The Indian data centre (DC) market is experiencing significant growth, driven by factors such as data localisation requirements, affordable data plans, adoption of emerging technologies, widespread use of budget-friendly smartphones and a rapidly expanding user base for social media, gaming and over-the-top platforms. India is well positioned to become a major player in the global DC landscape, with its capacity expected to reach 2,000-2,100 MW by FY 2027.
Key demand drivers
The demand for DCs is being driven by several key factors linked to the country’s increasing digital penetration.
India’s e-commerce market is expected to grow from $70 billion in 2023 to $325 billion by 2030, fuelling the need for more data infrastructure. Mobile data consumption is also rising, projected to nearly double from 29 GB per user per month in 2023 to 68 GB by 2029. Digital payments, particularly through the Unified Payments Interface, are set to grow from 131 billion transactions in FY 2023-24 to 439 billion by FY 2028-29. Additionally, the Indian public cloud services market is estimated to reach $24.2 billion by 2028, further driving the demand for DCs.
Artificial intelligence (AI) is expected to drive a substantial surge in demand over the next three to five years.
Regulatory landscape
The government plays a crucial role in fostering growth through a supportive regulatory framework. Key measures include the Digital Personal Data Protection Act, 2023, and initiatives under the Digital India programme. State governments are also offering special incentives, and data centres have been accorded infrastructure status. The Ministry of Electronics and Information Technology has introduced incentives to further promote investment in this sector.
Investment scenario
India’s cost dynamics are favourable for DC investments due to lower capex compared to developed markets. The average capex per MW for setting up a DC in India (calendar year 2023) is around Rs 530 million. Factors such as relatively lower real estate costs, skilled manpower availability and strong demand prospects contribute to this advantage.
Regional dynamics
Going forward, Tier I cities in India will continue to dominate the DC market, capturing the largest share, while Tier II and III cities are expected to see gradual growth in their DC capacities.
In terms of regions, Mumbai remains a top choice due to its strategic location, prominent cable landing stations and the presence of major headquarters. Its central position, equidistant from the northern and southern regions, ensures low latency across the country. With minimal power outages compared to other cities, Mumbai is projected to increase its IT power capacity from 485 MW in 2024 to 1,110 MW by 2027.
Chennai, traditionally a preferred DC hub, faced challenges due to flooding in 2017 and 2018. However, it remains an important location, with capacity expected to rise from 150 MW in 2024 to 325 MW by 2027.
Delhi NCR, located in seismic zone 4, faces risks related to disaster-proofing, limiting the number of third-party DCs. However, it continues to see growth in captive and edge DCs, with capacity forecasted to reach 135 MW by 2027.
Hyderabad and Bengaluru, both in seismic zone 2, are favoured for disaster recovery, with Hyderabad’s IT power capacity expected to increase from 40 MW in 2024 to 200 MW by 2027. Large hyperscalers are setting up huge DCs in Hyderabad closer to their operation bases.
Revenue profile and cost structure
Between FY 2021 and FY 2024, the revenue profile of India’s DC market has been marked by significant contributions from co-location and managed services. Co-location services dominated the revenue stream, accounting for 82 per cent, while managed services contributed 15 per cent.
From a tenant profile perspective during the same period, hyperscalers and cloud service providers emerged as the leading drivers of growth, making up 40 per cent of the revenue. Telecommunications accounted for 21 per cent, IT/IT-enabled services contributed 19 per cent, e-commerce 11 per cent and the Banking, Financial Services and Insurance (BFSI) sector 9 per cent.
Operationally, India’s DC market relies heavily on high-cost grid power, which makes up 29 per cent of the total operating cost structure for DC players. However, a notable shift is anticipated in the adoption of sustainable practices within the industry. The use of green power as a share of total energy consumption by Indian DCs is projected to rise from the current level of under 5 per cent to 20-25 per cent by 2028. Globally, top DC operators already utilise 76 per cent renewable energy in their power mix.
Industry challenges and outlook
The DC market faces several challenges, including lumpy supply additions, intense competition, environmental, social and governance compliance demands, and operations and maintenance risks. Nevertheless, the outlook for FY 2025 remains stable, with anticipated growth of 23-25 per cent in operating income and a 100-150 basis point increase in operating margins, driven by higher capacity utilisation and new facility ramp-ups. Moreover, the total debt-to-operating profit before depreciation, interest and taxes is expected to grow 4.4-4.6 times, with overall debt levels anticipated to rise 16-18 per cent year on year to support ongoing capex. The debt service coverage ratio is also likely to improve from 1.5-1.7x in FY 2024 to 1.8-2.0x in FY 2025. Furthermore, debt metrics will remain comfortable over the loan tenor.
Based on a presentation by Abhishek Lahoti, Assistant Vice President and Sector Head, ICRA Limited
