9 min read.Updated: 20 Jan 2021, 06:32 AM ISTGoutam Das
Driven by a localization push, companies are rushing to set up data centres. What are the pain points?
India has some distance to cover before it becomes a global data centre hub. Infrastructure bottlenecks and local permissions could stymie this power-hungry industry.
NEW DELHI :
The ochre and steel-coloured building in a dusty industrial area of Noida has no signboard. The building stores humongous amounts of consumer and corporate data and must be guarded against any disruption. After all, this is an industry that thrives on secrecy, perhaps even paranoia.
The site, operated by Web Werks India Pvt. Ltd, a data centre company, has six layers of security checks and 40 cameras staring at visitors and employees at all times. Cables are like arteries, pumping in and out packets of data and must therefore be protected against rats, not just men. There are ultrasonic rodent repellent systems, water leak detectors, and smoke sensors monitoring the campus. In case of fire, walls and doors of the data centre are designed to withstand flames for two hours.
The data is stored in servers placed on hundreds of racks lined after one another, much like books kept at a library. There are cages for customers who need a dedicated space. Life Insurance Corporation Of India (LIC), a Web Werks customer, has its computing and networking equipment in one such cage.
Equipment here not only stores but also helps process and distribute data, making data centres the warehouse of the digital world. As Indians use more apps, shop online, stream movies, make online payments and video calls—which they have been doing with fervour post the pandemic—the demand for digital warehouses has shot up multiple times. Corporates, meanwhile, have accelerated their digital pivot and adoption of cloud computing, feeding demand. Little surprise, data centre players find themselves in the middle of a revenue windfall.
Data centres are at the intersection of three industries—technology, real estate and power. India today has about 126 third-party data centres, spanning over 7.5 million sq. ft, a recent study by Mace, a construction company, and Anarock, a real estate services company, found.
The capacity, nevertheless, is concentrated among the top 12 data centre companies and this isn’t enough considering India’s growing data consumption. According to the report, India’s data centre capacity per million internet users totals less than one megawatt (MW) today compared to eight MW in the US and 21 MW in Europe.
Just how much has the pandemic provided a leg up? India received $977 million of private equity and other strategic investments in the data centre industry since 2008, as per the same report. Of this, $396 million came in 2020 alone, until September.
“In the past year, the uptake of data centres accelerated primarily because of the covid-19 environment," Rishu Sharma, principal analyst, Cloud and AI at IDC India, a technology advisory firm, said. “We surveyed organisations about their plans for co-location services (companies rent racks/servers in third-party data centres to store data). Some 80% said they would increase their co-location services in the next 12 months," she added.
Now, leveraged capital of nearly $10 billion is waiting to be pumped in, according to the Mace-Anarock report. A big trigger is expected to be the Personal Data Protection Bill (PDP), 2019, which is in the works. When ready, the Act is likely to mandate that companies store critical data of Indians within the country. Most social media companies currently store user data outside India. As they scout for local data centres, it could make data centres the hottest alternative real estate asset in India.
This comes at a time when residential real estate continues to remain distressed and the commercial market faces turbulence. Office space transactions in India fell 35% to a six-year low in 2020; new completions dropped 42%, Knight Frank, a property consultancy, reported. Large real estate companies therefore view the data centre business as a sunrise segment. Sovereign and pension funds are reportedly evaluating data centres as a potential yield investment, too.
“People realized this is a hot market particularly since other sectors in the real estate were suffering. I see robust growth over the next few years—at least 18% a year," Sharad Sanghi, CEO of NTT Ltd in India, a data centre company, said. “While right now, demand is more than supply, with 10-15 players building data centres at the same time, not everyone will succeed," Sanghi warned.
His prediction: In five years, the industry will need to consolidate.
A $19-billion dream
Cyfuture India Pvt. Ltd, a data centre company, had many Chinese customers including Club Factory, an e-commerce app. When India banned 59 Chinese apps in June 2020, the business disappeared overnight. It took a few months for Cyfuture to recover, but it did—there is enough business if companies have the right infrastructure. The day this writer visited its office, again in a Noida economic cluster, the lobby area buzzed with candidates waiting for job interviews.
“We are growing at 30% CAGR over the last four years. We now see this growth continuing for another three years," Anuj Bairathi, founder and CEO of Cyfuture, said. Bairathi, a first-generation entrepreneur, started the company from Jaipur in 2001 as a hosting firm but runs four data centres today.
Besides corporates, there is immediate demand from the government. For instance, the government has made e-invoicing mandatory for companies with annual turnover of at least ₹100 crore. “This implies there would be more demand for servers and data centres," Bairathi said.
A clutch of old and new players are eyeing similar demand. Among the older data centre companies are Sify, STT GDC India and CtrlS Datacenters Ltd.
Then there’s global “hyperscalers" or companies like Amazon Web Services (AWS) and Microsoft who have been offering their cloud computing services through Indian data centres since 2015-16. Microsoft provides cloud services from three data centres in India—in Pune, Mumbai and Chennai. Amazon is investing $2.77 billion to set up its second cloud infrastructure region in India, in Hyderabad, by mid-2022. The first region came up in Mumbai in 2016.
Recent entrants include Yotta Infrastructure, a Hiranandani group company, and Adani Enterprises Ltd. Both have aggressive scale-up plans. Yotta Infrastructure, in October 2020, announced that it has received approvals from the Uttar Pradesh government to set-up a 20-acre park in the Greater Noida region.
“We have started construction in Noida. In 2021-22, our capex will be ₹1,200 crore. Our capex in 2022-23 would be double that," Darshan Hiranandani, group CEO of the Hiranandani Group, said. “My parks have the ability to absorb ₹40,000 crore over the next 20 years (investments in fixed assets) because of the scale with which we will build those parks," he added.
Adani Enterprises Ltd wants to build data centres in NCR, Mumbai, Chennai and Hyderabad. While the company did not respond to Mint’s queries, the firm’s website stated that it was competitively placed in the market because of “ownership of large land parcels", “end-to-end power" capabilities and “strong policy advocacy credentials" among others.
Then there’s NTT, which operates 10 data centres in India; in the next 18 months, it is planning to add another six. STT GDC India runs 16 data centres across eight cities; two more will be ready over the next one-and-half months. CtrlS has about a million sq. ft in data centre space right now; the firm is building an additional five million sq. ft, which is expected to be ready between 2022-24.
Investors obviously see great returns ahead. The Mace-Anarock study estimates The enterprise value of the Indian data centre industry could rise from $3.6 billion today to $19 billion in five-seven years.
Domestic data push
The call to store Indian data on Indian servers is hardly unique. This has been building up in many countries. Over the last three years, the term "digital colonization" has gained traction with countries asserting data sovereignty.
India’s PDP bill 2019 fits in here. The bill requires sensitive data to be held within India. “Regulators like RBI have taken proactive steps in mandating all end-to-end transaction details to be maintained in India for supervision and security. The PDP Bill also bars the transfer of a category of data, termed as “critical personal data" from transfer across territorial limits," Kazim Rizvi, founding director of The Dialogue, a think tank, said.
Once the bill becomes an Act it will lead to huge transfer of data from servers abroad to Indian shores, fuelling data centre demand.
“Every e-commerce player, social media companies, over-the-top (OTT) players have to bring data back to India. So will foreign insurance, healthcare, supply-chain companies. There will be ghar wapsi (return home) of data," B.S. Rao, vice president of marketing at CtrlS Datacenters Ltd said. “The need for data centre space will explode. Over the next 10 years, by 2030, we would need about 30 million sq ft of data centre space in India and 50 million sq ft in another 10 years," he projected.
So, when would the bill become a reality? The bill is being studied by a Joint Committee of the Houses (JPC). “While it is not clear when we will have the bill presented in Parliament again, we hope this process is expedited and we get a data protection law in India soon," Rizvi said.
The data centre industry is power hungry and it needs reliable power supply to keep its servers running. Data centres also invest in back-ups, in case there is an outage from the grid. Nevertheless, running back-ups is not always easy.
Sumit Mukhija, CEO of STT GDC India, explained the challenges often missed by policy makers at the centre. “When the rubber meets the road, it is a different ball game," he said hinting at the bottlenecks in getting approvals prior to building a data centre and during the operations phase. A lot of the recurring approvals a data centre operator requires are from the fire department; some relate to disposal of hazardous material; others could be around running diesel generator (DG) sets.
“One can say DG sets are polluting and it should not be allowed. In 99.9% of the time, we use power from cleaner sources or what utility companies supply. However, 0.1% of the time, the electricity boards are unable to provide us power and we are forced to use the back-up," Mukhija said. “These are nuances that statutory bodies need to discuss," he added.
India, thereby, has some distance to cover before it becomes a global data centre hub, one that a draft policy on data centres, circulated by the ministry of electronics and information technology in November 2020, envisions.
The draft does hit some right notes, or those that the industry likes. For instance, it talks about infrastructure status to the sector to help in external borrowings. One proposal is to set up four data centre economic zones, which the government thinks would catalase an ecosystem of large data centres and allied industries. Not everyone thinks the idea of clusters is workable. This is after all an industry that thrives on secrecy.
“I didn’t quite understand the need for having certain economic zones. Data centre providers like us have our own campuses and parks. I doubt if people are going to get together and come to one park," Sharad Sanghi of NTT Ltd said.
The industry, in the meantime, is requesting quick changes to the National Building Code, which provides guidelines to regulate construction activities in India. Unlike offices or residential buildings, data centres don’t need large parking spaces or windows, for instance. Windows shoot up the cost of cooling.
“There are very few people in data centres. But the fire department likes windows. In case of fire, they can smash the windows and enter. It is constantly a conflict. Months and years go away in discussions," Darshan Hiranandani said. “We have to agree on some of these within the National Building Code framework," he added.
In real estate, quicker approvals lead to faster construction and completion. By extension, it implies quicker returns on investment. That’s an economic imperative in the server stack business too.