AI has become one of the most lucrative growth sectors in India (AI Generated Image).
Artificial Intelligence (AI)-led demand for data centres in India is projected to drive about 500 MW of capacity addition over next four years, according to a report released by Avendus Capital on Wednesday.
India is among the fastest-growing data centre markets globally; it has seen overall capacities doubling to about 1,011 megawatt (MW) in 2023 from about 540 MW in 2019.
Poised to grow at a compound annual growth rate (CAGR) of about 26 per cent over the next three years, the sector now has the attention of investors, from growth stage PEs to long-term pension and sovereign wealth funds, as per the report.
According to it, India's data centre (DC) market is undergoing massive disruption led by increased demand and use cases by AI customers.
The report said that AI-led data centre capacity in India has the potential to add another 500 MW over the next four years.
"With AI workloads set to surge and eventually outpace traditional cloud computing, the demand for DCs is also expected to rise sharply," the report said.
Hyperscalers in India are opting to build and own data centre tailored to their specifications, marking a major deviation from trends seen globally. This preference is bolstered by India's long-term growth potential and regulatory guidance for data sovereignty.
Prateek Jhawar, Managing Director and Head, Infrastructure and Real Assets Investment Banking, at Avendus Capital believes that India's data centre market will pave the way for the next wave of investments in real estate and AI unlocking tremendous stakeholder value.
"Developers can expect to generate 25 per cent plus IRR (Internal Rate of Return) with a build-and-sell model, highlighting the sector's potential for superior returns compared to other yielding real asset classes," Jhawar said.
This will drive overall demand for DC capacity in India, which is expected to double to 2 gigawatt (GW) by 2026, Jhawar pointed out.
Close to 94 per cent of the current installed data centre capacity is concentrated in India's top seven cities. Over the next five years, around 40 per cent of the total additional capacity is projected to be added in Mumbai. Chennai is expected to contribute about 25 per cent of the new capacity, while Delhi will account for around 15 per cent.
"We anticipate heightened transaction activity from both public and private markets. Scaled investments with a vintage of over 4 years are expected to seek listing opportunities, while developers will look to raise larger amounts of capital to fund this growth. The industry is maturing with the entry of long-term investors with commitments of over USD 250 million per investment, offering de-risked returns," Jhawar added.
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