Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable’ rating on the long-term bank facility and non-convertible debentures of NMDC Data Centre Private Limited (NMDC).

 

The rating continues to factor in the strong business risk profile of the company, supported by healthy revenue visibility because of its medium- to long-term contracts with marquee clients, strong order book, diverse clientele and high customer stickiness, resulting in stable cash flow. This will also aid the financial risk profile over the medium term, resulting in healthy debt service coverage ratio (DSCR).

 

The rating also considers the established track record of the parent, the Hiranandani group, in the construction of built-to-suit data centres (DCs) for large DC players. CRISIL Ratings believes NMDC has an edge over other established players because of the real estate expertise of the group and the company being able to provide power at the cheapest tariff vis-à-vis competitors because of captive power distribution company (discom) license. Moreover, NMDC offers competitive pricing for its DC facilities, despite the facilities being tier-IV certified with 99.995% uptime guarantee. Additionally, NMDC is a carrier neutral DC having connectivity with four fibre highways, which adds to its competitive advantage.

 

Currently, 40% of the total capacity of the NM1 tower is leased out, with strong orders in the pipeline providing revenue visibility for ~23 MW. The DC business is expected to see high growth momentum over the long term with rising data usage, rollout of 5G services, and increasing adoption of cloud, Internet of Things (IoT) and artificial intelligence (AI), which will help NMDC lease out the remaining 60% of capacity over the next 24 months. By fiscal 2026, the entire capacity is expected to be utilised. NMDC ramped up capacity from ~9.2MW to ~14MW over the past 12 months. Further ramp-up of capacity will remain a key monitorable.

 

In the first nine months of fiscal 2024, the company reported operating profit of around Rs 97 crore and revenue of around Rs 202 crore. The operating margin of 48% was short of expectation due to higher-than-expected marketing expenses to secure orders. NMDC is likely to post a strong operating margin once the entire capacity is tied up. This is because of pass-through of power expenses and decline in per unit overhead expense for cloud and managed services with full utilisation of built capacity and expansion of facilities in other locations. The management expects the operating margin to shoot up to 70% from fiscal 2025, given the increase in order book leading to better operating leverage. Improvement and sustenance of strong operating profitability will remain monitorable.

 

The downside risk to profitability in co-location services is limited owing to pass-through of the power expense, which accounts for majority of the operating expense in this segment. However, the company has stronger focus on cloud and managed services, which currently account for ~80% of the topline with the remaining coming from co-location services. While the contracts for cloud and managed services are more profitable, their duration is 1-3 years against 3-5 years for co-location services, exposing the company to renewals risks. The short tenure of contracts and intense competition can impact renewals as well as prices at which the contracts are renewed, and timely renewal along with healthy realisations needs to be monitored to maintain revenue and profitability. NMDC has limited track record of operations, and hence there is not sufficient history of contract renewal. That said, the churn observed in the industry is less than 1%.

 

The company had gross debt of ~Rs 2,306 crore as on March 31, 2023, which is expected to increase to Rs 2,950 crore by the end of fiscal 2024 against expected earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 150 crore for fiscal 2024, implying high leverage because revenue and profitability are yet to be ramped up. However, gradual ramp-up in capacity at favourable realisations should result in a healthy DSCR. The debt profile is a mix of long-tenure debt instruments, wherein there is an escrow and well-defined cash waterfall mechanism. Besides, personal guarantee from the promoter, Mr Darshan Hiranandani, is made available to cover shortfalls in debt servicing. The company will likely maintain healthy unencumbered cash balance of over ~Rs 500 crore over the near term, which will be more than sufficient to meet debt obligations in the near term, till operations stabilise.

 

NMDC plans capital expenditure (capex) of around Rs 2,500 crore in NM1 over fiscals 2024 and 2025, which will funded through debt and equity. The capex is towards specific, firm orders . NVIDIA has entered into an agreement with NMDC to supply 4,096 AI chips along with servers. The procurement of these chips and servers will entail a capital outlay of ~Rs 1,650 crore which will be funded in a debt-to-equity ratio of 3:1. NMDC has entered into contracts with three customers for 3,100 of the chips for a tenure of three years with auto renewal of one year. Revenue from these contracts is expected to accrue from July 2024. Contracts are yet to be tied up for the remaining 996 chips. NMDC expects revenue for all 4,096 chips to start accruing from April 2025. These are take-and-pay contracts subject to servicing of defined service-level agreements (SLAs) and the revenue from such contracts, along with strong operating margin, should support the healthy financial risk profile of the company. However, there is some counterparty risk and cash flow from the contracts will be monitorable.

 

Currently, only one tower, NM1 (with total built capacity of 30.4 MW), is operational under NMDC. NM2, with capacity of 35.2 MW, is under construction. CRISIL Ratings understands that capex for NM2 will be undertaken only when there are contracts in place, thereby mitigating project risk.

 

These strengths are partially offset by exposure to intense competition, project risk and risks pertaining to renewal of contracts.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of NMDC.

Key Rating Drivers & Detailed Description

Strengths:

Healthy cash flow, diversified revenue stream and strong operating efficiency

Of the total capacity of 30.4 MW of NM1, around 40% is leased out, with strong visibility of additional utilisation in the near term as the company is in advanced negotiations with various clients. By 2026, the entire capacity is expected to be utilised. Currently, the top 10 clients account for ~70% of revenue, exposing the cash flow to concentration risk. Medium to long-term contracts with key clients and stickiness of customers for the services offered by NMDC ensure stable cash flow. Large investments by customers for DC services and the associated downtime risks ensure negligible churn. Moreover, NMDC is expected to have strong operating margin once the entire capacity is contracted. This is because of pass-through of power expenses and decline in per unit overhead expense for cloud and managed services with full utilisation of built capacity and expansion of facilities in other locations.

 

Extensive experience of the promoters and strong management profile

NMDC, being part of the Hiranandani group, has a strong track record in the real estate business as well as in construction of DCs. The group has constructed four built-to-suit DCs for established DC players. It also constructed a large DC in Noida with capacity of 33.6 MW in 2023 in a short time frame.

 

Mr Sunil Gupta, co-founder and CEO of Yotta Data Services Pvt Ltd (marketing arm of NMDC), has unmatched experience in DCs, cloud and managed IT services industries. Other key managerial personnel, too, have significant experience in running the DC business. NMDC also enjoys strong financial flexibility as part of the Hiranandani group.

 

Expected healthy financial risk profile over medium term

The financial risk profile will be comfortable, supported by healthy cash accrual over the medium term. This, along with the long tenure of debt, will result in healthy DSCR. In fiscal 2024, there may be a shortfall in cash flow vis-à-vis debt obligation, but the company will have unencumbered cash of over Rs 500 crore in the near term. This will more than suffice to meet the debt obligation. Over the medium term, as capacity ramps up, cash flow will be enough to service debt. The company also maintains interest service reserve account (ISRA) of six months of interest obligation and debt service reserve account (DSRA) of six months of debt obligation. While it may undertake capex towards additional towers, including NM2, this will be against firm contracts.

 

Weaknesses:

Exposure to project risks

DCs require sizeable capex towards land, building, power supplies and infrastructure. While NM1 tower is largely completed, NMDC may undertake massive investments over the medium term to expand its facilities. However, the project risk associated with investments on additional capacities is largely mitigated because of the modular nature of capex based on visibility of contracts. Moreover, the company will ensure utilisation of internal accrual or adequate equity infusion for further capacity expansion to keep gearing in check. Nevertheless, the ability to maintain high utilisation for new properties and its impact on the cash accrual will be a key rating sensitivity factor.

 

Exposure to intense competition

The DC business is competitive with a few large players dominating the market. Over the past few years, new players have entered this space owing to favourable demand and expectation of healthy returns, intensifying competition. NMDC’s ability to maintain pricing (or realisation) for new capacities amid increasing competitive pressure will remain monitorable. 

 

Exposure to risk of renewal of revenue contracts

The lease rental discounting (LRD) loans availed by the company are for 15 years, while the tenure of revenue contracts is 1-5 years, leading to risk of renewals. The risk is mitigated by high customer stickiness due to downtime risks. NMDC has a limited track record of operations, and there is not sufficient history of contract renewals. While the churn observed in the industry is less than 1%, timely renewals of contracts at favourable realisations will be key to protect profitability.

Liquidity: Strong

The company had cash and equivalent of ~Rs 500 crore as on February 28, 2024. This, along with expected net cash accrual at Rs 800-850 crore, will be more than adequate to meet debt obligation of Rs 450-500 crore in fiscal 2025. The capex expected in fiscal 2025 will likely be financed through term loans and equity. The management has articulated that the company will maintain unencumbered cash and equivalent of Rs 300 crore at all times.

Outlook: Stable

The business risk profile of NMDC will continue to benefit from strong demand as reflected in its healthy order book, while the financial risk profile will be supported by strong cash accrual and long tenure of proposed debt instruments.

Rating Sensitivity Factors

Upward Factors

• Faster-than-expected ramp-up in contracted capacity resulting in sustained revenue growth
• Continued strong operating efficiency resulting in net debt to Ebitda ratio less than 5 times on a sustained basis
• Prudent funding of capex such that the capital structure and interest coverage ratio remain healthy

 

Downward Factors

• Slower-than-expected ramp-up in capacity
• Operating margin below 70% on a sustained basis owing to more-than-expected expenses
• Stretched working capital cycle constraining liquidity
• Large, debt-funded capex weakening the financial risk profile

About the Company

NMDC is a special purpose vehicle which will include all DC facilities of the Hiranandani group in Panvel, Mumbai. The company is 99.99% owned by Infin Data Centre Holdings Ltd (Mauritius) with the balance 0.01% held by Yotta Data Services Pvt Ltd. NMDC will provide a host of services, including co-location, cloud and managed services, to large, medium and small enterprises as well as hyperscalers. Mr Darshan Hiranandani is the chairman of the Hiranandani group’s DC business, which includes NMDC.

Key Financial Indicators (CRISIL Ratings-adjusted figures)

As on/for the period ended March 31	Unit	2023	2022
Operating revenue	Rs crore	56	9
Profit after tax (PAT)	Rs crore	-177	-202
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	7.57	13.55
Interest coverage	Times	0.01	-1.09

   NM: Not meaningful since the reported numbers are negative

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	400	Complex	CRISIL AA-/Stable
INE0FX607019	Non-convertible debentures	03--May-2023	9.40%	03-May-2033	800	Complex	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	1800	NA	CRISIL AA-/Stable

*Yet to be issued