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In early September 2023, we wrote to you about Data Centres and the lucrative opportunity that their market presents.
Data centres, also described as the ‘data factory of the world’, house the technological infrastructure that store, process, and manage colossal amounts of data. Join our Telegram Channel
These unassuming structures work tirelessly behind the scenes to ensure the seamless functioning of the technologies we heavily rely on.
Without them, you wouldn’t be able to chat on WhatsApp or initiate a UPI transaction or binge-watch your favourite show on Netflix.
Critical infrastructure like data centres could see massive investments in the coming years.
Big tech majors like Google, Microsoft and Amazon have already started setting up their hyperscale data centers in India.
India’s data centre inventory is likely to double to about 20 million square feet (MSF) by 2025 from the current 10.3 MSF with the advent of 5G, increased multi-cloud usage, and data localisation.
We at Equitymaster believe the data centre market is a lucrative opportunity and the stocks involved in this space could possibly be the next wealth creators.
Please note, the stocks discussed herein are directly or indirectly involved in the data centre industry. They may not be the ones that primarily own data centres or build them.
1. Kirloskar Oil Engines
First on this list is Kirloskar Oil Engines, the flagship company of the Kirloskar group, which manufactures and services diesel engines and diesel generator sets. Join our Telegram Channel
I know what you’re thinking… how does a renowned designer, manufacturer and distributor of engines and power solutions, become a data centre stock?
Well, the company’s management has said that data centres could fuel its next leg of growth.
Kirloskar Oil Engines is expanding its portfolio by creating 1,500 KVA+ category nodes to meet the burgeoning demand from data centres.
Higher data consumption along with faster cloud adoption is likely to push demand for power generation sets going forward. As the demand shifts to higher HP gensets, Kirloskar is at the forefront with new product offerings to capture the opportunity.
Kirloskar is a strong proxy play to ride the infra development and capex theme as well.
Infrastructure spending and capital expenditure, both private and public, have shot up in the past two years, signalling growth for capital goods companies like Kirloskar Oil Engines.
Being a leading player in power generation and industrial engine segment, Kirloskar is likely to witness demand for its products with the capex revival. Power generation and industrial engines business together account for majority of its revenue at present.
Apart from the domestic footprint, Kirloskar Oil has invested heavily in technology and overseas channel partners to not only capture the domestic demand but also drive growth abroad.
It has plans to generate around 30% of its revenue from the export market.
Coming to its financials, the company has posted stellar numbers for the first two quarters of FY24. Its revenue for the first half stood at Rs 23.1 bn, a YoY growth of 19%.
The company has reported steady growing numbers for the past five years.
Capital goods companies are generally cyclical in nature with strong linkage to IIP (index of industrial production) and GDP growth of the country.
It’s very important for a capital goods company to survive in a downturn, for it to take advantage of the positive turn in the cycle.
Kirloskar Oil has not only survived the downturn but emerged stronger, mainly on account of a strong balance sheet.
| Rs m, consolidated | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Net Sales | 36,264 | 33,795 | 32,961 | 40,198 | 50,198 |
| Growth (%) | 19% | -7% | -2% | 22% | 25% |
| Operating Profit | 4,388 | 3,298 | 4,122 | 4,389 | 7,622 |
| OPM (%) | 12% | 10% | 13% | 11% | 15% |
| Net Profit | 2,192 | 1,852 | 1,950 | 1,745 | 3,324 |
| Net Margin (%) | 6% | 5% | 6% | 4% | 7% |
| ROE (%) | 13.4 | 10.9 | 10.8 | 8.6 | 15.2 |
| ROCE (%) | 19.7 | 14.0 | 13.7 | 9.9 | 13.8 |
| Dividend (Rs) | 5.0 | 4.0 | 4.0 | 4.0 | 5.0 |
| Debt to Equity (x) | 0.1 | 0.1 | 0.4 | 0.9 | 1.4 |
2. Railtel Corporation of India
How is Railtel involved in the data centre market?
The PSU telecommunications infrastructure provider that focuses on offering high-speed broadband and networking services to the railway sector, also offers comprehensive data centre solutions.
Their portfolio comprises, transformation and systems management, hosting and co-location services, as well as the development of a secure and energy-efficient infrastructure environment.
In 2023, the company received multiple orders from entities as well as state governments for setting up and expansion of data centres.
Railtel is expected to release RFP for PPP Noida data center projects soon.
Coming to its financial performance, the government-owned company boasts a healthy debt free balance sheet and has performed exceedingly well.
It enjoys the highest net profit margin among key telecom companies in India and the highest operating margin among key IT/ICT companies in India.
| Rs m, consolidated | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Net Sales | 10,033 | 11,281 | 13,778 | 15,485 | 19,635 |
| Growth (%) | 2% | 12% | 22% | 12% | 27% |
| Operating Profit | 3,375 | 3,742 | 3,632 | 3,996 | 4,232 |
| OPM (%) | 34% | 33% | 26% | 26% | 22% |
| Net Profit | 1,116 | 1,411 | 1,425 | 2,089 | 1,891 |
| Net Margin (%) | 11% | 13% | 10% | 13% | 10% |
| ROE (%) | 8.8 | 10.6 | 10.2 | 14.2 | 11.9 |
| ROCE (%) | 14.9 | 14.6 | 14.7 | 19.7 | 16.8 |
| Dividend (Rs) | 2.0 | 2.1 | 2.2 | 2.4 | 2.6 |
| Debt to Equity (x) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
As of September 2023, its order book stood at Rs 51 bn.
Earlier this week, the company bagged an order from RVNL, related to data centre hosting and application support services.
As data centres become mainstream, Railtel could continue to get more orders which will provide healthy revenue visibility for years to come.
3. L&T
Of course, India’s favourite stock, L&T had to be a part of this emerging market.
Larsen & Toubro (L&T) is the most respected multinational conglomerate that operates in over 50 countries with unmatched capabilities in all its businesses, including construction, engineering, technology, and manufacturing.
L&T has, over the years, forayed into multiple business verticals, including infrastructure, power, hydrocarbon, metal and minerals, defence, aerospace, information technology (IT), products, systems and equipment, finance, and real estate.
Towards the data centre segment, L&T is building state-of-the-art green data centres.
It has won multiple orders over the past two years to build data centres across Indian states.
The company is banking on clean energy, data centres, semiconductors and other emerging themes that could power its next leg of growth.
L&T plans to create renewable energy infrastructure for the world’s largest green hydrogen plant in Saudi Arabia.
L&T is growing across all its business segments, and the proof lies in its sound financials.
In the last three years, the revenue of the company has grown at a compound annual growth rate (CAGR) of 10%, driven by a high inflow of orders across segments.
The net profit also grew at a CAGR of 39.3% on the back of the high-margin EPC business.
Its return on equity (RoE) was 14.2% at the end of financial year 2023, an impressive 8% improvement from three years ago. The return on capital employed (RoCE) also improved and stood at 17.9%.
In the September 2023 results, the revenue grew by 19.9% YoY driven by higher execution momentum in international projects. The net profit also grew at 36.8% YoY.
| Rs m, consolidated | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Net Sales | 1,352,203 | 1,454,524 | 1,359,790 | 1,565,212 | 1,833,407 |
| Growth (%) | 13% | 8% | -7% | 15% | 17% |
| Operating Profit | 249,108 | 271,627 | 271,997 | 268,981 | 302,254 |
| OPM (%) | 18% | 19% | 20% | 17% | 16% |
| Net Profit | 89,051 | 95,490 | 115,829 | 86,693 | 104,707 |
| Net Margin (%) | 7% | 7% | 9% | 6% | 6% |
| ROE (%) | 16.6 | 15.8 | 6.6 | 13.1 | 14.8 |
| ROCE (%) | 13.3 | 12.5 | 10.0 | 11.6 | 13.0 |
| Dividend (Rs) | 18.0 | 18.0 | 36.0 | 22.0 | 24.0 |
| Debt to Equity (x) | 2.0 | 2.1 | 1.8 | 1.5 | 1.3 |
4. Ahluwalia Contracts
Ahluwalia Contracts is an engineering, procurement, and construction (EPC) company, engaged in the business of civil construction activities.
It has five decades of expertise in infrastructure development.
How is the company involved in the data centre market?
Be it luxury residential projects, data centres, station redevelopment, medical colleges, or hospitals, Ahluwalia Contracts has had a good exposure to projects of different kinds pan India.
Over the years, it has received orders for building data centres from clients like Adani, Indian Financial Technologies, among others.
The company is currently enjoying infra sector tailwinds as the infra capex cycle presents huge opportunity for players with strong execution track record like Ahluwalia Contracts.
As of September 2023, it had order inflows of Rs 53 bn. These orders include residential projects, private hospitals projects, as well as data centres.
While keeping minimal debt on the balance sheet and requiring minimal capex for growth, the company is sitting on its highest ever orderbook that offers multi-year revenue profitability.
Although it does anticipate a slowdown in execution due to the upcoming elections.
| Rs m, consolidated | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Net Sales | 17,547 | 18,849 | 19,822 | 26,925 | 28,384 |
| Growth (%) | 7% | 7% | 5% | 36% | 5% |
| Operating Profit | 2,262 | 1,634 | 1,765 | 2,857 | 3,336 |
| OPM (%) | 13% | 9% | 9% | 11% | 12% |
| Net Profit | 1,173 | 644 | 772 | 1,552 | 1,940 |
| Net Margin (%) | 7% | 3% | 4% | 6% | 7% |
| ROE (%) | 17.3 | 8.4 | 9.2 | 16.2 | 17.1 |
| ROCE (%) | 27.4 | 16.0 | 16.7 | 26.1 | 26.0 |
| Dividend (Rs) | 0.3 | 0.0 | 0.0 | 0.3 | 0.4 |
| Debt to Equity (x) | 0.1 | 0.1 | 0.0 | 0.0 | 0.0 |
5. Aurionpro Solutions
It offers technology solutions that help enterprises accelerate digital innovation securely and efficiently.
Aurionpro offers a single platform for guiding businesses to adapt to a dynamic digital transformation across banking, transportation, logistics, and government sectors.
The company is quickly evolving into a formidable player in the data centre market with deep skills in design consultancy and turnkey build services.
With a strong pipeline, the company expects significant growth in the data centre segment.
As of September 2023, the company had an order book of around Rs 9 bn.
Coming to its financials, Aurionpro Solutions posted strong performance in the first half of FY24, with a revenue growth of 34% YoY.
The company’s focus on expanding sales channels and strategic partnerships with global FinTech majors contributed to this growth.
| Rs m, consolidated | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Net Sales | 5,222 | 4,698 | 3,740 | 5,050 | 6,593 |
| Growth (%) | 25% | -10% | -20% | 35% | 31% |
| Operating Profit | 1,181 | 918 | 867 | 1,165 | 1,494 |
| OPM (%) | 23% | 20% | 23% | 23% | 23% |
| Net Profit | 607 | 319 | -1,219 | 707 | 973 |
| Net Margin (%) | 12% | 7% | -33% | 14% | 15% |
| ROE (%) | 13.7 | 6.2 | -27.3 | 20.6 | 22.8 |
| ROCE (%) | 15.9 | 8.1 | -17.6 | 22.7 | 25.9 |
| Dividend (Rs) | 2.0 | 0.0 | 0.0 | 2.5 | 2.5 |
| Debt to Equity (x) | 0.2 | 0.3 | 0.3 | 0.1 | 0.2 |
Going forward, its diversified revenue profile and a healthy order book along with the data centre theme, are expected to act as next growth levers of Aurionpro.
In Conclusion
Technology’s transformative impact is reshaping our lives, work, and interactions from rural communities to bustling urban centres.
Amid this digital revolution, data centres play a pivotal role by providing critical infrastructure to store, process, and manage vast amounts of data.
It appears that data centres will propel us towards a more connected, efficient, and progressive world.
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