What's the Outlook for India's Leading Data Center Stock?

"Have you heard of Industry 4.0?" Jan Mrosik, COO of digital industries at Siemens, asked a roomful of analysts way back in 2018. Mrosik was referring to the onset of the fourth industrial revolution.

Mrosik recounted that to see the fourth industrial revolution in action, one had to take a trip to Siemens' factory in Amberg, Germany.

In Germany, in a facility that has been in production since 1989, people knew the World Wide Web (internet) existed well before the rest of the world.

The transformation from analog manufacturing to analytics-fuelled digital production had been, it seems, unfolding there in real time.

With innovation in its DNA, back in 2018 itself, Siemens had unveiled a new strategy. The objective was to revamp the 170-year-old behemoth into a new, AI-led version of itself.

The company also began shedding older lines of businesses. Meanwhile, it invested in technology it believes will allow it to dominate in the digital era.

Over the years, Siemens' manufacturing plants increasingly relied on smart machines and interconnected devices to build products cheaper, faster and more efficiently.

Fuelled by advances in artificial intelligence, the internet of things and computing speed, Siemens' global business segments, from auto to aerospace to retail have undergone changes.

Siemens India has 32 factories, most of which are operating at full capacity and need capacity expansions. The company announced one its largest capex of Rs 10 bn for India, demonstrating the parent company's focus on India as a global base.

At its analyst meet, aptly called the Transform - Innovation Day 2024, the company showcased its latest innovations, solutions, and partnerships.

The new products and innovations are meant to help customers in sectors such as data centres, metro rail, oil & gas, steel, power transmission and distribution etc. Also, the company plans to meet its own sustainability goals.

Of these, the opportunity emanating from the data center business seems most promising.

A data center is a facility that provides shared access to applications and data using a complex network, compute, and storage infrastructure.

Industry standards exist to assist in designing, constructing, and maintaining data center facilities and infrastructures to ensure the data is both secure and highly available.

The deluge in data generation is visible in the surge in mobile data traffic, which has risen at a compound annual growth rate (CAGR) of 45% over the last five years.

While most of this data is stored on the cloud, it is made available to us all via data centers.

These unassuming structures work tirelessly behind the scenes to ensure the seamless functioning of the technologies we heavily rely on. Without them, you wouldn't be able to chat on WhatsApp initiate a UPI transaction or binge-watch your favourite show on Netflix.

As technological innovation continues to unravel, the demand for data centres is likely to follow suit.

Large companies that operate massive data centres with immense computing power, storage capacity and network resources need massive green energy resources to run the data centres.

With the backdrop of a global energy crisis, this decoupling of energy usage from service demand is hugely significant.

According to a report by CRISIL Ratings, the Indian data centre industry is poised to attract investments exceeding Rs 450 bn by 2027.

Siemens is one of the biggest players in the data centre business globally. The Indian subsidiary has increasingly gained foothold in India's nascent data centre megatrend.

At the end September 2024, Siemens' order book stood at more than 2x FY24 revenue. This offers strong revenue growth visibility for the near future.

The smart infrastructure segment, which includes data centres and constituted the largest portion of Siemens' revenue at nearly 38%.

The next biggest revenue segment is energy. Siemens India's decision to demerge the energy segment of the business is on the lines of a global carve-out by its German parent three years ago.

The new company will mirror the shareholding of Siemens, and shareholders will receive one share of Siemens Energy India Ltd for every share of Siemens. The demerger and listing are expected to be completed by 2025.

Siemens could consider listing the energy business separately to unlock value from the growth in green energy related projects.

Therefore, apart from the growth in the core mobility, data centre and digital infrastructure businesses, Siemens India currently derives valuations from the prospects of product innovation and energy segments.

At nearly 100 times trailing 12-month earnings, the company is already enjoying PE valuations last witnessed at the peak of the power and infrastructure cycle.

Even on price to book value basis the stock is trading a premium far higher than it has ever in the past decade.

While the stock's return on equity (RoE) over the past decade has been stable, and the growth prospects remain solid on the back of innovation, investors would do well to exercise caution.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)