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Tata Communications has proposed to hive off its data centre business into a new entity in a bid to get a larger market share in this segment.
The book value of the data centre business is about Rs 500 crore as of September 2011.
To tap into future growth potential, the company wants to invest Rs 1,200 crore in this business over the next five years and hopes to raise capital by spinning it off into a new subsidiary.
“A carve out of the IDC business would have the dual benefits of creating a focused organisation to drive business strategy as well as a vehicle for raising investments to fund the capital expenditure required,” the company has stated in its proposal sent to the Government.
Govt approval needed
Tata Communications needs Government approval, according to the shareholders' agreement. Top Government sources said that the proposal may get the nod as long as it does not dilute Tata Communications' income.
According to the proposal, the data centre business will be transferred to S&A Internet Services Private Ltd, which is a 100 per cent subsidiary of Tata Communications. The business includes 3,50,000 square feet of data centre space spread over seven cities, including Chennai, Delhi, Hyderabad, Kolkata and Pune.
According to Mckinsey & Company, the third party outsourced data market in India is expected to grow at a compounded annual growth rate of 32 per cent to Rs 5,500 crore by 2017.
At present, Tata Communications' market share in the collocation business is 19 per cent by revenue and it serves over 700 enterprise customers in India.
Capital expenditure
According to the company, the capital expenditure for expansion in Delhi, Mumbai and Bangalore is expected to be Rs 400-500 crore in the financial year 2012-13.
“A carve out creates an opportunity to plan and raise financing for the IDC business independent of the parent company,” said an internal government note.
“A dedicated management team running operations would be able to develop customer relationship, create the partnership ecosystem required to deliver services effectively and attract the requisite talent,” it added.
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