Private-equity giant TPG agrees to invest $1 bn in TCS’s data centre business
American private equity giant TPG has agreed to invest $1 billion in Tata Consultancy Services’ data center business; The country’s largest information technology services company plans to appoint a Tata Group executive to run the business.
San Francisco-based TPG, which has $286 billion in assets under management, agreed to invest ₹8,820 crore will acquire a 49% stake in HyperVault AI Data Center, which TCS set up last month as part of its plan to build 1 GW of data center capacity by 2031. TCS will own the remaining 51%.
Deepesh Nanda, who currently runs Tata Power Renewable Energy Ltd, a subsidiary of Tata Power Ltd, is expected to head the HyperVault AI Data Center, according to executive information on the development.
On Thursday, TCS informed the stock exchanges that the company and TPG will invest up to Rs 100,000. ₹18,000 crore in the next few years. This marks TCS’ first concrete step towards building a data center business, a first among the country’s largest IT outsourcing providers.
“With this capability, TCS is uniquely positioned to deliver complete AI solutions for its customers and partners. We are excited and committed to playing a leading role in building world-class AI infrastructure and solutions for the industry and working to make TCS the largest AI-led technology services company,” said N Chandrasekaran, Chairman, Tata Group.
According to the above-mentioned executive, TCS is for now looking at building a 120MW+ data center facility in Navi Mumbai, which is expected to be operational within 18 months.
TPG’s investment in TCS’s data center business marks its second deal with a Tata Group company. In October 2021, it agreed to invest $1 billion in Tata Motors’ electric passenger vehicle unit at a valuation of $9.5 billion.
TPG’s investment in the data center business is also the Tata group’s second foreign investment in the new-age business. Earlier this year, AESC Group Ltd, a Chinese EV battery manufacturer originating from and headquartered in Japan, acquired a stake in Tata Group’s flagship EV battery company, Agratas Energy Storage Solutions Pvt, Mint reported on August 11.
Change in strategy
TCS’s entry into the data center space, arguably its biggest bet yet, was hidden in CEO K Krithivasan’s prepared remarks during the company’s post-earnings analyst call on October 9. TCS had announced that it would invest $6.5 billion over six years to build 1 GW of data center capacity.
“It actually reduces risk because we’re enabling an outside investor to put money into a business that needs it,” said one executive who asked not to be named.
This marks a shift from TCS’s and the IT industry’s strategy in general to serve as an IT outsourcing provider specializing in managing coding, customer support, application development and maintenance, cloud, data and AI functions for foreign clients. The company, which generated $30.18 billion in revenue last year, is currently focusing on its domestic market, which accounts for just 6% of its total business.
AZB & Partners was legal advisor to TCS and Deloitte Touche Tohmatsu India LLP were tax advisors to the deal. Cyril Amarchand Mangaldas and Latham & Watkins LLP served as legal advisors to TPG, and Price Waterhouse & Co. served as tax advisors. LLP was serving.
TCS’s foray into data centers is part of its plan to become the “world’s largest AI-led technology services company.” “If you look at the entire AI stack, starting from the infrastructure as the initial layer, all the way to applications and intermediary applications at the top layer, that gives us the scope of the AI technology stack,” Aarthi Subramanian, vice president of operations, said during last month’s analyst call.
Less profitable than main business
The company plans to sell these solutions to pure AI providers, deep tech firms, hyperscalers, the Indian government and local businesses. Hyperscalers are large-scale cloud service providers such as Amazon Web Services, Microsoft Azure, and Google Cloud.
But this turnaround comes at the expense of profitability. The asset-heavy data center business will be less profitable than the core IT services business, management said during an investor call earlier this month.
For now, the data center market is expected to grow driven by increased demand due to further mobile migration to 5G, increased cloud adoption, regulatory requirements to store data in a specific region, and new, data-hungry applications.
Mumbai and Chennai, where TCS’s data center is planned, house about 65% of the country’s data center capacity, with 536 megawatts and 113 megawatts respectively. According to a Kotak Mutual Fund report, India’s data center capacity is expected to reach 3 GW by 2030, up from 1.03 GW at the end of last year.
TCS shares are up 2.74% since the announcement on October 9, closing on October 9. ₹3,145.75 on November 20th.
