India's Data Centre Boom: A Digitalization-Driven Transformation

India's data centre capacity is projected to more than double to 2-2.3 GW by 2026-27, driven by the surge in digitalization and increased investments in cloud storage, according to a recent report by Crisil Ratings.

The report highlights that the rising penetration of Generative Artificial Intelligence (GenAI) will further fuel this demand in the medium term. To meet this robust demand, the incremental capital expenditure will be supported by a higher proportion of debt funding, leading to a moderate rise in debt levels.

Digital Shift Post-Pandemic: Data centres are essential for meeting the computing and storage infrastructure needs as enterprises rapidly shift to digital platforms, including cloud services, a trend that has accelerated post-Covid-19 pandemic.

High-Speed Data and Internet Usage: The increased accessibility of high-speed data has led to a surge in internet usage across various sectors, including social media, over-the-top (OTT) platforms, and digital payments.

Notably, mobile data traffic has logged a compound annual growth rate (CAGR) of 25% over the last five fiscals, standing at 24 GB per month by end-fiscal 2024, and is expected to rise to 33-35 GB by FY26.

Investment Requirements: To meet the growing data centre demand, an investment of Rs 55,000-65,000 crore is required over the next three fiscals, primarily towards land and building, power equipment, and cooling solutions.

Data centre operators typically invest in infrastructure - land and building, which account for 25-30% of overall capex - with the expectation of future tie-ups, according to Manish Gupta, Senior Director and Deputy Chief Ratings Officer at Crisil Ratings.

The capacity additions are driven by the expansion plans of existing players as well as the entry of new players. Data centres benefit from predictable cash flows backed by a stable client base resulting in low churn rates due to high switching costs for customers.

Amid significant capex plans for expansion, the debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio of data centre operators is expected to increase to 5.4x this fiscal from 5x last fiscal, before improving from next fiscal as capacity utilisation ramps up, according to Anand Kulkarni, Director at Crisil Ratings.