Investments worth Rs 1.5 trn likely on data centres in next six years: Icra

Current data centre capacity in India pegged at 870 Mw. Country likely to add 4,900-5,000 Mw; Mumbai, Hyderabad and NCR to hold 70-75% of overall installed capacity

Credit rating agency Icra on Tuesday said Indian and foreign corporations may invest over Rs 1.5 trillion in the next six years on expanding their data centre capacities in India, marking a six-fold growth.

A data centre is a large group of networked computer servers used by organisations for the remote storage, processing, or distribution of huge amounts of data. India's total data centre capacity is currently pegged at 870 Mw, powered by 138 units. Icra said the country could add 4,900-5,000 Mw of in the next six years.

Mumbai, Hyderabad and NCR will account for 70-75 per cent of the installed capacity in coming years. Providing infrastructure status to data centres, special incentives from Central and state governments like land at a subsidised cost, power subsidies, exemptions on stamp duty, and discounts on the usage of renewable energy will cause a data centre boom in the country. Availability of IT locally made components will further boost investments in the country, the rating agency said.

Investors such as the Hiranandani Group, the Adani Group in JV with EdgeConnex, the Reliance Group, Blackstone, CapitaLand, and Princeton Digital have invested massively in building data centre capacities in recent years. Cloud hyper scalers such as Amazon and Microsoft have also set up a large base in multiple locations across the country.

Anupama Reddy, Vice President and Co-Group Head of Corporate Ratings, Icra, said: “The presence of landing stations, fibre connectivity, uninterrupted power supply, proximity to tenant’s headquarters and a high score on disaster proofing are some of the key parameters a DC operator would look for in a location. Mumbai and Chennai have maximum landing stations, with the former being the preferred location for a DC operator.”

The data centre industry’s revenues are expected to grow at a CAGR of 17-19 per cent between FY23 and FY25, supported by an increase in capacity utilisation and ramp-up of new locations. The sector grew at a CAGR of 24.5 per cent between FY18 and FY22. With the increase in revenues and better absorption of fixed costs, operating margins are likely to improve and remain in the 43-45 per cent range during the next three years.

However, 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 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 withdrew the draft Personal Data Protection Bill in August 2022 after five years of deliberations and released a new draft Bill, titled the Digital Personal Data Protection Bill 2022 in November 2022.

“The new Bill has increased the penalty for breaches and eased cross-border data flows where data can be stored in trusted nations compared to the earlier Bill, which had a mandatory requirement for the storage of personal data locally. The impact of the new Bill on demand for data centres in India remains to be seen” Reddy said.