India’s Cost of Equity Stable at 14.2%: EY Survey Highlights
The India Cost of Capital Survey 2024 by EY reveals that the average cost of equity in India is stable at 14.2%, up by 40 basis points since 2021. This indicates strong resilience in the Indian economy.
According to the survey, sectors like e-commerce, real estate, and IT/ITES report the highest costs of capital due to their higher risk profiles and growth expectations. On the other hand, sectors like power, chemicals, and Media & Entertainment have lower costs of capital, benefiting from more stable cash flows.
Despite global economic challenges, India’s robust macroeconomic fundamentals and fiscal prudence have helped maintain a relatively stable cost of equity. The survey, which is in its fourth edition, captured perspectives from around 185 respondents from India Inc. and over 20 equity research analysts.
EY noted that the equity market risk premium has steadily declined over the past three surveys, reflecting increasing market maturity and reduced volatility in capital costing decisions. More than half of the respondents perceive the business environment in India as favorable, and over 40% found capital raising easier.
Amidst global headwinds, the Indian economy has shown resilience, supported by targeted fiscal measures and anti-inflationary monetary policy. The RBI’s policy repo rate hike from 4% in February 2021 to 6.5% now has led to an increase in the average cost of equity. However, the increase in the cost of equity has been muted compared to the rise in the risk-free rate.
Doubts Revealed
Cost of Equity -: Cost of equity is the return that investors expect to earn when they invest in a company’s shares. It’s like the interest you earn on your savings, but for company shares.
EY -: EY stands for Ernst & Young, which is a big company that helps other businesses with things like taxes, audits, and consulting.
Basis Points -: A basis point is a unit of measure used in finance to describe the percentage change in value. One basis point is equal to 0.01%, so 40 basis points mean 0.40%.
E-commerce -: E-commerce refers to buying and selling goods or services using the internet. Examples include websites like Amazon and Flipkart.
IT/ITES -: IT stands for Information Technology, and ITES stands for Information Technology Enabled Services. These sectors involve using computers and the internet to provide services.
Macroeconomic Fundamentals -: Macroeconomic fundamentals are the basic factors that affect the economy of a country, like inflation, employment, and GDP (Gross Domestic Product).
Fiscal Prudence -: Fiscal prudence means being careful and wise in managing a country’s money, like how you save and spend your pocket money wisely.
Capital Raising -: Capital raising is when companies get money from investors to grow their business. This can be done by selling shares or borrowing money.
