India is witnessing a data centre revolution, driven by the widespread adoption of new-age technologies, digital payments, cloud services, and mobile and internet services. This growth is supported by enabling government policies and large investments from global players.
In the Union Budget 2022-23, the government granted infrastructure status to the data centre sector. This is expected to help data centre operators get access to long-tenured debt at competitive rates. Further, various state governments have announced fiscal incentives to attract private investments in the sector. The policies are aimed at reducing the upfront and operational costs of data centres to create a conducive investment atmosphere. In order to attract investments, states such as Maharashtra, Telangana, Tamil Nadu and Uttar Pradesh have been offering rebates or incentives such as exemptions on stamp duties involving land transactions, providing power subsidies with uninterrupted power supply, and ensuring 24×7 access to water supply. Further, the Ministry of Electronics and Information Technology plans to set up data centre parks and ease the process of setting up data centres by providing single-window clearances. It also plans to provide fiscal incentives under a draft national policy framework for the sector.
To cater to the increasing demand for data centres, Indian conglomerates such as the Hiranandani Group, the Adani Group and the Reliance Group, foreign investors such as Blackstone, CapitaLand, the Princeton Digital Group, and captive consumers including Amazon and Microsoft have made significant investments in data centres. Existing players such as NTT, CtrlS, Nxtra, STT and WebWerks have started expanding their capacities. The average cost per megawatt for setting up a greenfield Tier-4 data centre is around Rs 500 million per MW. This is lower than that in other Asian and European markets, and is 10-15 per cent lower than the next competitive market, China.
Revenue and cost structure
The two major services that data centres offer are colocation and managed services. Colocation services account for 66-68 per cent of revenues while managed services account for 25-28 per cent. The majority of the upcoming investments are directed towards colocation services. This trend is driven by hyperscalers and verticals such as banking and information technology. In addition, cloud service providers are generating new demand for colocation as they opt for third-party facilities to host their infrastructure while providing services to their customers.
A significant cost for data centre operators is related to power and fuel. A major portion of power expenditure goes into maintaining redundancy and multiple cooling paths. The power required for cooling paths can account for as much as 40 per cent of the facility’s energy bill. Employee costs are also a key component, primarily involving the technical team responsible for ensuring data centre availability at all times. Other costs include bandwidth, licence purchase, and general and administrative costs.
Challenges and outlook
The Indian data centre capacity has tripled over the past three years. Further, in the next six years, the capacity is expected to increase by six times. With lumpy capacity additions and increasing competitive intensity due to the entry of Indian conglomerates and global giants, it is expected to exert pressure on margins for incremental business and return metrics for players.
With respect to O&M risks, some of the key challenges are the lack of technical manpower, the unavailability of uninterrupted power supply and technological obsolescence. These need to be addressed in the medium term.
From the financial viewpoint, industry revenues have increased at a steady compound annual growth rate (CAGR) of 24 per cent during the past five years and are expected to increase at a CAGR of 18-20 per cent during financial years 2024 and 2025. This is supported by the increased utilisation of existing capacities and net capacity additions. With the growth in revenues and better absorption of fixed costs, the operating margins are likely to improve to 43-45 per cent in the next two years. The return on capital employed is expected to remain modest due to the ongoing large capex programme undertaken by data centre players. The increasing competitive intensity is expected to exert pressure on margins for incremental business, and large debt funded capex plans could affect the credit metrics of players.
Overall, 5,100 MW of capacity, involving investments of Rs 1.6 trillion, is likely to be added in the next six years. Mumbai, Hyderabad and the National Capital Region will account for 70-75 per cent of the upcoming installed capacity by 2028. Investments are also expected in smaller edge data centres due to growing data requirements in Tier-2 cities. Along with investments in capacity expansion, given the ESG considerations for most of the key tenants, data centre players will need to additionally invest in green power to meet their power requirements. However, the returns on the same will be recouped over a period of time.
Based on a presentation by Anupama Reddy, Vice-President and Co-Group Head, Corporate Ratings, ICRA