Cost of capital -

India survey
2017
2 | India cost of capital survey
 Contents
Findings
1. Cost of equity in India 06
2. Basis of estimating cost of equity 08
+& Gl`]j\ak[gmfl]\[Yk`Ögo <;>!hYjYe]l]jk 10
4. Cost of capital in an international context 12
5. Start-ups 13
About the survey 14

India cost of capital survey | 3

 >gj]ogj\
Navin Vohra
Head – Valuation and Business
Modelling Services
HYjlf]j$LjYfkY[lagf9\nakgjq
Services
Ernst & Young LLP
4 | India cost of capital survey
L`]afYm_mjYd]\alagfg^l`]Af\aY;gklg^;YhalYdKmjn]qoYkjgdd]\gml
af]Yjdq*(),&L`]kmjn]qoYkl`]Õjkl%g^%alk%caf\Yll]ehllgmf\]jklYf\
the threshold cost of equity that India Inc. used for its capital allocation
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]da[al]\Yfgn]jo`]deaf_j]khgfk]Yf\`]dh]\[gehYfa]kZ]f[`eYjc
themselves.
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][gfgeq&9egf_l`]egklka_faÕ[Yflg^l`]k][`Yf_]kakl`]j]\m[lagf
g^gn]j*((ZYkakhgaflkafafl]j]kljYl]k$\jan]fZq^Yddaf_afÖYlagfgfl`]
ZY[cg^\][dafaf_[geeg\alqhja[]kYf\Õk[YdYf\egf]lYjqhjm\]f[]&
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survey. The survey encapsulates the responses of 135 respondents from
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afl]jYdaY[gf[dm\]kl`Yl$\]khal]^Yddaf_afl]j]kljYl]k$l`][gklg^]imalqaf
India has remained constant since the last survey. As the cost of equity is
Y[geZafYlagfg^Yjakc%^j]]jYl]Yf\Yjakchj]eame ^mjl`]j[gehjakaf_
g^YeYjc]ljakchj]eame$YZ]lY^Y[lgjYf\YfYdh`Y^Y[lgj!$Yf\Ykl`]
jakc%^j]]jYl]`Yk\][daf]\gn]jl`akh]jag\$alogmd\aehdql`Yl[gehYfa]k
h]j[]an]l`]jakchj]eamelgZ]`a_`]jl`Yfl`j]]q]YjkY_g&
O][Yffgll`Yfcgmj[da]flk]fgm_`^gjl`]ajnYdmYZd]lae]Yf\af[dafYlagf
lghjgna\]mkl`]ajl`gm_`lkgfl`akeYll]j$o`a[`akg^_j]Ylka_faÕ[Yf[]
Yf\afl]j]kllgl`]Zmkaf]kkYf\afn]klgj[geemfalqYko]ddYkklm\]flk
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Yf\\][akagf%eYcaf_hjg[]kk]klgklj]f_l`]fl`]ajafn]kle]fl]nYdmYlagf
and value-creation activities. This is a small step in our quest to deliver
exceptional client service.
Executive summary
L`]Af\aY;gklg^[YhalYd$Af\aYkmjn]q$*()/$Yaeklgmf\]jklYf\l`][gklg^[YhalYdl`Yl[gehYfa]kmk]^gj[YhalYdYddg[YlagfYf\
kljYl]_a[\][akagf%eYcaf_&AlYdkgYll]ehlklgÕf\gml`gona]ok`Yn][`Yf_]kgn]jl`]dYkll`j]]q]YjkYf\o`Yl[gehYfa]kYj]
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2014 edition of the survey.

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emdlafYlagfYdYko]ddYkdakl]\Yf\mfdakl]\[gehYfa]k$[gdd][l]\\mjaf_l`]h]jag\g^Fgn]eZ]j*().Yf\>]ZjmYjq*()/&

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• India’s average cost of equity is around 15%. This has • L`]imYflmeg^kmZb][lan][gehYfq%kh][aÕ[Y\bmkle]flk

j]eYaf]\[gfklYflkaf[]gmjdYkl[gklg^[YhalYdkmjn]q$gn]j
Yh]jag\afo`a[`l`]afl]j]kljYl]k`Yn]\][daf]\Zq*((
basis points.
• J]Yd]klYl]Yf\]f_af]]jaf_$hjg[mj]e]flYf\[gfkljm[lagf
=H;![geeYf\l`]`a_`]kl[gklg^]imalq$o`]j]Yk>E;?
Yf\[YhalYd_gg\kYj]Yll`]dgo]kl&
• L`]j]kmdlk[gfÕjel`Yll`]<ak[gmfl]\;Yk`>dgo <;>!
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YfYdqkakmk]\Zq[gjhgjYl]k$mkmYddqaf[geZafYlagf
oal`gl`]je]l`g\kkm[`Ykh]]j[gehYfqemdlahd]kgj
transaction multiples.
• AloYkgZk]jn]\l`Ylegkl[gehYfa]kl`Ylmk]l`]<;>
YhhjgY[`lqha[Yddq[gfka\]jY`gjargfg^-q]Yjk&
• L`]kmjn]q]eh`Ykar]kgmjd]Yjfaf_^jgel`]hj]nagmk
kmjn]ql`Yll`]Éjmd]g^l`meZÊgjYfgj_YfarYlagfYd`mj\d]
rate is preferred over objective models such as the Capital
9kk]lHja[af_Eg\]d ;9HE!lg]klaeYl]l`][gklg^[YhalYd&
made to arrive at the cost of capital has gone up since 2014.
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km__]kl]\Zqj]khgf\]flkYj][gehYfq'hjgb][l%kh][aÕ[jakc
^Y[lgjkYf\l`]kar]g^l`][gehYfq&
• Egklj]khgf\]flkY[cfgod]\_]\l`YlYfY\\alagfYd
jakchj]eameakbmklaÕYZd]o`]f[gfka\]jaf_kljYl]_a[
afn]kle]flkafklYjl%mhk$Yf\hjgna\]\l`]ajna]okgfl`]
imYflme&L`]imYflmeg^hj]eamenYja]\Y[jgkkaf\mklja]k$
oal`egklk][lgjk[Yhhaf_alYlYeYpaemeg^)(&
• Afmkaf_l`]<;>e]l`g\^gjfgf%Õfal]hjgb][lk$Yfgl`]j
c]qYj]YYhYjl^jge[gklg^[YhalYdakl`]l]jeafYdnYdm]&
J]khgf\]flko]j]]imYddq\ana\]\Z]lo]]fmkaf_l`]?gj\gf
?jgol`Eg\]dnk&Yf=palEmdlahd]lgYjjan]Yll]jeafYdnYdm]$
Yf\l`]hghmdYjdgf_%l]jeklYZd]_jgol`jYl]mk]\oYk
~4.5%.
L`]\]lYad]\Õf\af_k`Yn]Z]]f]dYZgjYl]\afl`]^gddgoaf_
pages. Happy reading!

India cost of capital survey | 5

 >af\af_k
1. Cost of Equity
in India

Current cost of equity in India Chart 1 - Cost of equity in India

The average equity discount rate suggested by the respondents 40%

akYhhjgpaeYl]dq)-&F]Yjdqgf]%l`aj\g^l`]j]khgf\]flk 35%
considered their equity cost in the 12%–15% range and another 30%
Responses (%)
quarter of the respondents considered it in the 15%–18% range. 25%
Only 10% of the respondents felt that the cost of equity is over 20%
)0$o`ad]Ydegkl*(g^l`]j]khgf\]flk[gfka\]j]\l`][gkl 15%
of equity to be less than 12%. It can been seen from chart 1 10%
l`YlZ]lo]]f>]ZjmYjq*(),Yf\EYj[`*()/$l`]gn]jYdd[gkl 5%
g^]imalqk`a^l]\egj]lgoYj\l`])*Ç)-jYf_]& 0%
<12% 12%-15% 15%-18% 18%-20% >20%
L`]Yn]jY_][gklg^]imalqakZjgY\dqafdaf]oal`*(),d]n]dk& Equity discount rate (%)
This may seem surprising if the trend of interest rates during
l`]hYkll`j]]q]Yjkak[gfka\]j]\&:]lo]]f>]ZjmYjq*(),Yf\ 2014 2017
EYj[`*()/$l`]jakc%^j]]jYl] a&]&$l`])(%q]Yj_gn]jfe]fl
Zgf\qa]d\!\][j]Yk]\^jge0&/lg.&1&L`akaehda]kl`Yl ]ph][lYlagf`Yn]k]]fYfaf[j]Yk]afl`][gklg^[YhalYd$o`ad]
people are expecting relatively higher premiums for equity sectors that had a relatively higher return expectation have
afn]kle]flkgn]jYf\YZgn]l`]jakc^j]]jYl]'_gn]jfe]fl k]]fY\][daf]&L`akY_Yafaehda]kYdYj_]jaehY[lg^hgdala[Yd$
Zgf\knak%€%nako`YloYk]ph][l]\af*(),&L`]kmjn]qYdkg j]_mdYlgjqYf\eY[jg][gfgea[^Y[lgjkgfgn]jYddZmkaf]kkjakck
^gmf\l`Yll`]Yn]jY_]Y\bmkle]fl^gjmfkqkl]eYla[jakc oal`d]kk]jaehY[lg^k][lgjkh][aÕ[jakck&>gjafklYf[]$l]d][ge
j]hj]k]fl]\Zql`]ÉYdh`YÊ^Y[lgj!`Yk_gf]mh\mjaf_l`] oYkYegf_l`]`a_`]klYf\AL'AL=KoYklgoYj\l`]dgo]j]f\
same period thereby indicating that participants are perhaps afl`][gklg^]imalq[`Yjl\mjaf_l`]hj]nagmkkmjn]q$ZmlZgl`
j]lYafaf_l`]]imalqeYjc]ljakchj]eameYlkaeadYjd]n]dkZml l`]k]k`a^l]\`Yn]k`a^l]\egj]lgoYj\l`]ea\\d]g^l`]jYf_]
eYcaf_Za__]j[gehYfq%kh][aÕ[Y\bmkle]flk& in the current study.
Afl]j]klaf_dq$l`][gklg^]imalqY[jgkkk][lgjkYhh]Yjklg L`]`a_`]kl[gklg^]imalqakafl`]j]Yd]klYl]k][lgj$^gddgo]\
`Yn][gfn]j_]\Èk][lgjkl`Yl`Y\Yj]dYlan]dqdgo]jj]lmjf Zq=H;Yf\gadYf\_Yk&L`]dgo]kl[gklg^]imalqakfgl]\af
l`]>E;?Yf\[YhalYd_gg\kk][lgjk&L`]lj]f\af[gklg^]imalq
Y[jgkkk][lgjkakk`gofaf;`Yjl*Z]dgo&
Chart 2 - Cost of equity - industry-wise
19.0% 17.8
18.0%
Discount rate (%)

16.8
17.0% 15.4 15.5 15.9
16.0% 15.0 15.1 15.3 15.4
14.1 14.5
15.0% 13.6 13.7 13.7 13.9
14.0%
13.0%
12.0%
11.0%
10.0%
k
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Industry
. | India cost of capital survey
Trends in cost of equity :Yk]\gfl`]j]khgfk]kYkk`gofaf[`Yjl,$l`]na]o^gjl`]
f]pl)0Ç*,egfl`kYdkgk]]eklg^gddgoYkaeadYjlj]f\$oal`
About half of the respondents believed that their cost of equity the cost of capital largely expected to remain the same. About a
has remained the same in the past 18–24 months. About 15% quarter of the respondents expected it to decrease by <2% and
of the respondents noted an increase of <2% in their cost of about 14% expected the rate to go up by <2%.
equity and nearly an equal proportion felt it has decreased by
4* j]^]j[`Yjl+!&Alakafl]j]klaf_lgfgl]l`Yll`]eYbgjalqg^
Chart 4 - Movement in cost of equity
the respondents considered their cost of equity to have either over the next 18-24 months
remained the same or increased despite policy changes that
have resulted in a reduction in interest rates. 1% Increase by <2%
1%
Increase by 2%-4%
9k\ak[mkk]\]Yjda]j$l`akaf\a[Yl]kl`Yl[gehYfa]kY\bmkl]\
14% Increase by 4%-6%
l`]ajeYjc]ljakchj]eamegj[gehYfq%kh][aÕ[jakchj]eame
24% Increase by >6%
so that their overall cost of capital captures their assessment 9%
g^jakc&L`akYdkg]eh`Ykar]k[gehYfa]kÌY^ÕfalqlgYf Remain same
3%
gj_YfarYlagfYd`mj\d]jYl]Ykghhgk]\lgjYl]kl`YlYj]^gjemdY% Decrease by <2%
1%
based.
Decrease by 2%-4%
Decrease by 4%-6%
Chart 3 - Movement in cost of equity 47%
over the past three years Decrease by >6%
Any other trend
1%
6% Increase by <2%
Increase by 2%-4%
14%
Increase by 4%-6%
16%
10% Increase by >6%
Remained same
4%
1% Decrease by <2%

48% Decrease by 2%-4%

Decrease by 4%-6%
Decrease by >6%

India cost of capital survey | /

 2. Basis of
estimating
cost of equity

How does India Inc. decide its cost O`Yl[gehYfq%kh][aÕ[^Y[lgjkYj]

of capital? used to adjust cost of equity?
L`]kmjn]q]klYZdak`]kl`]lj]f\l`Yl]e]j_]\afl`]Õjkl 9kh]jl`];9HEl`]gjqg^\ak[gmfljYl]]klaeYlagf$l`]jakck
]\alagfg^l`]kmjn]qÈl`Yll`]eYbgjalqg^[gehYfa]k Yjgmf\ l`Yl[gehYfa]kYj]^Y[]\oal`[YfZjgY\dqZ]hmlaflglog
,*![gflafm]lghj]^]jmkaf_Yfgj_YfarYlagf%kh][aÕ[`mj\d] Zm[c]lkÈkqkl]eYla[jakckYf\mfkqkl]eYla[jakck&Kqkl]eYla[
jYl]Ykl`]aj[gklg^[YhalYd J]^]j[`Yjl-!&L`]hjghgjlagf jakckg^Y[gehYfqYj]\]h]f\]flgfl`]jakcg^l`]gn]jYdd
of respondents that use the CAPM approach has increased eYjc]l'af\mkljqYf\[YfZ]]daeafYl]\Zq\an]jkaÕ[Ylagfg^
^jge*(afl`]]Yjda]j]\alagflgYZgml*/fgo&9kmjhjakaf_ afn]kle]fl&@go]n]j$mfkqkl]eYla[jakckYj]kh][aÕ[lgl`]
j]n]dYlagfakl`]mk]g^ZYfcd]f\af_jYl]$oal`f][]kkYjq company and not based on factors that affect the overall
Y\bmkle]flk$YkY_ma\Yf[]lg\]l]jeafaf_l`][gklg^[YhalYdZq eYjc]lgj]n]fl`]af\mkljq&L`]j]^gj]$mfkqkl]eYla[jakck
almost 20% of the respondents . [YffglZ]]daeafYl]\Zq\an]jkaÕ[Ylagf&
O`ad]kqkl]eYla[jakckYj]j]hj]k]fl]\ZqZ]lY$o`a[`akhYjl
g^\ak[gmfljYl]]klaeYlagfYkh]j;9HE$mfkqkl]eYla[jakck
Chart 5 - Methods for arriving at discount rate
are represented by alpha. There are various factors that could
necessitate an alpha adjustment to the cost of capital. The
2%
CAPM
j]khgf\]flka\]flaÕ]\[gehYfq%kh][aÕ[jakckj]hj]k]fl]\Zq
cfgofgjYfla[ahYl]\[gf\alagfkYll`]lae]g^]nYdmYlagfYkl`]
9% Organization speciÕc hurdle
Za__]kl^Y[lgj$^gddgo]\Zql`]kar]g^l`][gehYfq
rate/ IRR/ Thumb-rule rate
27% J]^]j[`Yjl.!&
Bank lending rate (with
19% adjustments, if any) Kge]g^l`]j]khgf\]flkaf\a[Yl]\l`Yl^gj]pngdYladalq$eYjc]l
kar]$_jgol`ghhgjlmfalqdafc]\lgeYjc]l_jgol`Yf\daima\alq
Built-in discount rate (starting
with a base rate adjusted for Yj]kge]gl`]j^Y[lgjkl`YlYj]Y\bmkl]\o`ad]\]l]jeafaf_l`]
various discounts/premiums) cost of equity.
43%
Other methodologies Chart 6 - Factors (alpha) responsible for adjustment
in discount rate
25% 23

20%
18
Responses*(%)

15 15
15% 12
9
10%
4
5% 2 2

0%
Alpha factors
Size of company/ project Stage of development /
gestation period
Stake under consideration
Distressed situation All of the above
Company/project speciÕc None of the above
risk factors
Conservativeness / Any other factor
Aggressiveness of projections
*Multiple answer options could be selected
8 | India cost of capital survey
How much is this alpha
adjustment?
More than three-fourths of the respondents considered an
Ydh`YY\bmkle]flmhlg,$oal`YZgml,+afl`](Ç*
jYf_]Yf\v+-afl`]*Ç,jYf_]&9Zgml).j]khgf\]flk
[gfka\]j]\YfY\bmkle]flg^egj]l`Yf, j]^]j[`Yjl/!&

Chart 7 - Quantum of alpha adjustment

50%
45% 43

40% 36
35%
30%
25%
20% 15
15%
10% 5
5% 1
0%
Adjustment in discount rate (%)

0%-2% 2%-4% 4%-7% >7% None

India cost of capital survey | 1

 3. Gl`]j<;>
parameters

Enterprise vs. equity level Chart 9 - Use of DCF for valuation analysis
discounting
As a primary tool
9dalld]gn]j/(g^l`]j]khgf\]flkkmjn]q]\\ak[gmfll`][Yk`
22% 18% In combination with
ÖgokYll`]]flalqd]n]d j]^]j[`Yjl0!&
other methods like
Afk][lgjkkm[`Yk>E;?$YmlgegZad]$[gfkljm[lagfeYl]jaYd companies/
transaction
Yf\\an]jkaÕ]\af\mkljaYdhjg\m[lk$0(gjegj]j]khgf\]flk
multiples
kmjn]q]\\ak[gmfll`][Yk`ÖgokYll`]]fl]jhjak]d]n]d&Af
k][lgjkkm[`Yk:>KAYf\afkmjYf[]$dg_akla[k$Yf\hgo]jYf\ Only for
mladala]k$Yld]Ykl--j]khgf\]flk\ak[gmfll`][Yk`ÖgokYll`] 60% benchmarking
equity level. purposes

Chart 8 - Equity level vs. enterprise level

Typical forecast period and

terminal value
29% Equity Level NYdmYlagfmkaf_l`]<;>YhhjgY[`afngdn]klog[gehgf]flkÈ
l`]nYdm]g^[Yk`Ögok^gjl`]]phda[al^gj][Yklh]jag\Yf\l`]
Project/ enterprise level l]jeafYdnYdm]g^[Yk`Ögok&
71%
L`]]phda[alh]jag\akl`]h]jag\^gjo`a[`j]YkgfYZdq\]lYad]\
forecasts can be prepared. More than half of the respondents
k`go]\Y[d]Yjhj]^]j]f[]^gj[gfka\]jaf_Yf]phda[al^gj][Ykl
h]jag\g^Õn]q]Yjk^gjl`]<;>YfYdqkakZ]^gj]Yhhdqaf_l`]
l]jeafYdnYdm] j]^]j[`Yjl)(!&L`]j]eYafaf_j]khgfk]k

How are DCF techniques Yj]]n]fdqkhdalZ]lo]]f+q]Yjk$)(q]YjkYf\Égl`]jk&Ê

;gehYfa]kl`YleYc]mhl`]Égl`]jkÌ[Yl]_gjqogmd\hjaeYjadq
used to evaluate investment Z]l`gk]l`Yl]nYdmYl]Õfal]%dan]\hjgb][lkYf\mk]\l`]Y[lmYd
j]eYafaf_hjgb][lda^]Ykl`]^gj][Ykl`gjargf&
opportunities?
Hj]^]j]f[]^gjYÕn]q]Yj^gj][Yklh]jag\Zql`]eYbgjalqg^
9Zgml0(g^l`]j]khgf\]flk[gfka\]j]\l`]<;>e]l`g\ the respondents indicates that they typically consider this to be
af[geZafYlagfoal`l`]gl`]je]l`g\kkm[`Yk[gehYfa]k' l`]h]jag\^gjo`a[`j]daYZd]]klaeYl]k[YfZ]hj]hYj]\oal`Y
ljYfkY[lagfemdlahd]kgjmk]\algfdq^gjZ]f[`eYjcaf_hmjhgk]k reasonable basis.
J]^]j;`Yjl1!&GfdqYZgml)0g^l`]j]khgf\]flkmk]\<;>
YfYdqkakYkl`]hjaeYjqZYkak^gjeYcaf_afn]kle]fl\][akagfk&
L`akakfglkmjhjakaf_Z][Ymk]o`ad]<;>akoa\]dq[gfka\]j]\
Ykl`]egklk[a]flaÕ[g^l`]nYdmYlagfe]l`g\k$eYjc]l%ZYk]\
methods that consider actual trading multiples and metrics at
o`a[`j]YdljYfkY[lagfk`Yn]lYc]fhdY[]Yj]]ehaja[Yde]l`g\k&
9[geZafYlagfg^e]l`g\kk]]eklgogjcZ]kloal`ÕfYf[]
professionals.

10 | India cost of capital survey

 Chart 10 - Forecast period Terminal growth rate
L]jeafYd_jgol`akl`]dgf_%l]jeklYZd]_jgol`Ylo`a[`Y
16% 13% [gehYfq]klaeYl]klg_jgoZ]qgf\l`]]phda[al^gj][Yklh]jag\&
L`]Yn]jY_]dgf_%l]jeklYZd]_jgol`jYl]^gjAf\aYfZmkaf]kk]k
Ykkm__]kl]\Zql`]j]khgf\]flkakYhhjgpaeYl]dq,&- J]^]j
16% [`Yjl)*!&L`akakZjgY\dqafdaf]oal`l`]]ph][l]\dgf_%l]je
afÖYlagfjYl]afAf\aY&9Zgmlgf]%l`aj\g^l`]j]khgf\]flk
kmjn]q]\Z]da]n]\l`Yll`]dgf_%l]jeklYZd]_jgol`afAf\aYak
-$o`ad]YimYjl]jg^l`]j]khgf\]flk]klaeYl]\allgZ]afl`]
55%
range of 2%–4%. Almost 15% of the respondents estimated the
dgf_%l]je_jgol`lgZ]/gjegj]&L`akYhhjgY[`eYqZ]\m]
3 years 5 years 10 years Other lgaf\mkljqgj[gehYfq%kh][aÕ[^Y[lgjk&

Chart 11 - Terminal value methodology Chart 12 - Long-term stable growth rate applied
to compute terminal value
40%
9% 37
Gordon Growth 35%
Perpetuity Model
30% 27
44% Exit Multiple
Responses (%)

Method 25%
47%
Others 20%

15%
10 10
10% 7
6
5% 3

0%
Terminal value is an estimate of the potential value that can
0%-2% 2%-4% 5% 6% 7% 8% >8%
be generated by the company/project once it operates at
Terminal growth rate (%)
klYZd]d]n]dkh]jh]lmYddq&Afegkl[gehYfa]k$l`]l]jeafYd
or perpetuity value accounts for a large part of the overall
[gehYfqnYdm]&L`]kmjn]qj]khgf\]flko]j]]n]fdq\ana\]\
gfl`]logegkl%oa\]dqY\ghl]\YhhjgY[`]klg]klaeYlaf_l`]
l]jeafYdnYdm]È?gj\gf?jgol`H]jh]lmalqEg\]dYf\l`]=pal
Emdlahd]E]l`g\ j]^]j[`Yjl))!&

India cost of capital survey | 11

 4. Cost of
capital in an
international
context

How does India’s cost of capital Chart 13 - Difference in discount rate, for investing
in India vis-a-vis investment in developed countries
compare with that of developed
35%
countries? 30% 29%
Responses (%) 26%
L`]j]khgf\]flko]j]Ykc]\YZgmll`]\a^^]j]f[]af\ak[gmfl 25%
jYl]$e]Ykmj]\af\gddYjl]jek$^gjafn]klaf_afAf\aYnak%Y%nak 20% 16%
15%
afn]klaf_af\]n]dgh]\[gmflja]kkm[`Ykl`]MK$l`]MCYf\ 15% 10%
?]jeYfqÈa&]&$l`]af[j]e]flYdjYl]^gjAf\aYYk[gehYj]\lg
10%
km[`[gmflja]koal`gml[gfka\]jaf_l`]afÖYlagf\a^^]j]flaYd& 5%
5%
About one-third of the respondents considered this difference
lgZ]Z]lo]]f,Yf\/$o`ad]YZgmlgf]%^gmjl`h]__]\alaf 0%
None 0%-2% 2%-4% 4%-7% >7% Others
the 2%—4% range. The overall average differential in the cost
of capital for investing in India vs. other developed countries is Difference in discount rate
v, j]^]j[`Yjl)+!&

Country parameters used when

Ej&9koYl`<Yeg\YjYfakYhjg^]kkgjg^[gjhgjYl]
ÕfYf[]Yf\nYdmYlagfYll`]Kl]jfK[`ggdg^:mkaf]kk$
F]oQgjcMfan]jkalqYf\akYj]fgof]\Yml`gjalqgf
valuation theory.
@akeg\]dg^]klaeYlaf_[gmfljqjakchj]eameakZYk]\
gfÕjkl]klaeYlaf_l`]\]^Ymdlkhj]Y\g^l`][gmfljq
ZYk]\gf]al`]jg^l`]^gddgoaf_e]l`g\k2
Y! Local currency sovereign rating for the country from
Moody’s
investing outside India
O`]f[gfka\]jaf_afn]kle]flkgmlka\]Af\aY$egj]l`Yf`Yd^
g^l`]j]khgf\]flkmk]\l`]lYj_]l[gmfljqÌkjakc%^j]]jYl]Yf\
eYjc]ljakchj]eame^gj]klaeYlaf_l`][gklg^]imalq&9Zgml
+(g^l`]j]khgf\]flkhj]^]jj]\lgmk]Af\aY%kh][aÕ[\ak[gmfl
jYl]hYjYe]l]jk j]^]j[`Yjl),!&Kge]g^l`]j]khgf\]flk
preferred to use discount rate parameters of the US or the
[gmfljq^jgeo`]j]l`]^mf\af_ak\gf]&

Z! ;<Kkhj]Y\^gjl`][gmfljq Chart 14 - Discount rate parameters considered

while investing outside India
L`]j]Y^l]j$l`]\]^Ymdlkhj]Y\ak[gfn]jl]\aflgY
[gmfljqjakchj]eameZqk[Ydaf_allgj]Ö][l`a_`]jjakc
g^]imalqafl`]mf\]jdqaf_eYjc]lj]dYlan]lgl`]\]^Ymdl
15%
khj]Y\$a&]&$[gehYjaf_l`]]imalqj]lmjfnk&j]lmjfgf
government bonds in the country.

:Yk]\gfl`akeg\]d$l`][gmfljqjakchj]eameg^ 31% 54%

Af\aY[gehYj]\lgl`Ylg^l`]MK$Ykkm__]kl]\ZqEj&
<Yeg\YjYf&

Source: www.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xls
(updated as at 05 January 2017)
Target/ investee country India Other

12 | India cost of capital survey

 5. Start-ups

What additional premium would Chart 15 - Additonal premium applied while

valuing start-ups in India
you consider applying to the
discount rate while investing in a 40% 36
35%
start-up? 30% 27
Respondents (%)

Many corporates in India have evaluating the prospect of 25%

19
afn]klaf_afklYjl%mhklgca[c%klYjl_jgol`gjYkY`]\_af_ 20%
kljYl]_q&@go]n]j$afn]kle]flkafklYjl%mhkYj]jakca]jYkegkl 15%
10
g^l`]eYj]]Yjdq%klY_][gehYfa]koal`dalld]j]n]fm]k$fg 10%
hjgÕlYZadalqYf\`a_`]jegjlYdalqjYl]k&@]f[]$afn]klgjk[YfZ] 5
5% 3
expected to demand a premium to invest in them.
0%
L`]Yn]jY_]Y\\alagfYdjakchj]eamekm__]kl]\Zql`]
j]khgf\]flkakYhhjgpaeYl]dq0&9Zgml+.g^j]khgf\]flk
kmjn]q]\^]dll`YlYfY\\alagfYdjakchj]eameafl`](lg-
Additional premium applied while valuing start-ups
jYf_]k`gmd\Z][gfka\]j]\^gjklYjl%mhk j]^]j[`Yjl)-!$o`ad]
a quarter of the respondents considered it in the 5%–10% range.
9Zgml)0j]khgf\]flk^]dll`YlY)(Ç*(Y\\alagfYdjakc
premium should be applied to start-ups. Only 8% respondents
^]dll`Yll`]Y\\alagfYdjakchj]eame^gjklYjl%mhkk`gmd\Z] “Technology is creating unprecedented
over 20%. What is surprising to note is that almost 10% of the
j]khgf\]flk^]dll`YlfgY\\alagfYdjakchj]eamek`gmd\Z]
business disruptions to the traditional
considered for start-ups. businesses leading to increased M&A
\]Ydkkh][aÕ[Yddq^g[mk]\gfY[imajaf_
[YhYZadala]klg`]dh_jgo[gj]Zmkaf]kk]k&
Strategic acquisition of start-ups calls
for thorough evaluation of the potential
kqf]j_a]kY_YafkljakckYkkg[aYl]\oal`
technology and business integration.”

—Ashish Basil
HYjlf]j$LjYfkY[lagf9\nakgjqK]jna[]k$
Ernst & Young LLP

India cost of capital survey | 13

 About the survey

GZb][lan]
L`]j]Yj]k]n]jYdl`]gja]kYf\]pl]fkan]ojal]%mhkgf`go
[gklg^[YhalYdak_]f]jYddq[gehml]\Ykh]jl`]<;>e]l`g\&
@go]n]j$alakafl]j]klaf_lgÕf\gmla^Yf\`gol`]k]l`]gja]k
Yj]Y[lmYddqYhhda]\afl`]j]Ydogjd\&L`akkmjn]qoYk
mf\]jlYc]foal`l`YlhjaeYjqgZb][lan]Yf\Ydkglgk]]`go[gkl
g^[YhalYd]klaeYlagf_]lkaehY[l]\ZqAf\aY%kh][aÕ[^Y[lgjk&
This survey is an exhaustive study on the prevailing industry
practices of estimating cost of capital for valuing companies
Yf\'gjhjgb][lko`]feYcaf_[jm[aYdZmkaf]kk\][akagfkkm[`
YkY[imajaf_'\an]klaf_$[gf\m[laf_afl]jfYdj]kljm[lmjaf_
]p]j[ak]k$dYmf[`af_f]ohjgb][lkYf\Ykk]kkaf_hjgb][l
hjg_j]kk&L`]hmjhgk]oYklga\]fla^ql`]hjY[la[YdYkh][lk'
considerations that determine the cost of capital in India and to
imYfla^qkge]g^l`]k]Ykh][lk&>mjl`]j$l`][mjj]flkmjn]qakY
^gddgo%mhlgl`]*(),klm\qlgYkk]kk[`Yf_]k$a^Yfq$afl`]k]
methodologies and industry practices over the last three years.
HjgÔd]g^j]khgf\]flk
Egklg^l`]im]klagfko]j]j]lYaf]\^jgel`]hj]nagmk]\alagf
g^l`]kmjn]q&O]YdkgY\\]\Y^]oim]klagfkZYk]\gfafhml'
^]]\ZY[cj][]an]\^jgel`]j]khgf\]flkg^l`]hj]nagmkkmjn]q
Yf\Y^]of]ogf]klghjgna\]Y\\alagfYdafka_`lkaflgl`]eaf\%
k]lg^\][akagf%eYc]jkYlgj_YfarYlagfko`]f]klaeYlaf_l`]aj
cost of capital/equity. As an improvement over the 2014 edition
g^l`]kmjn]q$o]Y\\]\kge]af\mkljq%kh][aÕ[im]klagfk^gj
k][lgjkkm[`YkYmlgegZad]k$h`YjeY[]mla[Ydk$j]Yd]klYl]Yf\
telecommunications.
Eg\]g^kmjn]q
L`]im]klagffYaj]oYkk]flgmllgl`]j]khgf\]flkaf]d][ljgfa[
^gjeYll`jgm_`Ykmjn]qdafc&
Afl`]]d][ljgfa[^gjeYl$o][gmd\YmlgeYl]k]d][lagfk^jge
\jgh%\gofZgp]kkgl`Ylgfdqgf]Yfko]j[gmd\Z]k]d][l]\
mfd]kkemdlahd][`ga[]ko]j][gfk[agmkdqYddgo]\!Yf\fg
im]klagfakkcahh]\&@]f[]$Yddl`]h]j[]flY_]Õ_mj]kj]hj]k]fl
responses to a particular question and a proportion of the
overall respondents.

The principal respondents belonged to functions such as ;gn]jY_]

ÕfYf[]$Zmkaf]kkhdYffaf_Yf\[gjhgjYl]kljYl]_qYf\e]j_]jk
L`]=QNYdmYlagf:mkaf]kkEg\]ddaf_ N:E!l]Yej]Y[`]\
and acquisitions. They represented a mix of Indian enterprises
out to various companies across industries for this survey
Yf\emdlafYlagfYd[gehYfa]k$af[dm\af_dakl]\[gehYfa]kYf\
Z]lo]]fFgn]eZ]j*().Yf\>]ZjmYjq*()/&O]k]flYkmjn]q
private companies. We tried to contact the respondents from
dafclg[gdd][lafhmlk^jge)+-;>GkYf\'gjk]fagje]eZ]jk
l`]hj]nagmk]\alagfYf\YdkgYhhjgY[`]\f]oj]khgf\]flk^gj
g^;>GkÌl]YekY[jgkkk][lgjkkm[`YkYmlgeglan]$\an]jkaÕ]\
l`]ajna]ok&
af\mkljaYdhjg\m[lk$ZYfcaf_Yf\ÕfYf[aYdk]jna[]k$>E;?$
Im]klagffYaj] =H;$AL'AL=K$e]\aYYf\]fl]jlYafe]fl$dg_akla[k$gadYf\_Yk$
h`YjeY[]mla[Ydk$hgo]jYf\mladala]k$j]Yd]klYl]Yf\l]d][ge&
L`]im]klagfko]j]hj]hYj]\oal`Y[`ga[]g^Yfko]jkafY
emdlahd]%[`ga[]^gjeYl&>gjim]klagfko`]j]l`]Yfko]jghlagfk
o]j]fgl[gehj]`]fkan]$j]khgf\]flko]j]hjgna\]\oal`Y
[gee]flZgp^gjl`]ajna]ok&

14 | India cost of capital survey

Gmjg^Õ[]k
9`e]\YZY\
2ndÖggj$K`anYdacAk`YYf
F]Yj;&F&Na\`qYdYqY
9eZYoY\a
Ahmedabad - 380 015
L]d2 #1)/1..(0+0((
>Yp2 #1)/1..(0+1((
:]f_Ydmjm
.th$)*th & 13thÖggj
M:;alq$;YfZ]jjY:dg[c
Fg&*,NallYdEYddqYJgY\
:]f_Ydmjm%-.((()
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Lgo]j;$+j\>dggj$
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:]ffa_YfY`Ydda$C&J&HmjYe$
:]f_Ydmjm$CYjfYlYcY-.(().
L]d2 #1)0(./*/-(((
>Yp2 #1)0(****11),
;`Yf\a_Yj`
1st>dggj$K;G2)..%)./
K][lgj1%;$EY\`qYEYj_
;`Yf\a_Yj`%).(((1
L]d2#1))/*++)/0((
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Chennai
La\]dHYjc$.th/th>dggj
9:dg[c Eg\md].()$/()%/(*!
Fg&,$JYban?Yf\`aKYdYa
LYjYeYfa$;`]ffYa%.(())+
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<]d`aF;J
?gd^Na]o;gjhgjYl]Lgo]j:
K][lgj,*$K][lgjJgY\
Gurgaon - 122 002
L]d2 #1))*,,.,,(((
>Yp2 #1))*,,.,,(-(
3rd.th>dggj$Ogjd\eYjc%)
A?A9ajhgjl@gkhalYdalq<aklja[l
9]jg[alq$F]o<]d`a%))((+/
L]d2#1)))../)0(((
>Yp#1)))../)1111
4th & 5th>dggj$HdglFg*:
Lgo]j*$K][lgj)*.
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?YmlYe:m\`FY_Yj$M&H&
L]d2 #1))*(./)/(((
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@q\]jYZY\
GnYdG^Õ[]$)0$aDYZk;]flj]
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Hyderabad - 500 081
L]d2 #1),(./+.*(((
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BYek`]\hmj
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India cost of capital survey | 15
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