Stability and Resilience: The State of Cost of Equity in India According to EY Survey
In the vibrantly evolving economic landscape of India, the cost of equity remains a pivotal measure for businesses engaging in strategic financial planning and investments. A recent survey conducted by EY, a leading global consultancy firm, sheds light on the dynamics of cost of equity in India, revealing a picture of stability and resilience amidst global economic challenges.
The survey presents an average cost of equity in India holding steady at 14.2 percent, experiencing a slight increase of about 40 basis points since 2021. This stability is an indicator of the robust macroeconomic foundations and the strategic fiscal prudence that characterizes India’s economy.
One of the key highlights from the survey is the gradual reduction in the equity market risk premium over the recent years, suggesting a maturing market that is becoming increasingly stable in the face of various economic variables, including interest rates.
Amidst the extensive analysis, the survey also delves into sector-specific insights, uncovering that e-commerce, real estate, and IT/ITES sectors record the highest costs of capital. These findings underline the correlation between cost of equity and the intrinsic risk and growth aspirations inherent to these industries. Conversely, more stable industries such as power, chemicals, and media & entertainment, exhibit lower costs of equity, benefiting from consistent cash flows and lesser volatility.
The India Cost of Capital Survey 2024 encompasses feedback from approximately 185 respondents from a cross-section of India’s corporate landscape, alongside insights from over 20 equity research analysts. This comprehensive gathering of data not only enriches understanding but also highlights the agility with which Indian businesses are navigating their financial strategies to foster growth in a globally competitive and intricate environment.
Despite facing headwinds on the international front, India’s economic fundamentals have shown remarkable resistance. The strategic fiscal policies and continued focus on anti-inflationary measures have played a crucial role in maintaining the stability of the cost of equity.
Reflecting on the business climate within the country, the survey reveals a predominantly positive outlook among the respondents, with more than half perceiving the current business environment as favorable. This optimism is further bolstered by the ease of capital raising witnessed by over 40 percent of the participants, fueled by strong GDP growth, robust domestic demand, and an upsurge in private investments in the country.
Addressing the challenge of inflation, which has averaged 5.9 percent over the past three years, the Reserve Bank of India (RBI) responded by adjusting the policy repo rate upwards by 250 basis points from 4 percent in February 2021 to 6.5 percent in the current period. This strategic move has, indeed, influenced the cost of equity but its impact has been relatively moderate compared to the rise in the risk-free rate, which saw a 90 basis point escalation.
In conclusion, the EY survey on the cost of equity in India encapsulates a tale of resilience and optimism. With its economy demonstrating strength and adaptability in the face of global uncertainties, India continues to forge a path of stable and sustained growth, strategically navigating its financial and sectoral landscapes to capitalize on emerging opportunities.
