Here’s the next sunrise sector for global investors

  • Given the proven market potential across the domain of opportunities and overall optimism in the space, India’s digital infrastructure space is attracting substantial interest from institutional and strategic investors

Prateek Jhawar
Published14 Mar 2023, 02:51 PM IST
Digital adoption is increasing across both retail and enterprise use cases, and India will be a high-tech society in the next five years.
Digital adoption is increasing across both retail and enterprise use cases, and India will be a high-tech society in the next five years.

India’s digital transformation has been very rapid and unprecedented, offering both potential and promise. Internet penetration has grown at a compound annual growth rate (CAGR) of 20.2% and data consumption has grown by 21X over the last five years. India has witnessed the highest-ever smartphone shipments in 2021, clocked the highest real-time online transactions globally, and is the fastest-growing e-commerce market. Digital adoption is increasing across both retail and enterprise use cases, and India will be a high-tech society in the next five years. A robust backend infrastructure needs to be set up to support this digital transformation and about $35-40 billion in capital expenditure is expected in the sector in the next five years, creating a need for substantial investments in the space.

Key investor considerations while exploring opportunities in the space are proven core competencies and the availability of managerial talent. Investors with significant shareholding want companies to quickly grab market share and obtain economies of scale. This trend has played out well globally. Large institutional investors such as Blackstone, Brookfield, DigitalBridge, GIP, I-Squared Capital, KKR, Macquarie, Stonepeak, and Tillman have invested in the space and are creating platforms specializing in digital infrastructure. Dedicated pools of capital have been set up with a mandate to invest in the space. India will mirror this trend as the market is brimming with optimism across various segments of digital infrastructure due to favourable headwinds, making this the right time for institutional investors to step in. We expect four sub-sectors to drive this trend over the next few years: in-building solutions (IBS), outdoor small cells (ODSC), data centres (DCs), and fibre networks.

The IBS market is undergoing a fundamental shift towards neutral host providers such as Indus Towers, ATC, iBus Networks and Crest Digitel, who enable multiple tenancies. The neutral host IBS market is expected to grow at a CAGR of 30-35% to cover about 4,500 million sqft, and about 1.2 million small cell sites are expected to be set up by 2027. The spending capacity of telcos is a prominent catalyst for this growth. With average revenue per user on a robust growth trajectory, rising at a CAGR of over 20%, telcos have enough muscle to spend on a quick rollout.

The DC industry is expected to grow at a 25% CAGR, from 870 MW in FY22 to 1,700 MW by FY25, which will require over $5 billion in investment. Developers have a pipeline to consistently deliver over 300 MW per annum over the next 10 years. The industry has been witnessing multiple partnerships between global financial and strategic players (who bring in customer relationships and technical capabilities), on the one hand, and domestic players (who enable access to suitable land parcels and development expertise) on the other. This will lead to an optimal mix required for success in this industry. Though, Adani - Edge Connex, Everstone-Yondr, Nxtra-Carlyle are some of the marquee partnerships, several other players are also in active discussions to tie-up similar arrangements. With hyperscalers now developing their own DCs, DC players are now increasingly offering managed services to provide a comprehensive solution to retail customers.

India’s fibre network is expected to grow at a 14% CAGR to reach 6.5 million-route-kms by 2028, majorly led by long haul, fibre-to-the-home deployments, DC connectivity and fibrization of telecom towers. The allocation of spectrum to non-telcos for setting up of captive non-public networks (CNPN) will open up business possibilities for major technology companies and digital infrastructure providers who can act as system integrators and operators for enterprise clients.

Other fast-emerging sub-sectors include massive and critical internet of things (IoT), which are both offering attractive opportunities as adoption is expected to increase across use cases. Similar advantages are expected to play out in India soon.

Further, the government is showing clear signs that it supports seamless digitization. The recent conversion of Rs16,133 crore of dues into 33.44% equity stake in Vodafone Idea will benefit the sector massively. The Union budget announcement regarding the setting up of 100 labs for developing applications using 5G services and framing a national data governance policy are positive steps in the right direction.

Given the proven market potential across the domain of opportunities and overall optimism in the space, India’s digital infrastructure space is attracting substantial interest from institutional and strategic investors. Recent marquee deals in India include Brookfield setting up a Data Infrastructure Trust to acquire Summit Digitel and Space Tele Infra, Equinix investing $160 million to acquire two of GPX’s data centres in Mumbai, Everstone and Yondr committing $1,000 million through a joint venture, and I-Squared Capital investing $300 million to set up digital infrastructure platform Lightstorm. Overall, digital infrastructure is the next massive investment opportunity in India’s real assets space, and we expect plenty of deal activity in 2023.

(Prateek Jhawar is managing director and head, infrastructure and real assets investment banking, Avendus Capital. Views are personal.)

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First Published:14 Mar 2023, 02:51 PM IST
Business NewsOpinionViewsHere’s the next sunrise sector for global investors

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