Data centre boom to power India's next market winners; How to play this theme & top picks

AI and semiconductor-led data centre expansion is emerging as India’s next infrastructure megatrend, creating a structural demand cycle across electricity generation, transmission, transformers and water treatment, according to market experts. Despite India not having a direct listed play on the global AI and semiconductor boom, market participants said another theme is quietly gaining ground on Dalal Street: the link between data centres, power and water.

Data centres that support AI applications consume large quantities of electricity and water for cooling and temperature control, driving demand for power infrastructure, water treatment, recycling and efficient distribution systems. Moody’s recently cautioned about rising water stress due to rapidly growing demand from data centres and said India’s fragmented water management framework raises fiscal and credit risks.

Data Centre theme has provided a boost to the power demand which after DC theme is expected to grow at 7-8 per cent CAGR over longer term. They capture a 2 per cent of global electricity and is expected to reach 3 per cent by 2030, said Ankit Soni, AVP Fundamental Research at Mirae Asset ShareKhan. "Data centers consume billions of liters of water for cooling. Data centres require large volumes of water to stay cool, yet more than half are built in water-stressed regions."

AI and data centres are a structural, multi-year demand layer on top of India's existing electrification and renewable push. Data-centre capacity is set to reach over 2GW by 2026 and 8GW by 2030, driving over $30 billion of capex and a near Rs 9 lakh crore grid build-out to 2032, said Harshit Patel, Director at Equirus Securities.

According to experts, power accounts for 25-30 per cent of the total bill of materials in a data centre. They said this creates durable earnings visibility for generation equipment, transmission and water-treatment players, although any re-rating would need to be supported by earnings rather than theme alone.

With freshwater becoming increasingly scarce, municipalities, industries and large commercial users will have to treat and reuse water instead of simply sourcing more of it, experts said. They said this points to a structural shift in the industry from water distribution to water efficiency and reuse.

Water is becoming increasingly important as one of the top strategic resources in India. In contrast to other infrastructure-related trends, which may be associated with economic cycles, the investments in water security are structural, policy-driven, and mandatory for sustainable development, said Vikram Kasat, Chief Business Officer-Advisory at PL Capital.

"Increasing urbanization, the growth of industries, and higher environmental standards provide for a long runway of growth in water purification, water reclamation and recycling, as well as in desalination and reuse facilities. We believe that the industry is now in the process of transitioning into a phase of fast-growing investments," he said.

"We would prioritise electrical-equipment and transmission players over power generation and water utilities, whose returns are largely regulated and capped," said Patel. "They are the picks-and-shovels of the theme: every data centre and fab needs power evacuation, transformers, switchgear and HVDC, regardless of which AI application ultimately wins," he said.

Analysts added that around 75 per cent of India's data centres are concentrated across Maharashtra, Tamil Nadu, Karnataka, Telangana and Uttar Pradesh. Transformer manufacturers are already booked for the next three to four years, while another capital expenditure cycle is expected to emerge in the power distribution segment.

Transmission and Distribution sector shall be the clear winners. Capex triggers particularly is seen in high voltage lines, interconnectivity and sub stations. Transmission sector also has structural moat and regulated returns and Visibility. Distribution segment to remain in limelight due to scarcity of supply of transformers and falling short when compared to demand, Soni said.

According to the management outlook of major power companies, the current power demand and capital expenditure cycle is expected to continue for around a decade, with the data centre theme likely to extend power demand over the longer term. Water demand in India could exceed available supply by nearly twice by 2030, while industry estimates indicate that more than Rs 20 lakh crore of investment may be required over the next decade across water supply, sewage treatment, wastewater recycling, distribution networks, storage and river-linking infrastructure.

"We would prioritise grid and electrification names like Hitachi Energy, ABB India and Siemens for data-centre power and HVDC, and CG Power for its transformer franchise plus a direct semiconductor OSAT play," Patel from Equirus adds, citing stretched valuations, execution and supply-chain delays, slower-than-expected AI monetisation and policy or power-availability bottlenecks as key risks.

"We believe direct DC theme beneficiaries like it infrastructure players will be benefiting but also power sector players like Clean max enviro, Hitachi Energy, GE Vernova T&D, Triveni Turbines, Genset stocks like Kirloskar Oil Engines, Cummins India and other ancillaries to benefit," said Sharekhan's Soni. From the water treatment space, he has picked Va Tech Wabag and Ion Exchange.

Market experts said data centre expansion is likely to keep power and water infrastructure in focus over the long term. Repeating VA Tech WABAG among its top recommendations, PL Capital has also suggested investors keep a close eye on Enviro Infra Engineers and Denta Water And Infra Solutions.