Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facility of Web Werks India Private Limited (WWI) to ‘CRISIL BBB/Positive’ from ‘CRISIL BBB-/Stable’.

 

The upgrade reflects the improvement in business and financial risk profiles in fiscal 2023, with expectation of further improvement over the medium term. The recent commissioning of new data centres in Mumbai, Bengaluru and HyAderabad increased the IT operational capacity of the company’s data centres to ~5 megawatt (MW) in fiscal 2023 from ~1.5 MW in fiscal 2022; utilisation rate of the centres has also improved. WWI has also secured multiple land parcels across key metro geographies in fiscal 2023 to fulfill the ever-increasing demand. Revenue grew by ~19%, backed by core data centre services revenues growing ~35%, while operating margin improved by ~1,100 basis points.

 

Earlier, Iron Mountain (IM; rated BB-/Stable by S&P Global Ratings), a leading global data centre operator, had announced in March 2021 that it will invest about Rs 1,125 crore in WWI. While the company has received two traches of Rs 375 crore each in fiscals 2022 and 2023, the final tranche is expected shortly, which will increase IM’s shareholding in WWI from the current ~54%. The IM equity improved adjusted networth to ~Rs 810 crore as on March 31, 2023, from Rs 419 crore previous fiscal.

 

Capital expenditure (capex) of Rs 1,300-1,400 crore over the next three fiscals will further increase the IT operational capacity by >6x to ~32 MW from 5 MW existing currently. Strong demand momentum for data centres is likely to lead to healthy growth in topline over the medium term. Stabilisation of capex and expected onboarding of a healthy mix of retail and large clients are likely to result in a 300-500 bps improvement in operating profitability. WWI will also benefit from its parent, IM, which is engaged in the same business. Though a large portion of the equity infused so far has been utilised for capex (the pending tranche to be used for that too), the company will contract additional debt to fund the remaining capex. However, a balanced mix of equity and debt will lead to a healthy DSCR (debt service coverage ratio). The outlook revision reflects the expectation that the company will be able to tie up a significant part of its under-construction capacities, thereby improving revenue visibility. Furthermore, as against the current cloud-led model that comprises overall income, the upcoming capacities will largely be on co-location model; which will stablise revenue.

 

In addition to the above capex, WWI has acquired land parcels to build hyperscale data centre facilities taking its overall IT capability to ~100 MW. CRISIL Ratings understands that execution of this would be contingent upon pre-received order book in place, and will remain a key rating sensitivity factor.

 

The rating reflects the stability of revenue profile with improving operating efficiency, healthy financial risk profile and experience of the promoters. These strengths are partially offset by large capex requirements, and susceptibility to implementation and stabilisation risks of the ongoing expansion and to increasing competitive intensity.

Analytical Approach

CRISIL Ratings has adopted a cash flow-based approach and considered the standalone business and financial risk profiles of WWI to arrive at its rating.

Key Rating Drivers & Detailed Description

Strengths: 

Stability of revenue and improving operating efficiency

WWI operates Tier-3 data centres with an uptime of 99.997% across five locations in Mumbai, Pune, Noida, Bengaluru and Hyderabad. The company derives revenue from a broad base of well-known brands, including enterprises, BFSI (banking, financial services and insurance), and SMEs (small and medium enterprises). Revenue has remained stable due to stickiness of clients, who have to incur high costs in switching data centre operators.

 

Operating revenue grew 19% in fiscal 2023 and is likely to increase manifold over the medium term with ramp-up of capacity and the subsequent optimal utilisation levels. Association with IM also lends a competitive edge to WWI given the parent expertise in the data centre space and longstanding relationships with a reputed clientele.

 

Operating margin improved 1,100 bps to ~27% in fiscal 2023 with the hiving off of the software business into a separate entity. Addition of sizeable data centre capacities is likely to further improve margin over the medium term. Operating expenses for the sector primarily comprise power, and data centre operations and maintenance. Of these, power accounts for majority of the cost but is largely passthrough, thereby aiding profitability. Successful ramp-up of capacity and utilisation levels over the medium term will remain key monitorable.

 

Healthy financial risk profile

Financial risk profile will be supported by high cash accrual over the medium term which, along with the long tenure of debt obligation, will result in a comfortable DSCR. The company would also maintain an interest service reserve account of three months of interest obligation and a debt service reserve account of three months of debt obligation. Infusion of the last tranche of Rs 375 crore by IM will improve networth and keep capital structure robust.

 

Experienced promoters and healthy growth in operations

The promoters have been in the data processing and outsourcing services segment for more than 20 years and own other similar businesses. They were able to enter into a collaboration with IM to expand their facilities. The promoters have also infused own funds in the past, whenever required.

 

Weaknesses: 

Exposure to project implementation and stabilisation risks

WWI is incurring a large capex and will remain in execution phase over the medium term. Timely commencement of commercial operations within budgeted cost and susceptibility to stabilisation issues are key monitorables. Delay in project and tie-ups with power supply arrangements and clients will also remain key monitorables.

 

Susceptibility to intense competition

Scale of operations is modest but is expected to improve over the medium term because of planned capacity addition. Increase in scale will be highly dependent on timely fulfilment of ongoing expansion activities and subsequent tie-ups with clients for new capacities. The company is exposed to intense competition from established players. However, strategic location of plants will mitigate this risk considering demand is currently outpacing supply, especially in metros.

 

Highly capital-intensive operations

Data centres require sizeable capex towards land, building, power supplies and infrastructure. WWI has already acquired land parcels for its upcoming data centre facilities and is likely to incur additional capex of Rs 1,300-1,400 crore over the next three fiscals. However, a large portion of project risks associated with investments in newer capacities gets mitigated because of the modular nature of capex based on visibility of contracts. Nevertheless, the ability to maintain high utilisation for new properties and its impact on cash accrual will be key rating sensitivity factors.

Liquidity: Adequate

Cash and equivalent stood at ~Rs 80 crore as on March 31, 2023. Annual cash accrual is expected to be healthy at Rs 35-40 crore, and the company has no debt obligation due to moratorium in fiscal 2024. The proposed capex plans in the fiscal will be met through a mix of debt and equity infusion from IM. Cash accrual and existing liquidity should be sufficient to meet working capital requirement and debt obligation over the medium term.

Outlook: Positive

Business risk profile is likely to improve over the medium term from the phased ramp-up of ongoing capex in the current strong demand scenario. Despite the capex, however, financial risk profile should remain comfortable.

Rating Sensitivity factors

Upward factors:

• Significant improvement in revenue visibility for upcoming data centre facilities
• Improvement in business risk profile after implementation and commercialisation of the upcoming data centres, leading to increase in operating profit by over 50%
• Sustained improvement in financial risk profile driven by healthy capital structure, leading to a strong DSCR

 

Downward factors:

• Large, debt-funded capex weakening capital structure and DSCR
• Suboptimal occupancy levels impacting business risk profile such that adjusted net cash accrual remains below Rs 15-20 crore

About the Company

Incorporated in 2000, WWI is a Tier-3 data centre operator and runs carrier-neutral data centres across five locations in Mumbai, Pune, Hyderabad, Bengaluru and Noida. Key service offerings include colocation, dedicated hosting, cloud hosting services and VPS hosting. It also provides access to a neutral interconnection ecosystem of carrier, content and cloud providers, including over 160 internet service providers (ISP) and 6 internet exchanges. Till fiscal 2021, the company was bootstrapped and fully owned by promoters who have over 23 years of experience in the sector.

Key Financial Indicators

Particulars	Unit	FY23*	FY22
Total Income	Rs crore	103	88
Profit after tax (PAT)	Rs crore	16.1	7.4
PAT margin	%	15.7	8.5
Interest coverage	Times	NM**	NM**
Total debt/adjusted net worth	Times	0.1	0.0

NM: Not Meaningful

*Provisional

**Interest capitalized and not charged to statement of profit and loss

Any other information: Not applicable