UBS sees power supply chain as key India play in data center expansion

UBS in its latest note said that India and Japan in particular are likely to face power constraints amid rising demand from data centers. This creates investment opportunities across the power supply chain, the firm said.

"In India, the high pipeline capacity may represent investment opportunities for the power supply chain," says the UBS note.

In its recent report, the brokerage notes that data centers, which fall among the most energy-intensive property types, could exert significant pressure on local power systems, especially in countries like Japan and India. UBS estimates that India's reserve margin, which measures the cushion between peak power demand and generation capacity, will fall below the 30% safety threshold as data center buildouts accelerate. The pipeline capacity in India is currently 2.2x of its existing capacity.

"Though data centers currently account for only 2% of total power usage in APAC, assuming pipeline capacity is delivered, this is expected to increase to 4%," UBS said, highlighting the spatial concentration of data centers and their impact on local grids.

From an investment standpoint, UBS sees opportunities not just in data center operators but more attractively in parts of the supply chain, particularly liquid cooling and stable system providers. "Using HOLT valuations, liquid cooling and stable system look more attractive than data center operators/developers, while power generator, chemical materials, grid operator, gas turbine, and transformer look less attractive," the note mentioned.

For India, UBS lists Bharti Airtel, Tata Power, and CG Power & Industrial Solutions as key stock picks tied to the data center expansion theme. Bharti Airtel is included as a preferred play among regional data center operators, while Tata Power and CG Power are cited under the power supply chain segment. UBS has a 'Buy' rating on all three.

UBS also highlights that APAC currently accounts for 40% of global data center capacity, with India making up 5% of the region's total. While China leads with 64%, countries like Japan, Australia and India are seeing significant investment momentum. However, the risk of a supply glut remains a consideration. UBS assigns a 3% probability of a glut in India, which is lower than China (20%) and Japan (14%), but still notable in the context of accelerating capex.