Abhishek Lahoti, Assistant Vice President, ICRA Limited

Cheap data tariff plans and access to affordable smartphones have resulted in increasing internet and mobile penetration in India. Mobile data consumption is estimated to increase from 19.5 GB per user per month to 62 GB per user per month by 2028, based on data from one of the leading information and communication technology players. Along with this, the adoption of new technologies such as cloud computing, artificial intelligence and 5G, and the growing user base of social media, e-commerce, gaming and over-the-top platforms, are some of the key triggers for the data centre (DC) explosion in India. Consequently, India currently has the highest average monthly data usage per smartphone.

Some of the leading industry reports chart a similar story for e-commerce demand, with India’s e-commerce market projected to grow to $150 billion in 2026 from $83 billion in 2022. Digital payments, backed by the growth of the United Payments Interface, are expected to reach 410 billion transactions in  2026-27 from around 100 billion in  2022-23. The overall Indian public cloud services market is expected to reach $17.8 billion by 2027, growing at a CAGR of 23 per cent over the next four years. All of these are fuelling the demand for data processing and data storage services in India.

This, along with favourable regulatory policies such as the Digital Data Protection Bill, grant of infrastructure status to data centres, and dedicated policies and incentives by various state governments, is expected to boost DC investments in the country. Given these triggers, the impact of the relaxation of cross-border data transfer rules in the new Digital Personal Data Protection Bill 2023, on the demand for DCs in India is expected to be low.

A sixfold increase in data centre capacity to 5,100-5,200 MW, involving investments of around Rs 1.6 trillion, is expected to happen in the next six years, supported by significant data explosion and favourable regulatory policy initiatives. Consequently, India’s share in the global installed capacity is expected to sharply increase to 15-17 per cent by 2028 from around 4 per cent (19 GW) in 2022. The majority of the upcoming investments are geared towards meeting high demand in co-location services. They will continue to be driven by hyperscalers and segments that require strict data confidentiality such as BFSI and IT/ITES.

Mumbai, Hyderabad and the NCR will account for 70-75 per cent of the installed DC capacity by 2028. The presence of landing stations, fibre connectivity, uninterrupted power supply, proximity to tenants’ headquarters and high scores on disaster proofing are some of the key parameters for a DC operator to select a location. Mumbai and Chennai have landing stations, with the former being the preferred location for DC operators. The other key emerging locations are Hyderabad and Pune, where some of the large hyperscalers are setting up huge DCs closer to their operational bases in India. The data requirements of Tier II cities are increasing because of the decentralised workforce and the adoption of new technologies. This could propel demand for edge data centres.

With regard to cost structure, power and employee costs are the major expenses for a DC operator. The major expense with respect to power is maintenance of redundancy and multiple cooling paths. The power required for cooling paths can account for  as much as 40 per cent of a facility’s energy bill. Other costs include bandwidth, licences, third-party services, and general and administration costs. For the top three global data centre players, the current renewable energy usage as a percentage of total power consumption is high, at 76 per cent. Though the use of green power in the DC business in India is at a nascent stage, investments in “green” power are likely to increase significantly in the medium term to meet the environmental, social and governance compliance requirements of clients, and long-term growth prospects. ICRA expects 20-25 per cent of the total power consumption to be met through green power by 2028.

The revenues for ICRA’s sample set are expected to increase at a CAGR of 17-19 per cent during fiscal years 2015-25 (23 per cent CAGR growth during fiscal years 2019-24), supported by an increase in rack capacity utilisation and the ramp-up of new DCs. With the increase in revenues and better absorption of fixed costs, operating margins are expected to remain in the range of 43-44 per cent. The return on capital employed is expected to be modest, as DC players are in continuous capex mode and the ramp-up of new DCs will happen over a period of time. With competition heating up, pricing flexibility may get constrained, thereby adversely affecting the margins for incremental business. This, along with the ongoing large debt-funded capex, will exert pressure on the credit metrics of the players