Data Center Expansion And Sovereign Cloud Demand Will Drive Long-Term Value

Catalysts

About Anant Raj

Anant Raj Limited is a North India focused real estate and digital infrastructure company developing high end residential, commercial, data center and sovereign cloud assets.

What are the underlying business or industry changes driving this perspective?

• Scale up from 28 megawatts to 63 megawatts by December 2026 and then to 117 megawatts by FY 2028 in data centers, with high visibility on demand from government and private clients, is expected to materially lift annuity style revenue and support a sustained step up in EBITDA and earnings.
• Rising enterprise and government migration to sovereign and compliant cloud, supported by data protection regulations and MeitY empanelment, positions Ashok Cloud to capture higher value services that can expand realizations per megawatt and structurally support EBITDA margins and return on capital.
• Conversion of co location capacity into higher yielding cloud workloads, combined with the ability to layer Platform as a Service and managed services, can increase wallet share per customer and drive faster growth in net margins and free cash flow than what headline megawatt additions alone imply.
• A deep residential pipeline in Gurgaon Golf Course Extension Road and Delhi luxury micro markets, where supply is constrained and demand is strong, provides multi year launch visibility that can support sustained growth in real estate revenue and stable blended margins despite project phasing.
• A net cash balance sheet following the INR 1,100 crores QIP, promoter warrant conversion and ongoing debt prepayment reduces financial risk and allows the company to fund the 307 megawatt roadmap and key real estate launches without dilution pressure, improving the trajectory of earnings per share.
• Tax incentives proposed for data centers and increasing policy push for data localization and domestic digital infrastructure, if implemented, could enhance post tax returns from the data center portfolio and lead to an upward revision in the company’s earnings and valuation multiples.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Anant Raj's revenue will grow by 28.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.5% today to 24.9% in 3 years time.
• Analysts expect earnings to reach ₹12.3 billion (and earnings per share of ₹31.64) by about December 2028, up from ₹4.9 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 35.4x on those 2028 earnings, down from 40.2x today. This future PE is greater than the current PE for the IN Real Estate industry at 28.3x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.6%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If the sharp ramp up from 28 megawatts to 63 megawatts by December 2026 and then to 117 megawatts by FY 2028 coincides with a slower than expected take up of capacity, particularly in co location where 8 megawatts are being kept vacant for future cloud, utilization shortfalls could reduce annuity style revenue and delay operating leverage in EBITDA and earnings.
• The cloud strategy relies on sustained premium pricing versus on premise alternatives, with management indicating around INR 12 crores per month per megawatt and 75 percent EBITDA margins. If competition from hyperscalers or other sovereign and MeitY empaneled providers forces pricing down or raises customer acquisition costs, realized yields per megawatt and net margins may compress.
• A large portion of current data center demand is tied to government and public sector clients. Any slowdown in government digitization budgets, changes in procurement policies, or delays in formalizing tax incentives and data localization rules could weaken long term visibility on contracts and temper revenue and earnings growth from the digital infrastructure segment.
• The real estate business is increasingly skewed to luxury and high end micro markets in Gurgaon Golf Course Extension Road and select Delhi locations with limited supply. Any cyclical downturn in high ticket residential demand, regulatory changes in approvals or circle rates, or execution delays on planned launches could impact booked sales, cash collection and blended EBITDA margins.
• Management plans to fund a long dated 307 megawatt roadmap and multiple real estate projects largely through internal accruals and existing equity. Any cost overruns in data center capex, higher than expected working capital needs or a reversal from a net cash to a leveraged balance sheet could pressure free cash flow and dilute future earnings per share growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹764.33 for Anant Raj based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹49.2 billion, earnings will come to ₹12.3 billion, and it would be trading on a PE ratio of 35.4x, assuming you use a discount rate of 17.6%.
  
• Given the current share price of ₹550.45, the analyst price target of ₹764.33 is 28.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.