Question

I want to measure the equity risk premium for a Manufacturing Company in India. What is the most appropriate method ?

Answer 1

Whatever the industry, just take a matured market ERP, say US ERP, and add on INDIA country risk premium to it and you're done!

Answer 2

Thanks ...how do i get a country specific risk premium ???????....I found out the us ERP for march

Answer 3

You can find out what is the default spread for indian sovereign bonds and multiple it by the volatility of the returns of the indian stock market divided by the volatlity of the returns on the indian gov. issued bond market.

Answer 4

To get the country risk premium, I would suggest to start with the INDIA sovereign rating and find out the spread attached to such a rating. Let's suppose INDIA's rating is B+ and let's assume that the spread to apply to that rating is 3.5%, you scale this spread (as pointed out by Fsbatista) with the relative volatility of equity and bond in Indian market so that to get the premium for equities. Assuming once more that the bond market volatility is 20% and the equity volatility is 30%, then the country risk premium would be 3.5% * 30%/20% = 5.75%!!!
Hope it helps.