June 20 (Bloomberg) -- India is ramping up spending on infrastructure to help secure states that border Pakistan and China, providing a boost to building companies that are grappling with the worst economic slowdown in a decade.
The South Asian country will open a 19-kilometer (12-mile) all-year rail link connecting the Himalayan territory of Kashmir with the rest of the nation as early as next week. The $3.4 billion rail project includes an 11.2-kilometer tunnel, India’s longest, built by Hindustan Construction Co. from Banihal in Jammu to Qazigund in the Kashmir valley.
Territorial disputes with nuclear-armed neighbors are prompting Prime Minister Manmohan Singh to accelerate public works in frontier provinces after China in 2007 opened a 1,956 kilometer rail line from Qinghai to Tibet, north of India’s Arunachal Pradesh state. Builders earn higher margins on projects in many of these states to offset risks such as insurgencies and tough terrain, said Amit Srivastava, a Mumbai-based analyst at Nirmal Bang Institutional Equities.
“These contracts are a big positive for builders in terms of experience and also margins,” he said. “Margins are usually higher and the experience helps companies bid for bigger projects.”
Such contracts typically yield as much as 200 basis points, or 2 percentage point, higher margin, he said.
Earnings before interest, depreciation and amortization as a percentage of sales, or Ebidta margin, at Hindustan Construction almost halved to 10 percent in the year ended March 31 from four years ago as India’s $1.8 trillion economy expanded 5 percent, the least since 2003.
The gauge for Punj Lloyd Ltd., India’s second-largest infrastructure construction company, averaged 6 percent in the five years through March 31, compared with 12 percent in the previous period, according to data compiled by Bloomberg.
Hindustan Construction shares have slumped 45 percent in the past year, compared with a 12 percent advance in the benchmark S&P BSE Sensex index. Punj Lloyd has declined 21 percent in the same period.
“The future looks bright and promising” for builders given the government’s focus on investing huge amounts of funds in the road and rail sectors, Punj Lloyd said in an e-mailed response to a query.
Punj Lloyd is currently implementing six road projects in the northeastern state of Assam, including the only link between the seven northeastern states and the rest of the nation. The company is also building an airport in Sikkim state in the region.
The federal government has earmarked 400 billion rupees ($6.7 billion) for a plan to build 7,090 kilometers of roads in the northeast, according to the Ministry of Development of North Eastern Region’s website.
This area, comprising Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura, is India’s remotest and least developed. Recurring ethnic and religious strife after the country became independent from British colonial rule 66 years ago have killed at least 5,261 people since 2005, according to the South Asian Terrorism Portal.
“India has neglected development projects in its border states for a variety of reasons,” said Deba Ranjan Mohanty, chairman of Indicia Research & Advisory, a New Delhi-based defense research organization. “Projects like the Kashmir rail link will give people, thus far shut out, opportunities for development.”
The rail link to Kashmir may also boost tourism in the state where half the population between 18 and 30 years of age is out of work. An anti-Indian insurgency that began in 1989 has killed 50,000 people over more than two decades in the territory claimed by both India and Pakistan.
India fought one war in China in 1962, while Kashmir was the focus of two of its three wars with Pakistan. India accuses China of occupying 38,000 square kilometers of its land in Jammu and Kashmir, while the government in Beijing says 90,000 square kilometers in Arunachal Pradesh belongs to China.
Hindustan Construction took seven years to build the Kashmir tunnel that cuts through the Pir Panjal range in the Himalayas. Chairman Ajit Gulabchand of the Mumbai-based builder declined to comment on the rail link.
The Kashmir railroad is considered a project of national importance and funds are directly released from the nation’s federal Ministry of Finance, according to a government statement. The country has earmarked as much as 195 billion rupees for the 311-kilometer Kashmir link that will go as far as Baramulla, located about 174 kilometers from Muzaffarabad, the capital of the territory controlled by Pakistan.
The projects in the border areas are sensitive and have political backing, giving confidence to builders about the government’s commitment to the contracts, said Rahul Kumar, chief financial officer at New Delhi-based Jaiprakash Associates Ltd., which is executing contracts in Kashmir and Himachal Pradesh.
“There are additional costs involved in these projects that need to be recovered and returns need to be secured,” Kumar said. “Profitability is greater than in others.”