Why Shankar Sharma calls data centre stocks a bubble and enthusiasm around them a “hope trade”

Data centre stocks jumped over 12% on Monday, but veteran investor Shankar Sharma dismissed the frenzy as a ‘hope trade,’ cautioning investors to play the bubble at their own risk. He likened the sector to the telecom tower business, which demands heavy capex and, in his view, suffers from weak underlying economics.

“The enthusiasm around data centres is largely a hope trade. In reality, it broadly resembles that Telecom Tower business in which the tower company invests massively in Capex and then leases out the capacity to various telecom companies,” Sharma said in a tweet on Monday.

Unlike the telecom tower business, the customer spread in the data centre business is much wider but the bargaining power largely rests with the customers and not the companies, he opined.

“While the customer spread in data centres is much wider, the bargaining power almost always rests with the customer and not with the data centre because ultimately, data centres are a capex guzzling business ( like an industrial warehouse eg), and once you have capex in the ground, you are at the mercy of the various customers who can play One against the other to get very low rates,” Sharma said.

He said that the model is one of a leasing business and risks more or less similar to the telecom tower business.

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“Therefore, this is ultimately a leasing business and it will have pretty much all the similar risks associated including leverage on the balance sheet. ROIs will trend down, cash flow will be largely negative most of the time,” Sharma said.He warned investors about the economics of the business saying that investors can play the bubble theme at their own risks. “Play the bubble if you want but remember the economics are not at all sexy,” he added.Sharma is the founder of GQuant FinXray – a stock market guide for investors.

Data centre stocks rose sharply today led by Anant Raj whose shares rallied 12% to hit the day’s high of Rs 599.95. The stock rose on media reports that suggested that the government has proposed a tax exemption of up to 20 years for data centre developers, provided they meet targets on capacity addition, power usage effectiveness, and employment generation.

These incentives are outlined in a new draft of the National Data Centre Policy, a Business Standard report said. According to the draft, the Ministry of Electronics and Information Technology (Meity) is likely to request the Ministry of Finance to allow input tax credit (ITC) on the goods and services tax (GST) levied on capital assets, such as data centre construction, heating, ventilation and air conditioning.

Others including Aurionpro Solutions, Amber Enterprises India, Black Box, Tata Communications, ABB and KEC International were up between 7% and 1% around 2 pm.

Also Read: IPO-bound OYO’s unlisted shares jump 26% in a month, beating listed peers. Time to buy?

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