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.
