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Average cost of equity for the telecom sector reduces to ~14%; a decline of ~1.8% from 2014: EY Report

Cost of equity for telecom decreases from 15.8% in the previous survey in 2014; in line with a decline in interest rates.

·         Cost of equity for telecom compares favorably with the overall India cost of equity of ~15%. 

New Delhi, 1 June 2017: According to the latest release of EY’s Cost of Capital – India Survey for the Telecom Sector, the average cost of equity for the Indian telecom sector in 2017, is ~14%, a drop from the 15.8% cost of equity recorded for the sector in the previous survey in 2014. This reduction is commensurate to the fall in interest rates over these three years.

The survey also highlights that the quantum of alpha adjustments made by companies in the sector, i.e. adjustments to the discount rate to take into account additional risks, appears to have increased since the previous survey. A significant portion of these adjustments were made to take into consideration the changes in the competitive landscape and regulatory challenges. 

Another finding specific to the telecom sector points out that about half the respondents apply additional premium when estimating discount rate for participation in regulatory auctions. Interestingly, all the respondents in the current survey believe that the long-term stable growth rate for the telecom sector is in the range of 2% to 4%, which is lower than the overall average across other sectors. Additionally, 80% of telecom respondents use a forecast period of 10 years for project evaluation, as against the preference of using upto a 5 year forecast period among the non-telecom respondents. 

Navin Vohra, Partner and Leader – Valuations and Business Modelling, EY, says, “EY – Cost of Capital – India Survey 2017 has provided an overall snapshot on the current trends, levels and best practices relating to this important financial parameter. Our endeavour now is to analyse each sector in detail, both on a temporal basis, and in comparison to other sectors, to provide meaningful data points to the finance practitioners in each sector.” 

The cost of capital survey India 2017 is focused on understanding the threshold cost of equity that India Inc. used for its capital allocation and investment decisions and the process by which practicing finance professionals in the industry make capital costing decisions. The survey results for the telecom sector covered response sets from finance professionals in companies across the telecom sector and had representation from listed, unlisted, domestic and multinational companies.

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