ESTIMATING COST OF CAPITAL FOR INDIAN SOLAR PROJECTS | APRIL 2018

The everchanging business landscape in India makes it essential for investors to constantly re-evaluate cost of capital as against relying on static benchmarks. This report examines different methodologies and related risk issues for estimating risk-adjusted cost of capital for solar projects in India.

The Capital Asset Pricing Model (CAPM) and market multiples method are not appropriate for the sector in our view. We prefer the cost build up method, which uses a suitable proxy market return indicator as a benchmark and makes incremental adjustments for various risk parameters. We have used three different benchmark indicators – DISCOM debt, INVIT trading yield and US solar project yield expectations – to arrive at a range of estimates for cost of capital.

Figure : Cost of capital estimates using different approaches

Source: BRIDGE TO INDIA research
Note: All estimates are shown on post-tax basis at project level (pre-tax for investors).