Buy Black Box Ltd For Target Rs. 670 By JM Financial Services
Black Box is a digital infrastructure service provider, enabling global corporates to build-out and manage enterprise networks (Private LTE, Cloud Networks, LAN/WAN) and connectivity (Fibre, IoT). It counts Fortune 500 companies such as Bank of America, Meta, Intel, Disney, etc. as its clients.
We identified Black Box as a potential play on India’s data centre (DC) growth story (see Data Centre 101: India’s Cloud Moment). In fact, Black Box’s core competence in networking and connectivity has lent itself well to capture rising DC demand globally. USD 340mn+ DC deals from a global social media giant over the past 12 quarters underscores the potential. Importantly, Black Box’s financial fortunes - after being acquired by AGC Networks, an Essar Group company - have turned. In the first phase of its turnaround, the combined entity (now called Black Box Ltd) expanded EBITDA margin by 420bps over FY22-25, delivering 40% EPS CAGR over the same period. The company is now embarking on its next phase – growth. Revamp of its sales structure - verticalised Go-to-market (GTM) - is now complete. Focus is on scaling the top 300 accounts even as it prunes tail accounts. The results are already visible. Order book has improved to USD 504mn (+7% YoY). Pipeline has swelled to USD 2.5bn, per our estimate. It has set itself a target of USD 2bn revenue (FY25: USD 705mn) by FY29E, including USD 600mn of inorganic contribution, implying 18% organic CAGR.
Black Box’s FY26 guidance and near-term outlook indicates growth will likely inflect in 2QFY26, before accelerating in 2HFY26. We conservatively model 14.2% USD revenue CAGR and 31.2% EPS CAGR over FY25-28E. We initiate coverage with a BUY rating at TP of INR 670, valuing it at 30x forward EPS (1x PEG). Sustained macro-economic uncertainty is a key risk to our estimates and rating.
About Black Box: Black Box Ltd, in its current form, came into being after AGC Networks acquired the financially distressed Black Box Corp. in 2021. AGC Networks itself had evolved through partnerships and acquisitions, including JV with AT&T and Avaya to become a significant player in the unified communication and IT Solutions space. The Black Box acquisition added DC, digital infrastructure and cybersecurity capabilities, making the combined entity a global digital infrastructure integrator. Major constituents of its revenue are US (71%; FY25), Technology vertical (28%) and System Integration services (85%).
Turnaround – Stabilisation to growth: The current management, helmed by Sanjeev Verma, has been executing a multi-year turnaround. The first phase was focussed on improving cost structure through rightshoring, bringing customer operations/shared services resources together in Bengaluru CoE, repricing contracts, exiting low-value, non-accretive clients, to name a few. Result has been 420bps margin expansion over FY20-25. The ground work for the next phase – growth – is complete as well. It has verticalised its GTM approach, adding leadership muscle. Focus is to penetrate the top 300 accounts with a multi-geography approach to expand wallet share. c.USD 220mn of order inflow in 4QFY25 reflects eary signs of success. 13-17% revenue guide for FY26 underscores management’s confidence on growth strategy.
Building data centre’s digital backbone: Black Box executes complex networking and connectivity set-up for large enterprises, airports and data centres. It has carved out data centres as a separate service line to capture the growing DC demand. Black Box has won USD 400mn+ orders in DC since 1QFY23, including USD 340mn from a US social media giant alone. Significant capex committed by this and other hyperscalers in the US opens up a large opportunity for Black Box. It is also trying to participate in these hyperscalers’ DC capacity expansion in India, making it a play on India’s DC story as well. Black Box intends to increase its DC revenue from 15-20% currently to 25% by FY29.
Initiate with BUY;TP of INR 670: We build 14% USD revenue CAGR over FY25-28E, below the ask rate (18%) to reach company’s FY29 target of USD 1.4bn organic revenues. We model 110bps margin expansion, driving 31% EPS CAGR over the same period. We value the stock at 30x, reasonable given the EPS growth. Initiate with BUY.
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SEBI Registration Number is INM000010361
