Corporates in India are incurring increased cost of capital unlike the developed world, mainly due to higher interest rates, says a survey.
Global consultancy EY found that cost of capital varied across sectors, with real estate and telecom segments perceived to incur the highest cost. FMCG and IT/ITES sectors are perceived to be at the lower end of the range.
As per the survey, almost half of the respondents felt that cost of capital has increased in India over the past three to four years.
"The cost of capital in India is higher as compared to the developed countries... The average difference in the cost of capital for investment in India is 3.6 per cent when compared to developed countries," the survey titled 'India's cost of capital' released today said.
A company's cost of capital generally has two components -- debt and equity costs, and proportion of debt and equity funds in its capital structure (debt equity ratio or leverage).
"... The cost of capital has been steadily increasing in India over the past few years. This is due to many factors including a significant rise in inflation and perceived risk in the economy," it said.
EY Partner (Transaction Advisory Services) Navin Vohra said it is not surprising since India has witnessed a significant rise in interest rates and inflation during the last few years, "unlike developed countries, which opted for a reduction in risk free rates to drive monetary stimuli".
The conclusions are based on more than 250 response sets from Chief Financial Officers (CFOs) and/or senior members of CFO teams. Respondents were spread across diverse sectors including automotive, banking & financial services, FMCG, media and entertainment, real estate, retail and telecom.
As per the survey, around half of the respondents adjust their cost of capital downwards for investing in projects that contain sustainability parameters like pollution control or green energy.
For overseas expansion or acquisitions funded out of India, the majority of respondents expect returns that are based on Indian parameters.
This could make Indian acquirers less competitive in instances where they are evaluating potential targets in developed countries and competing with potential acquirers from developed nations with a lower cost of capital, Vohra noted.
