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AI-Driven Growth in India's Data Centre Market: Unlocking Investment Potential
August, 2024
India's data centre market is experiencing a transformative surge, driven by the rapid adoption of artificial intelligence (AI) technologies. According to a recent report by Avendus Capital, India's largest investment bank, the country's data centre capacity is poised for exponential growth, presenting a significant investment opportunity. With AI workloads on the rise and traditional cloud computing models evolving, the demand for advanced data centres in India is set to soar. Let's explore the key findings and implications of this dynamic sector.
The Potential for Growth in India's Data Centre Market
Avendus Capital projects that India's data centre capacity could expand by an additional 500 MW over the next four years. This growth aligns with the country’s focus on data sovereignty and its long-term economic potential. Unlike global trends, hyperscalers in India are increasingly building and owning data centres customised to their unique specifications. This strategic approach highlights India's appeal as a prime investment destination.
India's Remarkable Data Centre Growth Trajectory
India's data centre sector has seen unprecedented growth in recent years. From approximately 540 MW in 2019, capacity nearly doubled to around 1,011 MW by 2023, making it one of the fastest-growing markets worldwide. This momentum is expected to continue, with a projected compound annual growth rate (CAGR) of approximately 26% over the next three years. The sector's impressive growth has attracted attention from investors, including private equity firms and long-term pension and sovereign wealth funds.
Superior Returns and Investment Opportunities
Investors are increasingly recognising the potential for substantial returns in the data centre sector. Developers can anticipate generating internal rates of return (IRR) exceeding 25% through a build-and-sell model, outperforming other real asset classes. As India's data centre market enters its next phase of growth, stakeholders have the opportunity to unlock significant value and contribute to the country’s digital infrastructure.
Evolving Investment Landscape and Maturing Markets
The investment landscape in India's data centre sector is evolving rapidly. Increased transaction activity is expected from both public and private markets, with scaled investments maturing beyond four years seeking public listing opportunities. As data centres become critical infrastructure, developers are exploring ways to unlock value through public listings, signalling the sector’s transition from private ownership to broader market participation.
Capital infusion is crucial to support this expansion. Developers, driven by rising demand, are actively seeking larger capital injections through debt financing, equity placements, and strategic partnerships. Long-term investors, often committing over USD 250 million per investment, bring stability and de-risked returns to the sector. Their involvement underscores confidence in India's data centre market and its alignment with the country’s growth prospects.
Enterprise Solutions and the Rise of Prefabricated Data Centres
To meet the growing demand, developers are increasingly adopting prefabricated data centres, offering rapid and efficient solutions. These prefabricated facilities provide not only development returns but also enhanced enterprise solutions, such as colocation and managed services. These strategies significantly increase return on capital employed (ROCE) by over 50% and double return on equity (ROE) compared to pure-play hyperscale colocation businesses.
Geographical Focus: Key Cities Driving Expansion
Currently, approximately 94% of India’s installed data centre capacity is concentrated in the top seven cities. Over the next five years, Mumbai is expected to contribute around 40% of the additional capacity, cementing its position as a hub in the data centre space. Chennai, with its coastal advantage and favourable climatic conditions, is projected to add about 25% of the new capacity. Meanwhile, Delhi is anticipated to account for approximately 15% of the expansion, highlighting its strategic importance.
The Rise of Edge Data Centres in Tier 2 and Tier 3 Cities
While major cities dominate the data centre landscape, edge data centres are gaining prominence, particularly in Tier 2 and Tier 3 cities. These smaller, strategically located facilities cater to the rising data generation and consumption in these regions. Developers building an extensive network of edge data centres stand to gain considerable advantages. Prefabricated data centres offer a swift and efficient solution to meet this growing demand.
Sustainability and Technological Advancements in Data Centres
India's data centre industry is at the forefront of technological innovation, with significant advancements in cooling technologies, energy-efficient infrastructure, and renewable energy integration. The country’s focus on green data centres aligns with global commitments to reducing carbon emissions. Policies and incentives are encouraging the adoption of renewable energy sources, making sustainability a priority in the sector.
Challenges and Future Outlook
Despite the promising growth trajectory, challenges remain. Ensuring a consistent and reliable power supply is critical to supporting this expansion. Additionally, bridging the skill gap within the workforce is essential to sustain the industry's growth. Looking ahead, India's data centre market is poised for continued expansion, driven by the increasing adoption of AI and favourable investment conditions. As the market matures, stakeholders will unlock new opportunities, cementing India's position as a global leader in data centre infrastructure.
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