CareEdge Ratings Estimates India’s Data Centre Capacity to Hit 2,000 MW By 2026

The CareEdge Ratings has said that India’s data centre industry has entered a growth phase and estimates its capacity to double to around 2000 MW by 2026. The growth plans have also created substantial investment prospects, stated CareEdge Ratings and estimated a capex of Rs 50,000 crore in this space over the next three years till 2026.

The rating agency stated that there is there is significant under-penetration of Data Center capacity in India which will pave the way for large capacity addition plans. The report highlights that India is transitioning towards a developed market economy. This wave of digitization, driven by the expansion of e-commerce, fintech platforms, online streaming, and gaming services, is anticipated to increase the number of internet users and boost internet penetration (internet users as a percentage of the population) from approximately 63 per cent in FY23 (refers to the period April 1 to March 31) to 87 per cent by FY29. 

While India generates about 20 per cent of the global data, however in terms of the Data Center capacity, it has a share of just 3 per cent. It also believes that the adoption of technologies such as 5G, IoT and artificial intelligence are expected to significantly augment demand for data and in turn data centres. Collectively, these demand factors are projected to triple data consumption in India.

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

Based on an assessment of 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 per cent CAGR from FY17 to FY23, corresponding with capacity additions. CareEdge Ratings forecasts a revenue growth of 32 per cent 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 per cent 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 centres 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”.

The first commercial data centre 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 and advent of 2G and 3G contributed to this surge, the major boom came with the launch of a new telecommunication company; Jio with a widespread network at a cheaper cost, as well as the 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 three years, the capacity reached close to 900 MW.

Challenges And Way Forward

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 have 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 centres and approximately 1.3 for green data centres due to high temperatures.

Thus, CareEdge Ratings foresees increased investments in renewable power deployment by data centre operators.

Balancing Debt And Profitability

Based on an assessment of 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 four times during the period FY17 to FY23. However, driven by large-sized investments the debt requirement is on a witnessing trend. 

“Going forward, with 70 per cent of capex plans being debt-funded, debt coverage indicators may moderate but are expected to remain at a comfortable level,” according to the report.