THE RACE FOR the world’s most valuable company has seen technology giants NVIDIA, Microsoft and Apple battling it out daily on Wall Street since the beginning of this year. In September last year, NVIDIA CEO Jensen Huang visited India to enhance his presence in a market where his rivals are already deeply entrenched, announcing partnerships with Tata Group and Reliance Industries Ltd. to build AI infrastructure for India and create supercomputing data centres. “AI could be built in India, used in India, and exported from India,” Jensen said.
At the centre of the tie-ups are data centres, which have become ever-more critical, thanks to digitisation and rapid adoption of AI by businesses to boost efficiency, cost effectiveness and R&D. And though India is still at a nascent stage in data centre capacity or hosting ability compared to global peers, on offer is a booming market, set to grow exponentially in the coming years.
Capacity & Revenue Landscape
From the beginning of the last decade, India’s digital journey has made ripples across the world. The creation of digital identity for a billion-plus people and cheap Internet data led to the mobile phone revolution, which aided the creation of a new ecosystem as well as tech companies around it. Social media, e-commerce, fintech and gaming, along with government’s programme for creating digital infrastructure for public services, have made India a data guzzler with an estimated 750-plus million Internet users consuming an average of over six hours of daily data. Compared to peers such as China and U.S., while India’s Internet penetration still remains low, it excels in mobile connectivity. According to CareEdge Rating, data centre capacity per million Internet users in India stood at just 1MW, against 4MW in China. Even though India generates an estimated 20% of global data, in data centre capacity, it is just around 3%. This abysmal ratio has seen those with resources loosening their purse strings to tap into the opportunity. The business, after all, requires massive capital expenditure. According to CareEdge Ratings, the cost of setting up a new centre in India has increased to ₹60-70 crore/MW, against ₹40-45 crore earlier, mainly due to incremental land, equipment and other soft costs. The cost break-up typically is as follows: 40% real estate, 40% electrical/tech and 20% for heating ventilation and cooling systems. But despite increased costs, the business still remains lucrative, since the capital expenditure for setting up a data centre in India is roughly 45% lower compared to the global average. Along with this, consolidated revenues of major players, including STT, Sify, CtrlS and NTT, have grown at a 16% CAGR between FY20 and FY23. It is likely to rise to 32% CAGR during FY24-26. While margin EBITDA has expanded during FY19-23, it is expected to moderate going forward.
“Data centres are homogenous product offerings with no significant differentiators,” says Puja Jalan, director, CareEdge Ratings. “Profitability and return will depend on per MW of capex incurred, type of data centre (co-location/built-to-suit, horizontal/vertical), capacity utilisation and bundled product offering viz connectivity and Cloud.”
“With competition intensifying, the ability of data centre players to enter into long-term agreements at competitive pricing is based on their bargaining power. Capacity absorption will lead to assured cash flow generation and profitability,” she adds.
The recent acceleration of momentum around data centres bolsters these assessments. In its APAC data centre trend report for Q1 2024, real estate consultancy CBRE says global investors retained a strong interest in India’s data centre business as well as partnerships with local players. For instance, in March this year, Colt DCS, which launched the first phase (22MW) of its 120MW data centre in Navi Mumbai, also announced a new 70MW hyperscale data centre that it plans to set up in Chennai and expects to be ready by 2027. In January, Digital Connexion, a three-way joint venture between Reliance Industries, Digital Realty and Brookfield Infrastructure, launched its maiden 100MW data centre in Chennai, with another 40MW campus building under way in Mumbai.
The resilience and attractive returns have been driving interest, especially with foreign investments playing a dominant role, says Anshuman Magazine, chairman & CEO, India, South East Asia, Middle East & Africa. “Build-to-suit, acquisition and equity investments remain preferred routes into the sector in India. Investors look to form partnerships with experienced operators and developers to gain exposure. The approach enables them to leverage their partners’ expertise in areas such as site selection, operations and regulatory compliance,” he adds. CBRE puts total data centre capacity in India at 950MW as of end 2023.
Mumbai and Chennai have traditionally been the preferred locations — while Mumbai being the financial capital, boasts of a large BFSI connectivity, Chennai has better power tariffs and a more favourable land acquisition process along with tax incentives. The clientele ranges from Cloud, banking and financial services companies to retail players, start-ups and ecommerce firms, telecom operators, OTT majors and hyperscalers.
Who Will Have The Edge?
According to industry estimates, among the 30-plus players in the fragmented Indian data centre market, the top five are STT GDC, Equinix, NTT, Nxtra Data and Sify Technologies. Other major firms such as CtrlS, ESDS Software Solution, Go4hosting, Pi, Reliance, WebWerks and Yotta Infrastructure Solutions, along with smaller players, account for the remaining capacity.
Data centre operators which currently have large hyperscalers as their clients are bulking up capacities. For instance, Sify Technologies, which forayed into the business in 2000, currently runs 12 facilities across six metros, and plans to add close to 100MW in 2025. It is also looking to set up a campus in Bengaluru’s aerospace park. Since FY22, Kotak has invested $120 million through Kotak Special Situation Fund and Kotak Data Centre Fund in Sify Infinit Spaces (a wholly owned subsidiary of Sify Technologies) through compulsorily convertible debentures. The company runs mission-critical operations for over 600 customers, including major banks and hyperscalers.
Another major player is Singapore-headquartered ST Telemedia, whose global data centre business is spread across Southeast Asia, India and Europe. STT GDC India operates nearly 28 facilities across 10 cities.
“Design, support and trust, built through long-term relationships with clients, will give big players an advantage over new entrants,” says Sumit Mukhija, executive director and CEO, STT GDC India. “I still remember the first data centre deal handed over to me was a customer who came to us in 2003, when we were just a line of business for TCL. We still have them with us,” recalls Mukhija. The experience of delivering built-to-suit data centres with 5-10MW of capacity to hyperscalers where in-house teams, including IT, design, civil, structural, electrical and quality assurance manage the facility, plus a proven track record of uptime, have all become important while picking up the right provider. Today, conversations with operators range from the location of the centre to ownership of land to extent of customisation and contractual flexibility along with safety and security measures. Hence, if pricing is the only arbitrage that new entrants offer, it could work in the short term.
The next three-four years will be critical with huge capacity uptick and expected market growth, says Mukhija. “A lot of consolidation opportunities will emerge in the next three-five years and there will be seven-eight good data centre players as the digital backbone of the country,” he adds.
Sridhar Pinnapureddy, founder and CEO, CtrlS, believes reliability and uptime are keys to success. Minimal downtime, robust infrastructure and security measures, both physical and cyber, are equally crucial to protect sensitive data and comply with the regulations. The company recently launched a new AI-ready data centre in Hyderabad with 13MW capacity over 1.3 lakh sqft. It is also an authorised service provider for Google Cloud interconnect partner, enabling low latency, high performance and security for enterprises that use the Google Cloud ecosystem. Currently, CtrlS manages 15 data centres across eight markets with a total capacity of over 250MW and 120MW under construction. It is looking to expand to over 1,000MW by 2029.
In a world where efficiency and security are continually evolving with technological advancements in data centres, Sridhar points at efforts for energy efficiency being improved through advanced cooling systems, optimised server designs and renewable energy sources. “Emerging technologies such as AI and machine learning are further improving both efficiency and security. AI-driven predictive maintenance helps prevent downtime, while machine learning algorithms detect and respond to security threats in real-time. Edge computing is decentralising data processing, reducing latency and improving efficiency for certain applications,” he adds.
That said, data centres are not just power guzzlers, but also use large amounts of water for cooling. With more coming up in the next few years, resource management, reduction of carbon footprint and sustainability goals will take centre stage. Reuse of water, use of air-cooled chillers and liquid cooling for high power density set-ups such as AI and GPU will become the norm. While the next few years will continue to see data centres attracting not just capital and new players, with private equity investors in the picture, the industry would well head into the merger & acquisition phase post 2030.