Top 5 ancillary companies driving data centre growth
Summary
- As India emerges as a global technology hub and a thriving digital ecosystem, these vital suppliers stand to benefit the most.
Data centres, often dubbed the "data factories of the world," are vital to the modern digital ecosystem. These seemingly modest facilities house the technology that stores, processes, and manages vast data. This storage enables the smooth operation of the technologies we depend on daily.
As technological advancements continue accelerating, the demand for data centers is projected to grow steadily. This trend has significantly benefited ancillary industries, which are experiencing remarkable growth.
Manufacturers of key components like diesel and gas generators, switchgear, motors, and electrical panels are seeing a sharp rise in domestic demand and exports.
Indian-made products are becoming increasingly popular in global markets, with shipments reaching Southeast Asia, the Middle East, and Europe.
According to Crisil Ratings, the Indian data center industry is expected to attract investments exceeding ₹45,000 crore over the three years through to 2026.
Similarly, a June 2023 report by Colliers, a commercial real estate company, projects India's data centre inventory to double to 20 million square feet by 2025, driven by the increased adoption of smart devices, e-commerce, and cloud services.
Leading Indian players in the generator industry have noted a substantial increase in domestic demand and export orders driven by the global expansion of data centres.
This surge emphasises the growing recognition of India's ancillary manufacturing sector as a dependable and competitive supplier of high-quality components for the Indian and global data center industry.
#1 Kirloskar Oil Engines
Kirloskar Oil Engines is a renowned manufacturer of diesel engines and power generation equipment. The company offers a diverse range of products for various applications, including agriculture, construction, transportation and industrial power generation.
As a flagship company of the Kirloskar group, it specialises in manufacturing and servicing diesel engines, diesel generator sets and pump sets powered by diesel, petrol or kerosene.
With manufacturing units in Pune, Kagal, and Nashik, the company caters to the agriculture, power generation, and industrial sectors.
Kirloskar Oil Engines' product portfolio extends across both B2B and B2C segments. The company offers engines and gensets, industrial engines, power solutions, after-sales support, and retail channels for tractor spares, oils, and batteries.
In the B2C segment, they provide engine-based pump sets, electric pumps (both under the KOEL and LGM brands), farm equipment, and financial services through the Arka group.
Kirloskar Oil Engines has a presence in both domestic and international markets. It caters to over 30 countries, with exports accounting for 11.8% of its total sales in FY24.
The business has grown consistently, with the sales and net profit reporting at a 5-year CAGR of 14.6% and 23.6%, respectively. The average Return on Capital Employed (RoCE) and Return on Equity (RoE) have also expanded, averaging 13.2% and 12.6% over a 5-year period.
#2 CG Power
CG Power, also known as Crompton Greaves Power, is an Indian multinational company that specialises in electrical equipment and engineering solutions.
The company provides a wide range of products and services including, transformers, switchgear, motors, automation products and EPC solutions for power transmission and distribution.
The company's business extends to both domestic and international markets. It exports to its European subsidiaries besides direct exports to South Asia, Middle East and Russia, with exports contributing 7% of its total revenue in the FY24.
In FY24, the switchgear and transformer along with the railways business achieved the highest-ever sales, highest-ever order inputs and profits.
In recent years, the company has undergone significant restructuring and has implemented several strategic initiatives to improve operational efficiency and profitability.
These efforts have resulted in improved financial performance, reduced debt and a positive outlook for the company.
The sales and net profit have improved drastically since FY22. Consequently, the returns have increased.
The company reported a substantial increase in its unexecuted order book. The unexecuted order book for CG Power as of 30 June 2024, was ₹7,050 crore, a 44% increase compared to ₹4,900 crore as of 30 June 2023.
#3 Schneider Electric Infrastructure
Schneider Electric Infrastructure supplies energy management solutions and automation technologies. The company offers a range of products and services, from low-voltage switchgear to energy management systems.
Schneider’s product portfolio also includes transformers, primary and secondary switchgear, medium voltage switchgear, protection relays, electricity distribution management systems, a software suite for self-healing smart grids, as well as e-House and smart city applications.
The company caters to the Indian and the international markets (over 40 countries), with exports accounting for 13% of total sales in FY24.
Over the past five years, the sales have grown at 5-year CAGR of 9.1%. After 9 years of losses the company churned a profit in FY22 and has been profitable since then.
Schneider Electric Infrastructure’s order backlog increased by 15.6% year-over-year (YoY) to ₹1,290 crore as of June 2024.
#4 Hitachi Energy
Hitachi Energy offers a comprehensive range of products and solutions tailored for the power industry such as transformers, circuit breakers, switchgear, instrument transformers, substation automation equipment, and advanced digital software solutions.
Leveraging its rich heritage and technological innovations in India, Hitachi Energy has been instrumental in initiatives like the One-Nation-One-Grid and the seamless integration of renewable energy at scale across multiple projects.
By focusing on both conventional and renewable energy sources, Hitachi Energy's sustainable offerings are designed to ensure the safe and efficient management of the entire energy cycle.
The company's customer base extends beyond India. It enjoys a wide customer base across Asia, Europe, the US and Africa, with exports making up 25% of its total revenue in FY24.
Between 2020-2024, the sales have reported a 5-year CAGR of 12%, whereas profit growth has been rangebound.
The RoCE and RoE have averaged at 19.8% and 14.3% over the last five years, respectively.
Hitachi’s order backlog saw a modest increase, reaching ₹8,539 crore as of June 2024, a 21% growth compared to the previous year.
#5 GE T&D
The company offers products for the power industry, including power transformers, circuit breakers, switchgear, instrument transformers, substation automation equipment, digital software solutions, and more.
GE T&D has strategically focused on providing transformers specifically designed for these applications, recognising the growing importance of renewable energy sources like solar and wind.
This has positioned the company as a frontrunner in the Indian market, supplying transformers that play a crucial role in integrating renewable energy into the power grid.
The company serves both domestic and international markets, with exports contributing 31% of its total sales in FY24.
It’s order backlog surged to a record-breaking ₹6,280 crore as of June 2024, reflecting a massive 59% YoY increase compared to ₹3,940 crore in June 2023. This robust backlog indicates a strong pipeline for future revenue.
Between 2020 and 2024, the sales and net profits have been on a roller coaster. However, it seems as though the company is turning around after minimising its losses in FY23. The business has reported a massive turnaround in FY24, reporting a net profit of ₹180 crore.
In Conclusion
The Indian ancillary industry, particularly those supporting data center growth, is powering ahead with robust momentum.
As global demand for data centers rises, Indian manufacturers of critical components like generators, switchgear, and transformers are experiencing significant growth in both domestic and international markets.
This promising trajectory is driven by increased investments in the data center sector, the expansion of digital infrastructure, and the global shift towards renewable energy.
With substantial orders and strong financial performances, these companies are well-positioned to capitalise on the opportunities. As the industry continues to evolve, Indian ancillary companies are set to establish themselves as key players on the global stage.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com