The average cost of equity for the Indian telecom sector has reduced to 14percent in 2017 from 15.8 percent cost of equity recorded in 2014. The reduction is commensurate to the fall in interest rates over these three years, according to the latest release of EY’s Cost of Capital– India Survey for the Telecom Sector.
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.
EY said that 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.
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 percent to 4percent, which is lower than the overall average across other sectors. Additionally, 80 percent 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.
The survey 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. EY said that 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.
By Baishakhi Dutta
