Indian data centres to grow fivefold with Rs 1.05-1.20 lakh cr investments

According to rating agency ICRA, the capacity of the Indian data centre sector is likely to rise fivefold over the next five years, with investments of Rs 1.05-1.20 lakh crore.

Large hyper-scalers such as Amazon Web Services, Google, Microsoft, Facebook, IBM, Uber, and Dropbox, who outsource their storage needs to third-party DC providers, are driving strong development in the Indian data centres (DC) industry.

To meet the rising demand, Indian corporations such as the Hiranandani Group and the Adani Group, as well as international companies such as Amazon, EdgeConnex, Microsoft, CapitaLand, and the Mantra Group, have begun investing in Indian data centres.

Existing players such as NTT, CtrlS, Nxtra, and STT India are growing their capacity alongside them.

After experiencing a 24% compounded annual growth rate (CAGR) during the fiscal year (FY) 2018-2021, the market is expected to grow at an 18-19% CAGR during FY2022-FY2024, owing to increased rack capacity utilisation and the ramp-up of new data centres.

Operating margins are likely to grow and continue between 40% to 42% as sales rise and fixed costs are better absorbed.

As the data centre companies are in a continuous huge capital expenditure (CapEx) phase, where data centres are ramped up over time, the return on capital employed (ROCE) is projected to remain modest.

The primary difficulties for the industry include rising competition intensity, projected to put pressure on margins for incremental business, and large-debt-funded capital plans, which might put a strain on the companies' credit metrics.

Power costs contribute to 55-60% of overall expenditures for maintaining various cooling pathways and redundancy. Given the ESG concerns of the majority of critical tenants, data centre operators are likely to invest in green electricity to satisfy their power needs.

Some state governments, such as Maharashtra, Telangana, Karnataka, and Uttar Pradesh, have made provisions for specific incentives such as stamp and electricity duty exemptions, power subsidies, and land at a reduced cost, and other concessions to encourage data centre investment.

Furthermore, under a national policy framework for data centres, the information technology ministry wants to grant incentives of up to Rs 15,000 crore.

It includes a 4-6% incentive for procuring components such as IT gear and power from Indian manufacturing facilities, as well as a 3% incentive for using sustainable energy.

Rajeshwar Burla, Group Head, Corporate Ratings, ICRA, told the media that favourable regulatory support, rapidly growing cloud computing, increasing internet penetration, Government effort in the digital economy, adoption of new technologies (IoT, 5G, etc.), and growing needs of hyper-scalers are some of the major factors driving demand for data centres in the country.

According to him, the government's decision to provide data centres infrastructure status would allow them to get longer-term financing at competitive rates, including access to overseas investment via the external commercial borrowing route.

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