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Strong structural opportunity, near-term risk-reward turns less favourable

ESDS reported in-line numbers, with the core standalone business remaining stable. However, the delayed Sharon AI deployment pushes the key AI-led revenue contribution from October to November and increases near-term execution risk. We remain constructive on the longer-term opportunity from sovereign cloud, AI infrastructure and rising GPU demand, supported by ESDS’ ~INR 30,000 Mn domestic order book and >50,000-GPU international pipeline. That said, conversion of the pipeline, deployment timelines and utilisation remain key variables, while the sharp scale-up in GPU capacity could also raise execution and funding requirements. We reduce FY27E revenue/PAT by 17%/13.5%, while retaining FY28E estimate. The management highlighted that incremental GPU capacity funded through IPO proceeds is expected to be operational by Q4FY27, with billing commencing from Q1FY28 should boost the domestic business revenue. We continue to value ESDS at 18x FY28E EV/EBITDA, with DCF as a sanity check and maintain our TP of INR 1,550. At CMP, the stock trades ~310% above its IPO price band, leaving ~12% downside to our TP; hence, we assign ‘SELL’, reflecting elevated near-term expectations and limited valuation headroom.

Revenue & EBITDAM in-line with estimates

? Revenue for Q1FY27 stood at INR 1,336 Mn, down 20.2% QoQ but up 7.2% YoY (vs CIE est. at USD 1,363 Mn).

? EBITDA for Q1FY27 came in at INR 559 Mn, down 45.5% QoQ but up 6.6% YoY (vs CIE est. at INR 575 Mn). EBITM was down 1940 bps QoQ and 20 bps YoY to 41.9% (vs CIE est. at 42.2%)

? PAT for Q1FY27 stood at INR 292 Mn, down 56.8% QoQ but up 13.8% YoY (vs CIE est. at INR 299 Mn)

Sharon AI ramp-up delayed, but pipeline remains strong

In Q1FY27, ESDS reported revenues of INR 1,336 Mn. The QoQ revenue decline primarily reflects the absence of INR 850 Mn one-off technical design revenue booked by subsidiary SPOC Hub in FY26, with majority recognised in Q4FY26. The management continues to favour bundled IaaS, Managed Services and SaaS offering to deepen customer integration. The Sharon AI deal has secured INR 1,100–1,200 Cr in customer advances, to be recognised from Q3FY27. Amid tight global GPU and component supply, ESDS is strategically timing capacity commitments to capture higher prevailing leasing rates.

AI ramp-up dilutes margin; domestic growth to drive recovery

Q1FY27 EBITDAM remained robust at 42%, but we expect margin to moderate as the lower-margin Sharon AI contract ramps up. While SaaS remains the most profitable segment, IaaS margin is already >50% and should benefit from increasing AI infrastructure utilisation. The management targets 15–20% PATM on large international GPU contracts, supported by premium pricing and 12–18 months of advance payments. We bake in margin towards the lower end of this range, given the initial Sharon AI mix and ramp-up profile. Thereafter, we expect margin recovery as the higher-margin domestic business scales up, GPU utilisation improves and operating leverage builds up, with EBITDAM reaching 24.2% by FY29E. Thus, near-term margin dilution should precede a gradual recovery as the business mix normalises

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