India's data centers to add 500 MW capacity in 4 years: Avendus Capital

Rising AI demand and use cases are propelling India’s data centre capacity growth to 500 MW over the next four years, said a report by investment bank Avendus Capital.

The report, *Powering Digital India* Volume II, stated that the sector doubled from 540 MW in 2019 to 1,011 MW in 2023, making India one of the fastest-growing data centre markets globally.

This is expected to grow at a compound annual growth rate (CAGR) of 26 per cent over the next three years. The sector is attracting considerable attention from a wide range of investors, from growth-stage private equity firms to long-term pension and sovereign wealth funds.

“We believe 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 a 25 per cent-plus internal rate of return (IRR) with a build-and-sell model, highlighting the sector’s potential for superior returns compared to other yielding real asset classes. This will drive demand for DC capacity in India, which is expected to double to 2 GW by 2026,” said Prateek Jhawar, managing director and head, infrastructure & real assets investment banking, Avendus Capital.

Moreover, the study highlighted that with AI workloads set to surge and eventually outpace traditional cloud computing, the demand for data centres is also expected to rise sharply.

In a major deviation from global trends, hyperscalers in India are opting to build and own data centres tailored to their specifications. This preference is bolstered by India’s long-term growth potential and regulatory guidance for data sovereignty.

Avendus Capital stated that about 94 per cent of the current installed DC capacity is concentrated in India’s top seven cities. Going forward, around 40 per cent of the total additional capacity is projected to be added in Mumbai over the next five years.

Meanwhile, Chennai is expected to contribute about 25 per cent of the new capacity, while Delhi will account for around 15 per cent. Edge DCs (smaller facilities located close to the populations they serve) are anticipated to experience substantial demand due to rising data generation and consumption in Tier II and III cities.

Furthermore, developers creating an extensive network of data centres are expected to gain considerable advantages, and prefabricated data centres are poised to provide a rapid and efficient solution to meet this demand. Those aiming at more than just development returns are offering enterprise solutions such as colocation and managed services, increasing ROCEs (return on capital employed) by over 50 per cent.

“We anticipate heightened transaction activity from both public and private markets. Scaled investments with a vintage of over four 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 $250 million per investment, offering de-risked returns,” Prateek added.