Despite a high per unit data consumption, India’s data centre capacity stands at approximately 1.2 MW per million internet users, which is relatively low compared to the US (with about 12.6 MW per million internet users) and China (2.3 MW per million internet users). However, factors such as the rising adoption of cloud, internet of things, artificial intelligence, and big data analytics, expanding 5G roll-outs, growing data usage, increased use of digital commerce and the Digital Personal Data Protection Act, 2023 are expected to drive growth in the data centre space in the coming years.
These factors will drive growth in India’s data centre IT capacity, going from 780 MW in FY2023 to approximately 1,700 MW in FY2026, reflecting a compound annual growth rate of 30 per cent. This growth will be fuelled by surging data consumption, demand from hyperscalers, mass adoption of 5G and data localisation requirements. Further, since India lags in terms of data centre infrastructure, this leaves ample room for incremental capacity absorption. Revenue for the data centre industry is projected to increase twofold, going from Rs 84.5 billion in 2023 to Rs 198 billion in FY2026.
In terms of regions, Mumbai is expected to lead in co-location capacity addition, with a projected growth of 33 per cent in installed IT capacity from 354 MW in FY2023 to about 660 MW in FY2026. This will be followed by the National Capital Region (NCR), Pune, Hyderabad, Chennai, Bengaluru and Kolkata. Meanwhile, edge data centres are anticipated to usher in the next phase of growth and drive demand in Tier II and Tier III cities.
Lower real estate costs and skilled manpower make India a cost-effective market for data centre construction. Between FY2024 and FY2026, a capex of around Rs 450 billion is expected for data centre construction. Of this, 32 per cent is expected to be allocated for land and building materials, while 68 per cent is expected to go towards power set-up, cooling units and racks. Currently, capex investments are being undertaken with some visibility on contracts. Players are also investing upfront in land, buildings and common mechanical, electrical and plumbing (MEP) to demonstrate expertise. A significant portion of the capex is modular and depends on customer MEP requirements.
Revenue for the data centre industry is projected to increase twofold.
Competition in the industry could intensify in the medium term, driven by a slew of new entrants across sectors. These sectors include telecom; engineering, procurement and construction; real estate; power; global private equity investors/funds; and domestic/global data centres. However, operational expertise and the ability to form partnerships with global hyperscalers could serve as key differentiators. Further, the rising competition may lead to consolidation in the industry over the long term.
Lower real estate costs and skilled manpower make India a cost-effective market for data centre construction.
Profitability, credit metrics and risks
Operating profitability in the industry is expected to rise to 42-43 per cent between FY2023 and FY2026. Operating margins are expected to increase by 200-300 basis points to reach 42-43 per cent by FY2026. However, the net profit is expected to remain below 20 per cent.
Scaling up, enhancing operating leverage and improving power usage effectiveness are expected to moderately increase margins. Further, the percentage of green energy usage in the industry is expected to increase in the coming years. In the medium term, the rising share of renewable energy is expected to reduce costs, with the benefits passed on to customers.
In terms of risks, unutilised capacity remains a key concern in the data centre industry. High unused capacities could result in a cash flow mismatch. Other risks include operations, technology change and security risks; heavy water usage; regulatory risk; power outages; and heavy import dependence.
Based on a presentation by Naveen Vaidyanathan, Director, CRISIL Ratings Limited