Forget power: The unquenchable AI thirst propelling water stocks up to 45%

While India may not have a direct listed play on the global semiconductor and AI boom, another theme is quietly gathering momentum on Dalal Street, and it’s not power. The connection with water is stronger than it appears.

Water is critical to the functioning of AI infrastructure and data centres. So much so that Moody’s recently cautioned about rising water stress due to rapidly growing demand from data centres. It also warned that India’s fragmented water management framework raises fiscal and credit risks.

Yet, what may be a challenge for some is turning into an opportunity for others. Water-linked stocks such as Shakti Pumps, VA Tech Wabag, Jash Engineering, Enviro Infra and Ion Exchange among others have surged as much as 45% in just a month, drawing investor attention to a sector that has largely remained outside the spotlight.

Data centres that power AI applications consume large quantities of water for cooling and temperature control, creating demand for water treatment, recycling and efficient distribution systems. Companies such as VA Tech Wabag, Ion Exchange and Enviro Infra operate in water and wastewater treatment, while Shakti Pumps supplies pumping solutions and Jash Engineering provides flow control and water infrastructure equipment.

What is lifting these stocks?

“The surge in water stocks has occurred due to the combination of the fundamentals behind water infrastructure and the new emerging data centre theme. With regards to the fundamentals, the increased government funding for water infrastructure projects, the extension of the Jal Jeevan Mission and the resulting order visibility to companies such as Va Tech, Shakti Pumps, Enviro, Jash Engg and many more have created a positive environment for water companies,” said Ravi Singh, Chief Research Officer at Master Capital Services.

On the other side, the data centre narrative has added a new opportunity for investment in water. So far, there have been no significant revenues generated by any listed company that can be linked to data centre operations. Therefore, part of this recent re-rating has been driven by the anticipation of future cash flows that will be generated from data centres rather than actual earnings generated by listed companies today.

“The truth is that the fundamentals are what provided the basis for the rally, however, the data centre theme has also provided a momentum for the move beyond,” he added.

Which segment will prosper?

Singh suggests that the biggest beneficiary of increasing water shortages is likely to be the wastewater treatment and recycling segment. Given that freshwater is becoming increasingly scarce, municipalities, industries and large commercial users will have to treat and reuse water instead of simply sourcing more of it.

This marks a structural shift in the industry, from water distribution to water efficiency and reuse. Companies engaged in wastewater treatment, industrial water solutions, recycling systems and desalination are therefore likely to be among the biggest beneficiaries.

Valuations look stretched?

Santosh Meeena, Head of Research at Swastika Investmart, told ETMarkets that valuations reflect optimism but are supported by order books and policy visibility, making the sector selective rather than outright frothy across the board.

Water stocks often trade at premiums to the broader market, with India Nifty/Sensex trading at around 20–23x forward earnings. VA Tech Wabag has been around 25–35x P/E with strong growth and ROE, while smaller names such as Enviro or pump stocks can appear elevated due to momentum.

Supporting factors include multi-year order books, government spending certainty and earnings growth. For instance, Wabag reported a 22% rise in Q4 revenue and a 29% increase in profit.

Risks remain and these include execution delays, working capital intensity in EPC projects, competition and any slowdown in capital expenditure. Not all companies are positioned equally. Leaders with strong moats and better order visibility justify premium valuations more than pure-play participants.

The rally has already priced in strong growth expectations, making it important to monitor any policy slippages or margin pressures.

Current valuations suggest investors are increasingly pricing in future growth opportunities alongside fundamentals. The market is assigning value to long-term drivers such as rising water stress, government spending, growing industrial demand and the potential emergence of data centres as a new customer segment.

While these are credible long-term growth drivers, most will take years to translate into meaningful revenues and profits. As a result, share prices across several water stocks have risen significantly faster than earnings estimates.

The long-term outlook for the industry remains positive. However, current valuations indicate that investors are paying a premium for future possibilities rather than performance delivered so far.

More legs to this new emerging theme?

Singh believes data centres could become a significant growth opportunity for some water companies over the next three to five years, although they are unlikely to emerge as a major revenue driver for the sector in the near term.

As AI, cloud computing and digital infrastructure continue to expand, demand for water treatment, cooling and recycling solutions is expected to rise, creating opportunities for companies with expertise in industrial water management.

However, for most listed water players, government and municipal projects are likely to remain the primary source of revenue. The data centre opportunity is real and could contribute to growth over time, but its impact on earnings is likely to be gradual.

Water is not merely another infrastructure theme. It sits at the heart of several of India’s most important growth sectors. Reliable water supplies are essential for data centres, semiconductors, pharmaceuticals, power generation and agriculture. As water stress intensifies across the country, the need for treatment, recycling, desalination and efficient water management will only continue to grow.

Unlike energy sources or technologies, water has no substitute. While industries can switch from one source of energy to another or adopt new technologies, they simply cannot operate without water.

For now, the market largely views water companies as beneficiaries of government spending. But the bigger opportunity lies in solving a long-term scarcity challenge. As investors begin to view water as a strategic resource rather than merely an infrastructure segment, the sector could witness a much larger re-rating. The recent rally signals growing interest, but the market may still be underestimating the scale and longevity of the opportunity ahead.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)