindings;
 };
 
 void physical_register_ovs_idl(struct ovsdb_idl *);
@@ -63,7 +65,8 @@ void physical_handle_port_binding_changes(struct physical_ctx *,
                                           struct ovn_desired_flow_table *);
 void physical_handle_mc_group_changes(struct physical_ctx *,
                                       struct ovn_desired_flow_table *);
-
+bool physical_handle_ovs_iface_changes(struct physical_ctx *,
+                                       struct ovn_desired_flow_table *);
 bool get_tunnel_ofport(const char *chassis_name, char *encap_ip,
                        ofp_port_t *ofport);
 #endif /* controller/physical.h */
