According to Investment Information and Credit Rating Agency of India (ICRA) Limited, the data centre capacity in India is expected to surge six-fold in the next six years. Overall, 4,900-5,000MW of capacity involving investments of around Rs 1.5 trillion are likely to be added during the period. 

Data localisation and data explosion are paving the way for a data centre revolution in India. To cater to the increasing demand, Indian corporates such as the Hiranandani Group, and the Adani Group, in joint venture (JV) with EdgeConnex, the Reliance Group; foreign investors such as Blackstone, CapitaLand, and Princeton Digital Group; captive consumers such as Amazon, Microsoft – have all started investing massively in Indian data centres. Along with them, existing players including NTT, CtrlS, Nxtra, and STT India are also expanding their capacities.

Commenting on the data centre landscape, Anupama Reddy, vice president and co-group head, Corporate Ratings, ICRA, said, “The key triggers for digital explosion in India are the increasing internet and mobile penetration, the government’s thrust on e-governance/digital India, adoption of new technologies (cloud computing, internet of things, 5G etc.), growing userbase for social media, gaming, e-commerce and over-the-top (OTT) platforms. This, coupled with favourable regulatory policies such as the draft Digital Data Protection Bill 2022, providing infrastructure status to data centres, special incentives from central and state governments such as land at subsidised cost, power subsidies, exemptions on stamp duty, discounts on usage of renewable energy and procurement of IT components made locally, and other concessions are expected to boost data centre investments in the country.“ICRA expects the sector to witness a six-fold increase in capacities in the next six years, with Mumbai, Hyderabad and national capital region (NCR) to account for 70-75 per cent of the installed data centre capacity. The presence of landing stations, fibre connectivity, uninterrupted power supply, proximity to tenant’s headquarters and high score on disaster proofing are some of the key parameters a data centre operator would look for in a location. Mumbai and Chennai have maximum landing stations, with the former being the preferred location for a data centre operator. Chennai’s reputation took a dent due to the floods of 2017 and 2018. The other key emerging locations are Hyderabad and Pune, wherein some of the large hyper scalers are setting up huge data centres closer to their operation bases in India.”

As per ICRA, given the ESG considerations for most of the key tenants, data centre players are also expected to invest in green power to meet their power requirements. The industry revenues are expected to increase at a compound annual growth rate (CAGR) of around 17-19 per cent during FY2023-FY2025 (24.5 per cent CAGR growth during FY2018-FY2022), supported by an increase in capacity utilisation and ramp-up of new data centres. With increase in revenues and better absorption of fixed costs, operating margins are likely to improve and remain in the range of 43-45 per cent during next three years.

Further, the return on capital employed (ROCE) is expected to remain modest as the data centre players are in the midst of a large capex programme wherein the ramp-up of the data centre is likely to happen over a period of time. The increasing competitive intensity is expected to exert pressure on margins for incremental business. This, along with the large debt-funded capex, could exert pressure on the credit metrics of the players. 

The government has withdrawn the draft Personal Data Protection Bill in August 2022 after five years and rolled out a new draft bill, titled the Digital Personal Data Protection Bill 2022 in November 2022. Reddy further added, “The new bill has increased penalty for breaches and eased cross-border data flows where data can be stored in trusted nations compared to the earlier bill, which had mandatory requirement for storage of personal data locally. The impact of the new bill on demand for data centres in India remains to be seen.”