Stable Outlook: Key trends in the data centre segment

Some of the key triggers for data explosion in India are low data tariff plans, access to affordable smartphones, the government’s focus on Digital India, the growing user base of  social media, gaming, e-commerce, digital transactions and over-the-top platforms.

Further, the overall public cloud services market in India is expected to reach around $24 billion by 2028 as per some  industry reports. Moreover, driven by artificial intelligence (AI) requirements, the global data centre (DC) market has already witnessed multiple large (over 300 MW) deals signed by hyperscalers, and India is expected to follow this trend.

Regulatory support

The Digital Personal Data Protection Bill has acted as a game changer for this industry. Further, in the Union Budget for 2022-23, the government provided infrastructure status to DCs, enabling players to get  access to long-tenor debt at competitive rates as well  as foreign funding through the external commercial borrowing route.

Also, some state governments have special incentives such as the provision of land at subsidised costs, power subsidies, exemptions on stamp duty and other concessions to boost AI investments. Moreover, as a part of the Union Budget 2025-26, the government’s proposal to set up a centre of excellence in AI for education, besides the BharatNet project to provide broadband connectivity to all gram panchayats and deep-tech fund of funds to provide access to skilled professionals in AI, cybersecurity and cloud computing, complements strong growth prospects for the sector.

Capital expenditure and capacity

The majority of the upcoming investments are geared towards meeting the high demand in co-location services. This will continue to be driven by hyperscalers and verticals such as banking, financial services and insurance and information technology (IT)/IT-enabled services companies, which require strict data confidentiality and complete management control of their operations.

ICRA expects the DC operational capacity to increase to around 2,000-2,001 MW by March 2027 from around 1,150 MW operational capacity as of December 2024. This involves investments of around Rs 400 billion to Rs 450 billion in FY 2026-27, supported by data usage and data localisation initiatives. Further, DC players have a development pipeline of 3-3.5 GW to be delivered in the next 7 to 10 years, involving significant investments of Rs 2 trillion to Rs 2.3 trillion.

Around 75 per cent of the upcoming capacities in the next three years are concentrated in the Mumbai, Chennai and Hyderabad markets. The data requirements of Tier 2 cities are increasing because of a decentralised workforce and greater adoption of new technologies. Consequently, the demand for edge DCs, which are built closer to the base, is on the rise.

Cost structure and key challenges

Co-location services, backed by hyperscalers, contribute to around 80 to 85 per cent of the DC revenues for major developers. However, with an increase in the number of DC developers in India, servicing the same set of hyperscalers has led to a moderation in rentals in the recent past as the negotiation power has tilted towards hyperscalers. So, ICRA expects an increase in the payback period and an impact on return metrics for the majority of developers in the medium term.

The power required for cooling paths can be equal to as much as 40 per cent of the facility’s energy bill. Given the environmental, social and governance consideration for most of the key tenants, DC players are also expected to invest in green power to meet their power requirements. In India, green power as a percentage of the total power consumption for the DC segment is less than 5 per cent, although it is projected to increase to 20 to 25 per cent by 2028. However, the returns on the same will be recouped over a time period.

Some of the key challenges are the non-availability of technical manpower, uninterrupted power supply, and technological obsolescence risk, which need to be addressed in the medium term. Also, due to global supply chain issues, there can be a delay or shortage of mechanical-electrical-plumbing components because the majority of them are imported, which could result in cost or time overruns.

Outlook

ICRA’s outlook on the DC sector for FY 2026 is stable. It estimates the overall industry revenues and operational capacities to increase by 18-20 per cent year on year (YoY) in FY 2026, supported by an increase in rack capacity utilisation and ramp-up of new DCs. Operating margins are expected to remain healthy in the range of 40-41 per cent in FY 2026. The return on capital employed is likely to be modest as DC players are in a continuous capex mode.

Debt for the top five players is estimated to be higher by 13-15 per cent YoY to fund the ongoing capex. However, leverage is likely to improve to around 4.1 to 4.3 times in FY 2026 from 4.4 to 4.6 times in FY 2025, backed by an increase in earnings before interest, taxes, depreciation and amortisation. Despite a higher debt dependence, the debt service coverage ratio is likely to be comfortable in the range of 1.5-1.7 times, backed by higher cash accruals and ballooning repayment structure of the players.