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ET Exclusive: TCS looks to rope in TPG for $2 billion AI data centre JV
Tata Consultancy Services is forming a multi-billion dollar joint venture with TPG to build AI and Sovereign Data Centers, marking a strategic shift towards a capex-heavy model. This ambitious project aims to establish TCS as a major player in the data center space, investing significantly to meet growing demand.
India's largest software exporter Tata Consultancy Services (TCS) is set to form a multi-billion dollar joint venture with private equity group TPG to create multiple AI and Sovereign Data Centers as the Tata Group flagship looks to accelerate its efforts towards becoming “the world's largest AI-led technology services firm,” said people in the know.
This would be a strategic pivot for the IT firm that has historically pursued a capex-light, organic growth business model.
Together TCS and TPG are planning to invest around $2 billion of equity as alliance partners in HyperVault AI Data Centre Ltd – incorporated as a wholly owned subsidiary of the technology company in late October. TCS will be the majority partner in the JV with 51% stake, according to officials of the company in condition of anonymity, as the talks are still in private domain. The residual $4.5-$5 billion will be raised through debt over time, they added.
Both sides are expected to sign a formal agreement by this weekend, possibly as early as Thursday. This will be the third time that the US buyout group will be partnering with India's largest conglomerate after Tata Motors EV arm and Tata Technologies. This will also be the first time cash rich TCS, will be taking external equity from a PE firm as well as external debt.
Last month, TCS announced its plan to make a foray into the data centre space with an aim to build up to 1.2 GW of capacity, which will entail $6.5-$7 billion in investments. The company had said this will be made possible through partial equity investments from financial investors and funding through debt, according to the company's management.
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It has so far not disclosed the identity of its financial partners. The new business unit led by a separate management will operate as a co-location data centre provider offering services to hyperscalers, Indian enterprises and government entities along with Tata group companies, said the company's management. The project will require five-seven years for complete build out and revenue could start kicking in over the next 18-24 months.
To put the scale of TCS' project in context, 1.2 Gigawatt is the entire combined capacity of India's existing data centres. However, this is expected to grow multifold reaching 9 Gigawatt in the next 5-7 years attracting capex investments of $50-$95 billion as competition heats up in the space, market forecasts suggest.
The announcement however triggered polarising views from investors and analysts, some of whom expressed apprehensions over the diversification which they saw as having limited overlaps with its core IT services and potential pressure on returns. 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. The TCS stock had also reacted negatively, dropping 1.5% following the public announcement.
"We have set a target of 1 GW. We will be doing it in phases. We expect to do 1 GW in 5-7 years," TCS' chief executive K Krithivasan said at an investor call after the company announced its September quarter earnings. As per the company's calculations, every 150 MW will entail an investment of $1 billion, which translates into over $6.5 billion for the overall capacity building. Samir Sekhsaria, TCS' chief financial officer said revenues from the data centre business will start accruing in 18-24 months' time.
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India's largest software services firm is confronting one of its most significant transitions yet, as it seeks to pivot its traditional, human-led services model to stay relevant amid AI disruption. For the first time, TCS laid off 1%, or 6,000, of its around 600,000-strong workforce during the last quarter as part of its larger plans to reduce its headcount by 2% in this financial year. This, combined with voluntary and involuntary attrition, TCS' workforce declined by 19,755 on a net basis in July-September, its largest quarterly decline ever.
TPG was unavailable for comment. Mails sent to TCS spokesperson also did not generate an immediate response.
Data Centre Gold Rush
The Tata Group would be the latest among deep pocketed Indian business groups to make a big entry and would pit them directly against leading co-location providers such as Reliance Industries, AdaniConnex, Bharti Airtel's Nxtra Data, NTT Global, Sify Technologies and CtrlS Datacenters.
You Might Also Like: Reliance to set up 1 gigawatt AI data centre in Andhra Pradesh
Last month, Adani Enterprises and Alphabet's Google said they will invest $15 billion over the next five years to develop a gigawatt-scale data center hub in Andhra Pradesh. AdaniConneX, a joint venture between the Adani Group and data center operator EdgeConneX, will undertake the project, which will be supported by a subsea cable network and renewable energy facilities.
In August, Reliance Industries signed deals with Meta and Google to develop AI platforms and announced plans for a gigawatt-scale data center in the western state of Gujarat. ET on November 14 reported Reliance is also planning to set up a 1 GW data centre in Andhra Pradesh, a twin of its facility that is coming up in Jamnagar.
Even then these multi-billion dollar initiatives are a fraction of what the big tech titans — Meta, Microsoft, Amazon and Google — are spending globally, with their combined annual capex projected to exceed $400 billion in 2026 alone.
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Source: EconomicTimes
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