Cost of equity in India is stable, reflecting maturity and resilience: EY survey
Jul 21, 2024
New Delhi [India], July 21 : The average cost of equity in India is stable at 14.2 per cent, up by about 40 basis points since 2021, indicating strong resilience, according to a survey by global consultancy firm EY. It also noted that the equity market risk premium has steadily shrunk over the past surveys.
Despite global economic challenges, India's robust macroeconomic fundamentals and fiscal prudence have helped to maintain a relatively stable cost of equity.
Theoretically, the cost of equity is the return that a company must realize in exchange for a given investment or project.
In the survey outcome of The India Cost of Capital Survey 2024, EY said e-commerce, real estate, and IT/ITES sectors report the highest costs of capital reflecting their higher risk profiles and growth expectations.
Conversely, sectors like power, chemicals, and Media & Entertainment feature at the lower end, benefiting from more stable cash flows.
In a rapidly evolving economic landscape, understanding the cost of capital remains a critical metric for corporate decision-making.
This survey, its fourth edition, which captured perspectives of around 185 respondents from India Inc. and over 20 equity research analysts, provides invaluable insights while highlighting how India Inc. is adapting its financial planning for sustained growth in a complex global environment.
"Equity market Risk Premium has steadily declined over the past three surveys. This reflects increasing market maturity and reduced volatility in capital costing decisions to other economic variables like interest rates," EY said.
Despite various headwinds, India's robust macroeconomic fundamentals and strategic fiscal measures have maintained a relatively stable cost of equity, EY added.
The survey highlights a generally positive business environment in India, with more than half of the respondents perceiving it as favorable, while about 30 per cent were neutral.
Additionally, over 40 per cent found capital raising easier, with more than one-third being neutral.
"This optimism is aptly supported by India's strong GDP growth and is driven by buoyant domestic demand and increasing private investments," EY asserted.
Amidst the global headwinds, the Indian economy has exhibited resilience, led by targeted fiscal measures and continued anti-inflationary monetary policy.
In response to high inflation, averaging 5.9 per cent during the last three years, the RBI hiked the policy repo rate by 250 bps from 4 per cent in February 2021 to 6.5 per cent now, which in turn has led to an increase in the average cost of equity during the corresponding period.
"However, the increase in the cost of equity has been muted vis-a-vis the increase in the risk-free rate, which rose by 90 bps during the period under review," found the EY survey.
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