NTT expects short-term margin pressure as competition grows in India data centre business

(L-R) Abhijit Dubey, Global CEO, NTT & Sharad Sanghi, MD, NTT India

NTT, the world’s third-largest data centre service provider, said increasing competition in the sector in India will likely lead to short-term margin pressure as clients become more picky about using cloud services.

In addition to global technology giants Microsoft and Amazon, many local companies have cropped up since the pandemic to build data centres in India. However, NTT said the increasing competition isn’t expected to be a threat beyond the current short-term margin pressure.

“There are 25 new players in the market. Some of them don’t have any deals because the large clients want to go to the market with tried and tested players. The new entrants would do anything to buy a deal. That will build some pressure on margins in the short term but there will be consolidation in the long term,” NTT India MD Sharad Sanghi said.

Also, companies like Microsoft, Amazon Web Services and Google Cloud work in a combination of co-locating and building their own data centres as it takes time to get approvals and finish processing. Globally and in India, such companies first test and understand the market, build teams and then start building data centres, Sanghi said.

He said these companies largely used to outsource capacity rather than build their own.

Capacity growth

“But look at their campuses. They have started land banking, both Amazon and Microsoft. Though they continue to co-locate, there will be a significant amount of capacity they will build on their own,” Sanghi said.

The Indian government’s steps to encourage building of digital infrastructure and data localisation laws are driving the data centre industry in the country.

Since 2020, Tokyo-based NTT has committed about $4.5 billion to set up data centres in India. First, it planned to invest $2 billion to build data centres in India over five years. That was followed by a $2.5 billion accord signed with the Maharashtra government for another five years during the World Economic Forum in Davos this year. NTT also provides IT services and consultancy.

Microsoft recently committed about Rs 16,000 crore to set up three additional data centres in Hyderabad.

In November 2022, Amazon Web Services said it will invest about $4.4 billion by 2030 to build data centres in Hyderabad. In mid-2020, Alphabet Inc’s CEO Sundar Pichai said Google will spend about $10 billion in India over five-seven years, part of which will go into building data centres in the country.

Currently, NTT has 12 operational data centres in India, with an additional six to be launched by June. Three more data centres are under construction and 70 percent of the new capacity already has commitments in place.

Abhijit Dubey, the global CEO of NTT, highlighted that cloud migration deals and client movement to public cloud are continuing despite caution, a slowdown and cancelling of discretionary projects. Sanghi said there had been a lot of blind spending on cloud and some of that is now converting into reverse migration deals, where companies transfer their business functions from a public cloud to a local data centre.

Sanghi, who is also acting senior executive VP for the data centre and marine cable business, said, “Clients look for more hybrid multi-cloud now. As Abhijit mentioned, we want to deploy our full-stack and hedge as a service. When the cloud fever started, a lot of people blindly moved workloads to the cloud, later realising that all of this is very expensive.”

He said clients are now thinking about what needs to have dedicated infrastructure and what goes on to the cloud.

“Hence, we also saw a demand for reverse migration… Lot of elastic workloads will move to the cloud, but predictable workload will remain off-cloud,” he said.

“There used to be a lot of cloud at first. Now, I think it is about the best cloud,” Dubey told Moneycontrol.

IT services deals

For the $30 billion tech giant that NTT Data is, 9 percent of its business is through data centres and the rest is predominantly IT services which include offerings like network and infrastructure, managed services, multi-cloud, application development and application maintenance to name a few.

Dubey said that for IT deals, given the ongoing inflation, the pricing of deals has started to go up in 2023.

“Big deals of $50 million and above are becoming bigger portions. That trend, I think, will continue. The trend of fewer, more strategic partners in an enterprise will continue,” he said. “When you have cost pressures, you do see more outsourcing deals. Lot of these deal sizes do tend to be bigger than project-based deals. I don’t see a significant slowdown in big deals in 2023, at least not yet.”