India’s data center capacity to hit 2,000 MW by 2026

India’s data center industry is set to double its capacity to around 2000 MW by 2026, according to CareEdge Ratings. Substantial investment opportunities are expected in the sector, including a CapEx of Rs. 50,000 crore over the next three years.

There is significant under-penetration of data center capacity in India, indicating potential for large capacity additions. The internet penetration in India is expected to rise from 63% in FY23 to 87% by FY29, contributing to increased data generation. Adoption of technologies like 5G, IoT, and Artificial Intelligence is projected to boost data demand and triple data consumption in India.

CareEdge Ratings believes that adoption of technologies such as 5G, IoT, and Artificial Intelligence are expected to significantly augment demand for data and in turn Data Center. Collectively, these demand factors are projected to triple data consumption in India.

Highlighting the need for Data Center, CareEdge Ratings report mentions that per MW cost in India for setting up Data Center has witnessed escalation due to incremental land, equipment and other soft cost with new capacities now being set up at a cost of Rs.60-70 crore/MW. This cost of data centre is also contingent upon provisions for scalability, design and location.

Based on an assessment on the financials of major Data Center players in India, CareEdge Ratings observes that the revenue of Data Center operators has witnessed growth of approximately 24% CAGR from FY17 to FY23, corresponding with capacity additions. CareEdge Ratings forecasts a revenue growth of 32% CAGR during FY24-FY26. Since FY19, EBITDA margins have expanded due to higher occupancies and better absorption of fixed costs and thereafter stabilising at ~43% during FY22-23. These margins are expected to remain steady for the next 2-3 years.

Puja Jalan, Associate Director, CareEdge Ratings said, “The capacity addition of ~1.1 GW in Data Center space needs to be corroborated with increased absorption in future/ medium term, as cashflow stability is an important consideration for the debt-funded investments. A key risk mitigant is the annuity akin structure wherein Data Center operate on long-term/medium-term contractual arrangements with strong counterparties thereby providing revenue visibility and assured cash flow. However, rising costs need to be weighed adequately with competitive pricing to balance the leverage and profitability”.

Maulesh Desai, Director, CareEdge Ratings adds, “the Data Center growth is driving/attracting large scale investments in the expansion of the network connectivity ecosystem which is critical for high volume data transfer at low latency levels. It is imperative that for such large scale capacity addition, Data Center players incorporate mix use of renewable energy and low carbon technologies to ensure cost competitiveness for sustainability”.

The first commercial Data Center was set up in India in the year 2000 with the industry growing at a snail’s pace, reaching a mere 122 MW by 2010 i.e. average addition of 12 MW per year. Thereafter the capacity witnessed swift addition with growth of almost 3x till 2020 i.e. average addition of 32 MW per year. While the dot com boom, broadband policy, advent of 2G and 3G contributed to this surge, the major boom came with the launch of new telecommunication company; JIO with wide spread network at a cheaper cost, as well as introduction of Unified Payment Interface (UPI) in the country in the year 2016. The industry witnessed per year addition of 100 to 150 MW during the three years 2020 to 2023 and within 3 years, the capacity reached close to 900 MW.

Power cost – a significant input constitutes 65% of overall operating cost. The IT equipment and its cooling system consume nearly 75% of total power intake.

With the advent of technologies like AI which require more computational power, the power consumption by the Data Center is expected to go up further. Thus, the rising carbon footprint and stakeholders’ demand for sustainable business practices has given rise to “Green Data Centres”. Sustainability, as measured by Power usage effectiveness in the Indian context is close to 1.9 for conventional Data Center and approx. 1.3 for green Data Center due to high temperature.

Thus, CareEdge Ratings foresees increased investments in renewable power deployment by Data Centre operators.

Increasing competitive intensity
Data Center co-location space is occupied by 4-5 major players (the pioneers and early entrants) who have a market share of more than 90%. The growth phase of the industry has seen new entrants from multiple domain expertise such as Construction, Power, and Real Estate as well as investments by global fund and private equity players. This is likely to moderate the market share of existing players to close to 70-75% going forward. Huge capex announcement needs to be corroborated with streamlining of execution on the ground. The new capacities are likely to get absorbed over the next 2-3 years and thereafter the supply may outpace demand. CareEdge Ratings expects an industry consolidation phase by FY31 consequent to commissioning of announced capacity additions.

Balancing debt and profitability
Based on an assessment on the financials of major Data Center players in India, CareEdge Ratings observes that, the financial profile of the existing players is healthy as represented by an interest coverage ratio above 4x during the period FY17 to FY23. However, driven by large-sized investments the debt requirement is on a witnessing trend. Going forward, with 70% of capex plans being debt-funded, debt coverage indicators may moderate but expected to remain at comfortable level. CXO Today