India's data centre industry is experiencing explosive growth, driven by the country's rapid digitisation. CareEdge Ratings predicts a data centre capacity surge, doubling to 2,000 MW by 2026. This expansion will attract significant investments, with an estimated Rs 500 billion flowing in over the next three years.

The data centre 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 centre players incorporate a mix use of renewable energy and low carbon technologies to ensure cost competitiveness for sustainability, said Maulesh Desai, Director, CareEdge Ratings.

CareEdge Ratings highlights the significant under-penetration of data centres in India, compared to the massive amount of data generated (20% globally). This signals a huge opportunity for building new data centres.

The booming e-commerce, fintech, online streaming, and gaming sectors are propelling India's transition to a developed market economy. This digitisation trend is expected to push internet penetration to 87% by 2028-29, further fuelling data centre demand.

The rise of 5G, Internet of Things (IoT), and Artificial Intelligence (AI) will significantly increase data consumption, potentially tripling it in India.

While the growth potential is immense, challenges exist. Setting up data centres has become more expensive due to rising costs of land, equipment, and other factors. 

The per MW cost now ranges from Rs 600-700 million. However, this can vary based on factors like scalability, design, and location.

The capacity addition of 1.1 GW in Data Centre space needs to be corroborated with increased absorption in future/ medium term, as cash flow stability is an important consideration for the debt-funded investments, commented Puja Jalan, Associate Director, CareEdge Ratings. 

CareEdge Ratings emphasises the importance of mitigating risks through long-term contracts with reliable clients. This strategy ensures revenue visibility and a steady cash flow for data centre operators. However, it's crucial to balance competitive pricing with rising costs to maintain profitability.

A financial analysis of major data centre players reveals strong performance. Revenue has grown at a 24% CAGR between 2016-17 and 2022-23, with a projected 32% CAGR growth forecast for FY24-FY26. EBITDA margins have also been healthy, stabilising around 43% in FY22-23 and expected to remain steady for the next few years.

The first data centre in India opened in 2010. Initially, growth was gradual, reaching 122 MW by 2010. However, a surge occurred from 2010 to 2020, driven by factors like the dot-com boom, broadband policy advancements, and the launch of Jio and UPI (Unified Payments Interface).

Looking ahead, challenges include high power consumption costs and increasing competition from new entrants. CareEdge Ratings expects data centre operators to invest more in renewable energy. They also predict industry consolidation by FY31, as supply might exceed demand after the current capacity expansion phase. Despite healthy financial profiles, existing players may require increased debt to fund future growth. However, debt coverage indicators are expected to remain comfortable.

(Source: Economic Times)