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Riding India's data center localization wave

RE business to grow steadily, while DC & Cloud will be in the limelight Diversification in progress…: Anant Raj (ARCP) is transitioning from its stronghold in real estate to a diversified business model with strategic investments in data centers (DCs) and cloud services. This shift capitalizes on India's burgeoning data localization and digital transformation trends. With a planned capacity of 300MW for DC over the next 4-5 years, the company is leveraging its existing technology parks to enhance execution speed and cost efficiency. …with intense focus on profitability: ARCP's foray into higher-margin cloud services (IaaS) in partnership with Orange enhances its profitability potential, with cloud capacity projected to rise to 25% by FY32. Its residential business remains robust, with 14msf deliveries expected by FY30, generating a cumulative NOPAT of INR85.1b. Multiple growth levers at play: Strong pre-sales, collections, and operational cash flows underpin ARCP’s growth. While execution risks remain, we expect significant revenue and EBITDA margin expansion, driving long-term value creation. We initiate coverage on the stock with a BUY rating and a TP of INR1,100.

Beneficiary of NCR recovery, with a strong presence in Gurugram

* Over the past 15 years, Delhi has experienced a significant decline from its peak until FY21. Although the RE sector began to show positive trends in FY22, the NCR markets were only at one-tenth of their peak levels in FY11, both in terms of launches and absorption. This situation leaves considerable room for improvement moving forward.

* Building on its rich legacy, the company has restarted with renewed enthusiasm following the demerger, acquiring a land parcel of 167 acres in Sector 63A, Gurugram, and an additional ~100 acres in New Delhi.

* ARCP is executing ~14msf across various stages of development, with a total revenue potential estimated at INR219b in Sector 63A, Gurugram.

* ARCP possesses an additional 100 acres of land in various locations throughout New Delhi, which is currently earmarked for future development. The Master Plan for Delhi 2041 (MPD2041) is under critical review and is likely to unlock opportunities for sustainable and inclusive growth over the next two decades.

JV with Birla Estates is a testimony of strong legacy & asset-light growth

* Following the demerger, it was crucial for ARCP to grow prudently with an asset-light approach and generate cash flow without further straining its balance sheet, as the separation resulted in a debt of INR14b.

* Phases 1-3, totaling 554 units, are fully sold out for Birla Navya. Phase 4 is scheduled for launch in the upcoming quarters, and upon completion of the project, ARCP will benefit from ~INR6.7b in net operating profit after tax.

Pre-sales/collections to clock 23%/87% CAGR over FY24-27E

* The 2.08msf launch pipeline could yield sales of INR36b. We estimate pre-sales of INR11b in FY25, with GH-2 launching in Mar’25, and anticipate a 22.5% CAGR in pre-sales over FY24-27.

* The company is likely to reach cumulative sales of INR173b in the next six years.

* ARCP’s increased execution is projected to result in an 87% CAGR in collections over FY24-27. The company is targeting to achieve cumulative collections of INR202b over FY25-30E, by delivering 13.2msf.

Strong OCF and net cash flow generation on the cards

* ARCP is on a firm footing, with robust real estate sales and growing rental income from its DC and cloud operations.

* The real estate segment has an average operating margin of over 45%, while that of commercial, DC, and cloud businesses exceeds 75%, resulting in strong cash flow generation.

* ARCP is likely to generate an operating cash flow of INR192b over FY25-30, with a net cash flow of INR15b after interest and capex of INR165b for commercial annuities, DC, and cloud services.

India: the next frontier for DC expansion

* India’s DC market is on the brink of a growth phase, fueled by the country’s rapid digital transformation and increasing demand for data storage.

* Despite generating 20% of the world’s data, India accounts for just 3% of global DC capacity, leaving massive room for expansion. With the rise of 5G, cloud computing, AI, and IoT, along with supportive government policies like data localization and Digital India, the industry is set to flourish.

* The market is expected to double its capacity by FY26, driven by investments from global and local players. Established giants such as NTT and STT are joined by emerging stars like AdaniConneX and Yotta, creating a competitive and fastevolving landscape.

* Multiple tailwinds are at play, which are driving the growth for DC. We expect the following tailwinds to sustain in the foreseeable future: 1) accelerated adoption of cloud services, 2) artificial intelligence, 3) data localization requirement, 4) roll-out of 5G & enhanced bandwidth, and 5) explosion in data creation and consumption.

Early mover advantage in catering to the emerging DC demand

* ARCP ventured into the DC business in Sep’23 with an ambitious plan to transform three existing tech parks in Manesar, Panchkula, and Rai into cuttingedge DCs, aiming for a total capacity of 300MW within the next 4-5 years.

* Unlike many competitors, ARCP benefits from its already-built tech parks, allowing it to complete DCs in just 6–9 months instead of the usual 3–5 years.

* With its early-mover advantage and cost efficiency, the company is well-placed to thrive in this capital-intensive industry, where setup costs have risen to INR600–700 m per MW.

* With competitive lease rates of INR9m per MW per month and lower construction costs, ARCP’s DCs are set to deliver healthy profits. The company is also emerging as a leading player in Delhi-NCR, a region expected to grow its DC capacity from 84MW in 2022 to 364MW by 2026, fueled by increasing digital demand and its strategic location.

ARCP’s leap into cloud services with Ashok Cloud

* The company is making a bold move into the cloud space through its partnership with Orange Business Services India. Together, they’re building and operating a cutting-edge cloud platform, setting up servers at ARCP’s DCs, and promoting cloud and colocation services.

* By FY26, the company plans to expand its IT load capacity to 63MW, with 14MW dedicated to cloud services.

* With cloud services offering 4-5x higher margins than traditional colocation, ARCP is tapping into the fast-growing Infrastructure as a Service (IaaS) market. This move not only diversifies their portfolio but also positions them to drive higher profitability through scalable, value-driven solutions.

* Cloud Services (IaaS) will experience a gradual increase in rates to INR123m per MW per month by FY32 from INR100m per MW per month in FY24, reflecting a consistent demand for premium cloud infrastructure. Cloud Services' share in total capacity is set to increase from 8% in FY24 to 25% in FY32, highlighting the strategic shift towards higher-margin services.

Key financial assumptions

* For ARCP, we expect revenue to clock 26.5%/23.3%/33.3% YoY growth over FY25E/FY26E/FY27E. EBITDA margin is anticipated to see significant improvement with 46.9%/50.8%/50.6% during the same period from 22.5% in FY24. We anticipate adj. PAT to grow by 124%/26%/14% in FY25E/FY26E/FY27E, resulting in a 47% CAGR over FY24-27E.

* ARCP’s return ratios, including RoE and RoCE, which have historically remained in single digits, are set to improve significantly. RoE is projected to rise from 7.3% in FY24 to 14.6% in FY27E, while RoCE is expected to increase from 7.4% to 13.8% over the same period.

* Co-location services are expected to maintain steady rental rates of INR9-11m per MW per month, with a 3% annual rent escalation. Cloud Services (IaaS) will see a gradual increase in rates to INR123m per MW per month by FY32 from INR100m per MW per month in FY24, reflecting a consistent demand for premium cloud infrastructure.

* The DC capacity is primarily driven by co-location services, which dominate the capacity share, although their proportion is expected to decline to 75% by FY32 from 92% in FY24 as the focus on Cloud Services intensifies.

* Currently, ARCP is in a capital expenditure phase, which is expected to increase the debt to INR59b. ARCP's debt-to-equity ratio is projected to peak at 0.7x in FY28, supported by a robust cash generation strategy that will enable the company to achieve positive cash flow by FY30.

* Cloud Services' share is set to increase from 8% in FY24 to 25% in FY32, highlighting the strategic shift towards higher-margin services

* Total capacity is projected to grow significantly, to 307MW by FY32 from 6MW in FY24. Co-location capacity will scale from 2 MW to 230MW, while Cloud Services capacity will expand to 77MW from 0.5MW.

RE to shine, while DC & Cloud will take center stage; Initiate with a BUY

* ARCP’s residential segment is expected to deliver 14msf over FY25-30, generating a cumulative NOPAT of INR85.1b.

* Residential business cash flow, discounted at 11.6% WACC and with a 5% terminal growth rate, accounts for INR2.5b in annual business development expenses, yielding a GAV of INR140b, or INR409/share.

* The annuity business cash flow is discounted at a capitalization rate of 8.5%, valuing it at INR13b or INR38/share.

* We believe that India’s DC market is on the cusp of a major growth period, driven by rapid digital transformation, the increasing demand for data storage, and several key tailwinds, including the adoption of cloud services, AI, 5G, and data localization.

* We further believe with its early-mover advantage and efficient cost management, the company is set to transform three existing tech parks into cutting-edge DCs, targeting a total capacity of 300MW over the next 4-5 years.

* The company’s move into the cloud services space and tapping into the Infrastructure as a Service (IaaS) model offer the potential for 4–5x higher margins than traditional co-location. This further strengthens ARCP’s profitability, in our opinion.

* We expect ARCP’s DC revenue to grow materially, with capacity increasing from 6 MW in FY24 to 307 MW by FY32, and a shift towards cloud services, which will expand from 0.5 MW to 77 MW over the same period.

* This growth, coupled with a projected EBITDA margin expansion to 77% by FY30E, reflects ARCP’s ability to scale operations and achieve strong profitability.

* We expect data center business to start generating positive EBIT from FY26 onwards and positive free cash flows from FY30 onwards. We expect NOPAT to reach INR 60b from Data center business by FY32.

* We model the free cash flows for data center business till FY32 using discounting rate of 11.6%, a rental escalation of 3% and a terminal growth rate of 3%, resulting in EV of INR200b or INR580/share.

* We set a TP of INR 1,100 based on our SOTP-based valuation and initiate coverage on the stock with a BUY rating.

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