TCS’s $7bn India data centre bet raises questions over returns, fit

BENGALURU: Tata Consultancy Services’ plan to invest up to $7 billion in a 1 gigawatt data centre unit in India has sparked cautious reactions, with some analysts flagging limited overlaps with its core IT services and potential pressure on returns.

The move, which pushed TCS shares down as much as 1.5% on Friday, marks a strategic shift for India’s largest IT firm, which has traditionally followed a capex-light, organic growth business model.

The recent boom in AI technologies, which require vast amounts of computing data, has led to an unprecedented growth in data centers globally as well as in India. TCS also said the move is aligned with the government’s push to store user data within shores of the country.

“While the plan seems ambitious and aims to capture the significant growth expected in India’s data centre market over the next few years, it will likely impact the return ratios of TCS as it effectively moves away from capex-light to capex-intensive business,” PhillipCapital analyst Karan Uppal said.

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TCS, which expects to reach 1GW capacity within five to seven years, has not disclosed its financial partners for the project that will involve a total setup cost of $6–7 billion.

TCS’s return on equity (ROE) stood at 51% and return on invested capital (ROIC) at over 80% in FY25, but the shift to a capex-heavy model may weigh on these metrics.

BOBCaps analysts called the plan “negatively surprising”, estimating the AI data centre business could generate ROE in the teens, far below the company’s core business.

The brokerage also flagged TCS’s more proactive M&A stance as a departure from its historical focus on organic growth, warning that these moves could reduce free cash flow available for shareholder distributions and potentially affect valuation.

Jefferies echoed concerns about limited synergies, saying the data centre foray may not materially alter TCS’s growth profile, even though the intent to invest for future growth is promising.

TCS’s move comes at a time when India’s data centre industry is predicted to grow at a fast pace. According to real estate consultant Colliers, the country’s data centre capacity is expected to more than triple to 4.5 gigawatt by 2030 from current levels.

The sector is likely to attract investments to the tune of $20-25 billion in the next 5-6 years, it added.