What’s really going on with ESDS?

Shrehith Karkera (0:01)

Hello, hello, hello, welcome folks, you're tuned in to Finshots Daily. I'm Saad, if you're new here, welcome. If you're returning, welcome back. In today's episode, we explain why ESDS Software Solution shares fell into consecutive lower circuits after a sharp rally, and unpack its $1.25 billion AI contact.

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ESDS Software Solution has had a rather extraordinary journey since it went public. It went public last month, giving investors a 76% gain on day one of listing. But that was just the beginning. Over the next few weeks, the stock surged by roughly 310% above its IPO price, pushing its market capitalization close to 16,000 crore rupees. And it's easy to see why everyone is excited. ESDS operates at the intersection of three of the biggest technology trends in India right now. Cloud computing, data centers, and artificial intelligence. But ESDS isn't simply another company putting servers in buildings and renting out the space. It has spent more than two decades building a combination of hosting, cloud infrastructure, and managed services for banks, government organizations, and enterprises that need secure, reliable, compliant infrastructure. It operates something called community clouds for over a hundred banks, and even the government. Basically, a community cloud is a private cloud shared by organizations with similar needs. So, instead of every bank building and managing its own IT infrastructure, ESDS can provide a common, secure environment that multiple banks can use while keeping their data and applications isolated from one another. And this isn't necessarily a business where customers can casually switch providers every few months, because once a bank or government department has built its applications and workflows around a particular infrastructure provider, moving everything to another system can be expensive and complicated. That makes these relationships relatively sticky, which means that ESDS has a recurring customer base to sell additional cloud and manage services to.

In fact, in FY26, close to 90% of ESDS customers used all three of their major service lines, LASS, which is Logging as a Service, Manage Services and SAS. And now, it's trying to add another potentially much bigger opportunity to this business, AI computing. Training and running AI models requires enormous amounts of specialized computing power, particularly GPUs. Most companies don't want to spend hundreds of crores buying GPUs, building specialized infrastructure and figuring out how to operate it. They would much rather rent computing capacity when they need it. That's the basic idea between GPU as a service. And this is where ESDS becomes particularly interesting. In India's listed markets, few companies offer investors a direct way to invest in this specialized infrastructure opportunity. ESDS and E2E networks are the two obvious listed names. And that brings us to the reason ESDS has suddenly become a part of recent market chatter. Its stock kept climbing until it hit a peak on September 24th. Then, things suddenly turned around. The stock started falling and hit the lower circuit for six consecutive trading sessions before recovering slightly this week. The sell-off began soon after the company announced its Q1 FY27 results. Revenue fell 20% sequentially to ₹133.65 crore, while net profit plunged 56% to ₹29 crore. And most of its decline came from its subsidiaries. Their combined revenue fell from ₹50.4 crore in Q4 FY26 to ₹17.5 crore in Q1 FY27. Their combined profit also dropped from about ₹37 crore to ₹11 crore. Interestingly, the first tranche of anchor shares became freely tradable only this week, releasing around 25 lakh shares into the market. By then, five trading sessions had already passed. So while the lock-in expiry may have added to the selling pressure, it wasn't what triggered the initial correction. So what's going on? Well, you could blame it partly on ESDS business. Because a significant part of the previous quarter's revenue wasn't recurring business at all. During the earnings call, management explained that the subsidiaries had recognized around 85 crore rupees for technical design services. The work involved designing the layout for the GPU cluster that an Australian AI cloud platform, Charin AI, is building. But here's the thing, while the 85 crore rupees was a one-off fee, the work itself was linked to ESDS biggest AI bet yet. The company had been helping design the GPU cluster that the same Charin AI plans to build in Sydney. And that relationship eventually turned into a five-year, $1.25 billion AI infrastructure agreement. And for a company of ESDS size, a billion-dollar deal is quite significant. Under that deal, ESDS is essentially acting as the middleman. Charin AI provides the GPU infrastructure, while ESDS leases that capacity and then sells access to its own customers. In other words, ESDS can pursue the AI opportunity without putting the full cost of the GPUs on its balance sheet. That's clever, because GPUs depreciate rapidly, and buying thousands of them requires significant upfront capital. But there is a trade-off.