India’s digital transformation has been 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 increased 21 times in the last five years. India has witnessed the highest ever smartphone shipments in 2021, the highest number of real-time online transactions globally, and is the fastest growing e-commerce market. Digital adoption is on the rise, both in 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 around $35-40 billion of capital expenditure is expected in this area over the next five years, creating a need for substantial investment in the space.
Key investor considerations when exploring opportunities in the space are proven key competencies and the availability of managerial talent. Investors with significant stakes want companies to quickly gain market share and achieve economies of scale. This trend has performed well globally. Large institutional investors such as Blackstone, Brookfield, DigitalBridge, GIP, I-Square Capital, KKR, Macquarie, Stonepeak and Tillman have invested in the space and are building platforms specializing in digital infrastructure. Dedicated pools of capital have been set up to invest in the space. India will reflect this trend as the market is brimming with optimism across various sectors of digital infrastructure due to favorable headwinds, making it 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 Cell (ODSC), Data Centers (DCs), and Fiber Networks.
The IBS market is undergoing a fundamental shift towards neutral host providers such as Indus Towers, ATC, IBS Networks and Crest Digital, which enable multiple tenancy. The neutral host IBS market is expected to grow at a CAGR of 30-35%, covering around 4,500 million sqft, and around 1.2 million small cell sites are expected to be installed by 2027. Telecom affordability is a major driver for this. This increase. With average revenue per user on a strong growth trajectory, growing at a CAGR of over 20%, the telco has ample strength to spend on an accelerated rollout.
The DC industry is expected to grow at 25% CAGR, from 870 MW in FY22 to 1,700 MW by FY25, which would require over $5 billion in investment. The developers have a pipeline to consistently deliver over 300 MW per annum over the next 10 years. The industry is witnessing a number of partnerships between global financial and strategic players (which bring in client relationships and technical capabilities) on the one hand and domestic players (which enable access to suitable land parcels and development expertise) on the other. This will lead to the optimum mix required for success in this industry. While Adani – Edge Connex, Everstone-Yondr, Nextra-Carlyle are some of the major partnerships, many other players are also in active discussions to enter into similar arrangements. Hyperscalers are now developing their own DCs, DC players are now increasingly offering managed services to provide comprehensive solutions to retail customers.
India’s fiber network is expected to grow at 14% CAGR to reach 6.5 million-route-km by 2028, mainly due to longer haul, fiber-to-the-home deployment, DC connectivity and fiberisation of telecom towers. Allocation of spectrum to non-telcos for setting up 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 customers.
Other rapidly emerging sub-sectors include the massive and significant Internet of Things (IoT), both of which are providing attractive opportunities as adoption is expected to increase use cases. Similar benefits are expected to be available in India soon.
Moreover, the government is showing clear signals that it supports seamless digitisation. The recent conversion of Rs 16,133 crore into 33.44% equity stake in Vodafone Idea will benefit the sector in a big way. The Union Budget announcement regarding setting up of 100 labs to develop applications using 5G services and formulation of a National Data Governance Policy are positive steps in the right direction.
Given the proven market potential and overall optimism in the space of opportunities, India’s digital infrastructure space is attracting substantial interest from institutional and strategic investors. Recent major deals in India include Brookfield setting up a data infrastructure trust to acquire Summit Digital and Space Tele Infra, Equinix investing $160 million to acquire two GPX data centers in Mumbai, Everstone and Yondre invested $1,000 million through a joint venture, and I-Square Capital invested $300 million to set up digital infrastructure platform Lightstorm. Overall, digital infrastructure is the next big investment opportunity in India’s real asset space, and we expect a lot of deal activity in 2023.
(Prateek Jhawar is managing director and head of infrastructure and real assets investment banking, Avendus Capital. Views are personal.)
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