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How developers are riding the data center wave

In our previous report, Data Centers: Hyper growth phase ahead, we had highlighted how India seems to be on the verge of data explosion spurred by i) penetration of e-commerce and social media, ii) advent of OTT platforms, iii) 4G / 5G telecom revolution, iv) IOT devices and v) data localisation norms. The recent budget has given further filip to the data center industry by according it with infrastructure status as the government seeks to implement data protection bill by creating a supply of data centers. We have already seen traction in the data center market backed by announcements from Adani Enterprises, Anant Raj Limited (ARL), Bharti Nxtra-Carlyle, Brookfield-Digital Realty, DLF, Mindspace REIT, Reliance Jio, YondrEverstone, and Yotta (Hiranandani backed). We recently interacted with Mr Ashim Sarin, Director and COO of Anant Raj Limited and Mr Pankaj Gupta, Chief Financial Officer (CFO), to better understand the industry prospects and how they are planning to create a 300MW IT load data center platform (to be executed in phases over the medium term; 150MW retrofit + 150MW greenfield; c.7x the current inventory in Delhi NCR region) out of which 21MW is expected to come up in the near term with potentially attractive return ratios.

* 300MW of data center capacity to come up in phases;

21MW in near term: ARL plans to develop combination of Tier III and Tier IV data centers (Tier III have n+1 backup system for equipment while Tier IV have n+n backup) with a capacity of up to 300 MW IT load including i) 50MW of capacity by retrofitting existing building in Manesar, Harayana (3MW to be completed by Apr’21 and 21MW over the next 1 year - received TIA 942 Tier 3 approval for 21 MW), ii) 50MW of greenfield capacity at Panchkula, Chandigarh and iii) 200MW of capacity at Rai, Haryana (100 MW retrofitted in existing building + 100MW in greenfield project). The total retrofit capacity of 150MW can be quickly executed within 6-12 months as an when visibility is there.

* Attractive return ratios:

ARL is already in talks with enterprises, hyper-scalers, government departments and other data center operators to lease out the under-construction area. Average Realisation is expected to be c.INR 9mn per month / MW (above INR 400psf; 15- 20K sqft of area per MW; c.10x higher realisation compared to office spaces) with an estimated 70-75% EBITDA margins for a Tier III data center. Management believes c.80% of the customer requirements are satisfied with Tier III data centers and Tier IV data centers are required only for some mission critical applications. Only the proposed data center at Rai is eligible to become Tier IV while other locations will be Tier III. As per the contracting / consulting company (recently constructed a competitors building) the project seems to be technically feasible and building strength is high with some unutilised developmental potential and high importance factor therefore allowing ARL to retrofit a commercial tower into data centers (INR 250-260mn capex for 1MW of retrofit; Exhibit 1). In terms of contractual agreements, generally a leasing tenure of 15 years is preferred with 15% rental escalation every 3 year with ROCEs of 25-30%. As far as construction timelines are concerned, the built to suit portion can be completed in 2-3 years from the date of project commencement.

* Large scale investments in Delhi NCR / Uttar Pradesh region:

ARL aims to have a significant first mover advantage in the Delhi NCR data center market where it has an established base and will look to expand ahead of other major players. Currently, enterprise demand led to 2.5MW of data center absorption in Delhi NCR region during H1CY21 (Source: JLL) but it is expected to increase exponentially as data protection laws becomes a reality. The UP government has also announced their data center policy with an objective to develop a 250 MW data center industry in the next few years. In terms of competition, Reliance Jio is planning to develop a 200 MW data center campus with a US$ 950mn investment outlay and Yotta Infrastructure (Hiranandani backed) is also planning to commit US$ 950mn in Uttar Pradesh.

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