From streaming your favourite show to powering AI breakthroughs and enabling cloud computing giants, these ordinary-looking facilities form the backbone of our hyper-connected world.
Yet, while tech titans like Amazon and Microsoft dominate headlines, a group of undervalued data center stocks hidden in plain sight are poised to ride this wave of global data demand.
Despite the euphoria around data centre stocks, not all of them have captured Dalal Street’s attention. Some trade at discounted valuations, overlooked by investors chasing flashier tech names.
Using Equitymaster’s Undervalued Data Center Stocks Screener, we’ve identified companies with strong fundamentals and untapped potential. These five lesser-known stocks are worth adding to your watchlist.
#1 Kirloskar Oil Engines
Kirloskar Oil Engines is a key company of the Kirloskar Group. It’s a diversified manufacturer specialising in power generation solutions.
The company produces internal combustion engines, gensets, industrial solutions, pump sets, and farm mechanisation equipment.
The company’s expertise in gensets positions it as a crucial supplier of reliable emergency power backup systems—an essential requirement for data centres.
With a strategic focus on penetrating the international data centre market, it is leveraging its engineering, R&D, and manufacturing capabilities to offer innovative and fuel-agnostic solutions that cater to evolving industry needs.
Coming to its financial performance, the stock has delivered a solid top-line growth of 21% compound annual growth rate (CAGR) over the 3-year period and a net profit CAGR of 32% over the same period.
But to deliver this growth the company has compromised on its balance sheet health. The total debt of the company has more than doubled to ₹41,246 million over the last 3 years.
This might have impacted the stock price in the recent market-wide correction.
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The recent performance has been driven by cost optimisation and product innovation.
Segments like international business, high horsepower products, and aftermarket services have driven growth. Certain areas like B2B power generation and farm mechanisation have faced headwinds.
The stock is currently trading at a price-to-earnings ratio (PE) of 18 compared to an industry PE of 44.
Looking ahead, Kirloskar Oil Engines is targeting revenues of ₹65,000 million with sustained double-digit earnings before interest, taxes, depreciation, and amortization (Ebitda) margins by FY25.
It has set an ambitious goal to grow its consolidated business to $2 billion, with further details expected in upcoming quarter.
It’s expanding its footprint in the international data centre market. The firm’s focus on high horsepower and technologically advanced products (such as the K-Cool Engine range and OptiPrime series) is expected to enhance its competitive edge.
The stabilisation of manufacturing facilities and the introduction of a new subsidiary in the UAE could streamline operations and boost margins.
With a strong order book and expected recovery in demand, especially in the power generation and data center segments, the management is optimistic about improved profitability.
#2 Larsen & Toubro
Larsen & Toubro (L&T) is an Indian multinational company engaged in EPC projects, hi-tech manufacturing, and services, across many locations.
The company is scaling up new-age businesses, including data centres, under the brand name L&T Cloudfiniti.
L&T Cloudfiniti offers colocation services and cloud services. L&T has the capability to create a complete value chain of building, operating, and managing data centers. It’s setting up state-of-the-art data centers at Mumbai and Chennai.
New data centers in Mahape, Navi Mumbai, and Whitefield, Bangalore (20 MW each), are also under consideration.
A hyperscale data center at Sriperumbudur, Chennai, will be built in stages with a total capacity of 30 MW.
L&T has also entered into a strategic partnership with E2E Networks, an Indian cloud and AI cloud provider, for the adoption of Gen AI solutions. An investment agreement was signed on 5 November 2024, for the acquisition of a 21% stake in E2E Networks.
Coming to its financial performance, the company has delivered top-line growth of 18% CAGR over a 3-year period and a net profit CAGR of -2% over the same period. The last 3-years’ return on equity (ROE) was 12%.
Due to this mixed performance, the stock has remained sideways over the last year.
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The stock is trading at a PE of 32 which is slightly above its 5-year median PE of 30 but lower than the PE of 40 it was quoting at just a few months ago.
Looking ahead, the company management anticipates surpassing the 10% guidance on order inflows for FY25. The company has a total prospects pipeline of ₹8.08 trillion (tn) in the near term.
#3 Kalpataru Projects International
Kalpataru Projects International is an engineering and construction company with a diversified portfolio.
It operates through various segments:
Buildings and factories (B&F): In this segment, the company is involved in the construction of buildings and factories.
Urban infrastructure: In this segment, the company undertakes urban infrastructure projects such as metro projects, bridges, and flyovers.
Power transmission and distribution (T&D): It delivers solutions for power transmission and distribution firms in this segment.
Oil & Gas Pipelines: The company constructs oil and gas pipelines.
Coming to its financial performance, the stock has delivered a decent top-line growth of 15% compounded annual growth rate (CAGR) over a 3-year period but the net profit has been flat over this period.
Meanwhile, the total debt of the company has continued to increase and has reached to ₹39,092 m over last 3 years.
This unprofitable growth has acted as a deterrent to the stock price. The stock has come back to the price at which it was a year ago.
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The stock is trading at a PE of 32 and at a price-to-book ratio (PB) of 2.4 which is a significant discount to the industry PB of 3.8.
Data centers are specialised buildings. The company’s B&F segment can be leveraged for data center construction. It has won many data center projects.
Its expertise in urban infrastructure, such as tunnelling, can be applied to constructing underground data centers, particularly in urban areas.
Data centers require significant power. Kalpataru’s T&D business is critical to provide the necessary power infrastructure. It’s among the top EPC contractors on the transmission side, with a strong team and a presence across transmission and substations.
Looking ahead, the company’s management is focused on improving profit before tax margins, targeting 4.5% to 5% on an annualised basis, with potential increases of 25 to 50 basis points in the next year.
Overall growth and margin improvement are expected over the next two years, with the T&D business potentially achieving over 20% growth.
New order books are expected to yield better margins, with double-digit margins anticipated in the T&D segment.
#4 RailTel Corporation of India
RailTel Corp. of India is a government-owned mini ratna (Category-I) and navratna PSU.
Incorporated in 2000 and under the Ministry of Railways, RailTel is positioned as a key ICT provider and one of India’s largest neutral telecom infrastructure providers.
RailTel owns an extensive optic fibre network, spanning over 62,000 route km connecting 6,108 railway stations across India and has citywide access across the country of 21,000+ km.
The company offers a wide array of services including telecom, enterprise, ICT, digital, and data center services.
It operates its own UPTIME (USA) certified Tier-III data centers located in Secunderabad and Gurugram. It’s working on establishing another state-of-the-art data center in Noida and is setting up 102 Edge Data Centres across India.
RailTel data centers serve as trusted hubs for numerous government agencies and Public Sector Undertakings (PSUs). RailCloud, RailTel’s cloud service, is empanelled with the Ministry of Electronics and Information Technology (MeitY).
Coming to its financial performance, the stock has delivered a good top-line growth of 24% CAGR over a 3-year period and a net profit CAGR of 24% over the same period.
The last 3-years’ return on equity (ROE) has been 13%.
The stock gave good returns but has now come off its top due to PSUs going out of favour. It’s now trading at 46 PE which is lower than the industry average of 458.
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Increased government capital expenditure has contributed to RailTel’s robust performance.
Looking ahead, the company’s strong order book position of ₹52,800 million as of January 2025 indicates healthy revenue visibility.
RailTel being a debt-free company adds to its fundamental strength.
But all is not rosy. RailTel’s operating margins are likely to witness some moderation due to a growing proportion of relatively less profitable projects.
It’s planning a new data centre of higher capacity at Noida and 102 Edge data centres pan India in coming years. It aims to expand its international presence by exploring new markets and enhancing its service offerings.
#5 Aurionpro Solutions
Aurionpro Solutions is an IT transformation products and services provider that caters to the banking, financial services, and technology sectors.
The company operates through two main segments: banking and fintech, and the technology innovation group (TIG).
The banking and fintech segment provides digital solutions for retail and wholesale banking, as well as FinTech offerings like payment solutions.
TIG focuses on mobility solutions, data centers and hybrid cloud services, and smart city initiatives.
A significant portion of Aurionpro’s revenue is linked to its data center business. The company offers design and build services for data centers, as well as design consultancy. Their expertise extends to complex projects such as Tier IV data centers.
The company has delivered an impressive top-line growth of 33% CAGR over the 3-year period and a net profit CAGR of 52% over the same period.
The last 3-years’ return on equity (ROE) has been 20%.
The stock gave good returns due to good financial performance, but the stock has now come off its top because of growing concerns about a slowdown in the data center and artificial intelligence (AI) sectors.
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The stock is trading at a PE of 42 which is higher than the industry average of 30. whereas its PB is 5.2 which is lower than the industry average of 7.5.
Several factors have contributed to Aurionpro’s good financial results. It saw robust demand for its core offerings in both the banking and fintech and TIG segments.
Data center business growth exceeded 50% annually for the past three years. Strategic acquisitions, such as Arya.ai and the comprehensive loan management system (Omnifin), have also played a role.
Looking ahead, the company aims to productise its data center offerings to drive non-linear economics and increase recurring revenue. It is getting ready to launch an edge compute product.
The company projects revenue growth higher than 30% for FY25. Ebitda margins are expected to be between 20% and 22%, with PAT margins between 15% and 16%.
It plans to allocate 7-8% of revenue to R&D annually. The company aims to be a top three global player in its chosen spaces by 2030.
Conclusion
The five stocks discussed represent a diverse range of businesses, each playing a unique role in building and sustaining the data-driven future.
From power backup solutions and construction expertise to telecom infrastructure and IT innovation, these companies are integral to the digital ecosystem.
However, while the potential for growth is compelling, investing in these opportunities requires a balanced and disciplined approach. It is essential to look beyond surface-level valuations and delve into the underlying fundamentals.
Investing in the data centre space is not without risks. Technological advancements, such as more energy-efficient AI models, could disrupt demand dynamics. Macroeconomic factors, including interest and government policies, may also influence growth trajectories.
Therefore, it is crucial to adopt a long-term perspective, focusing on companies with strong execution capabilities, sustainable business models, good corporate governance, and clear competitive advantages.
Happy investing.
Disclaimer: This article is for education purposes only. It is not a recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
