The Indian data centre industry is set to expand significantly, with capacity projected to reach 2-2.3 GW by fiscal 2027, driven by greater digitalization and rising consumer demand for data. Generative Artificial Intelligence (GenAI) will further boost this demand. Investment needs are estimated between Rs 55,000 and Rs 65,000 crore over three years, focusing on infrastructure. Despite increased debt levels, robust cash flows are expected, supporting a stable credit profile. Effective capacity management and pricing strategies will be crucial for industry players.
The Indian data centre industry is poised for impressive expansion, with capacity projected to exceed 2-2.3 GW by fiscal 2027, according to a recent report by CRISIL Ratings. This growth is primarily driven by the increasing digitalization of the economy, as businesses ramp up investments in cloud storage and consumer demand for data continues to rise. The burgeoning influence of Generative Artificial Intelligence (GenAI) is also expected to enhance demand over the medium term.
CRISIL Ratings notes that to meet this strong demand, there will be a significant rise in capital expenditure (capex), which will likely involve a greater reliance on debt funding. Despite this increase in debt levels, the report highlights that capacity additions are expected to lag behind demand growth, minimizing offtake risks. Consequently, the industry is likely to enjoy robust and stable cash flows, contributing to a steady credit profile for market players.
The analysis conducted by CRISIL encompassed industry participants representing approximately 85% of the market share in operational capacity.
The demand for data centres is underpinned by two key factors: the swift transition of enterprises to digital platforms, including cloud services, and the growing accessibility of high-speed internet, which has fueled increased usage of social media, over-the-top (OTT) platforms, and digital payments. Notably, mobile data traffic has experienced a remarkable compound annual growth rate (CAGR) of 25% over the past five fiscal years, rising from 24 GB per month at the end of fiscal 2024 to an anticipated 33-35 GB by fiscal 2026.
Additionally, CRISIL points out that the ongoing advancements in GenAI, which demand higher computational power and lower latency than traditional cloud computing, will further propel data centre demand in India.
Manish Gupta, Senior Director and Deputy Chief Ratings Officer at CRISIL Ratings Ltd, emphasized the need for investment ranging between Rs 55,000 and Rs 65,000 crore over the next three fiscal years. This investment will primarily focus on land acquisition, building infrastructure, power equipment, and cooling solutions. Data centre operators typically allocate 25-30% of their overall capex to infrastructure, anticipating future partnerships. While this strategy carries some risks regarding capacity utilization, strong demand is expected to ensure utilization rates reach 80-90% within a year or two.
The expansion efforts of existing players, coupled with the entry of new competitors into the market, are contributing to increased capacity. This growth is largely driven by the significant demand from hyperscalers, who possess considerable bargaining power due to their large capacity needs. As a result, hyperscalers often benefit from pricing that is 10-20% lower than that offered to other customers. According to CRISIL, effectively managing the balance between capacity utilization and pricing will be crucial for securing returns on data centre investments.
Anand Kulkarni, Director at CRISIL Ratings Ltd, added, “Once capacities are tied up, data centres benefit from predictable cash flows backed by a stable client base resulting in low churn rates. This is due to high switching costs for customers, stemming from their investments and potential business disruptions when changing providers.” Amid ambitious capex plans for expansion, the debt-to-earnings before interest, tax, depreciation, and amortization (Ebitda) ratio for data centre operators is expected to rise to approximately 5.4x this fiscal year, up from around 5x last year, before improving as capacity utilization increases in subsequent years.
In conclusion, CRISIL highlights that the timely commissioning of capacities and securing customer partnerships, along with the ability to maintain pricing, will be critical factors to monitor in the evolving landscape of the data centre industry.
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