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Cost of equity declined in India

Thursday,27 May 2021 12:37 PM IST

New Delhi, May 27

The India Cost of Capital Survey 2021 concludes that in line with the falling interest rates, the cost of equity in India has declined since EY's last cost of capital survey in 2017.

The EY-NSE report encapsulates views of around 200 respondents from the corporate India, spread across different sectors and company sizes.

The survey concludes that in line with the falling interest rates, the average cost of equity in India has decreased since EY's last cost of capital survey in 2017.

While largely a measure of risk, the cost of equity is also a proxy for return expectation, and its decline with falling interest rates can be interpreted as signs of conservatism in return expectations from prospective investments.

The survey findings say that India's average cost of equity is 14 per cent; declined by 100 basis points since EY's last cost of capital survey in 2017.

Real estate, healthcare (including pharmaceuticals and life sciences) and renewables command the highest cost of equity, whereas chemicals, media and entertainment and FMCG, are at the lowest.

The survey also found that start-ups or internet-age companies recorded higher cost of equity on an average.

The Discounted Cash Flow (DCF) methodology is one of the key approaches for valuation analysis used and most companies typically consider a horizon of five years under this approach.

In the light of the pandemic, most of the respondents indicated that they did not make any temporary adjustments to discount rate and the inherent uncertainty arising out of the situation was met by businesses by adjusting their projections or evaluating multiple scenarios instead.

Most respondents acknowledged that an additional risk premium is justifiable when considering strategic investments in start-ups and provided their views on the quantum. The quantum of premium varied across industries, with most sectors capping it at 10 per cent.

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