Estimating the Cost of Capital of a Listed Indian Tyre Manufacturer

The aim of this paper was to estimate the cost of capital of GDS Limited for five Financial Years and compare with two other competitors. An average WACC of 12.07 per cent in a 66 basis point band is not that interesting, it's the production that matters. GDS is funded with over 4/5 equity and that is the reason for the discount rate being so stable, the narrowness of the beta, the small size of the tax shield, and the reason why it's sandwiched between CRUISE Tyres and VESP when ranked on peers. The best part of the analysis is the comparison with CRUISE Tyres because it reinforces the ratio-based comparison between the two companies done by Kumar (2025) which came to a similar conclusion about the conservatism being practised by GDS. CRUISE reduced its debt by 40% over a period of five years while its cost of capital increased by 182 basis points. This does not reflect poorly on the CRUISE project that had valid reasons for reducing debt arising from their previous European growth. However, this is one of the key points of trade-off theory illustrated through empirical evidence: it is very useful to reduce debt immediately. The use of debt is cheaper than equity after tax considerations; thus, a firm that reduces its debt will make profit from its safety. The value-added criterion suggests that a low cost of capital is not necessarily an advantage. Return on capital of GDS is consistent but not impressive, and it is below the WACC for three out of five years and cyclically. During the period under review, the key constraints on value creation for GDS were operational rather than financial, which are attributable to high raw material costs and inability to charge higher prices due to competition in the replacement market. It is impossible to reduce costs through lower prices. The cost of capital analysis does reveal the availability of unused financial slack in GDS, and losing the tax shield would be a tangible cost rather than a theoretical one, especially considering low returns on capital. The analysis reveals how dependent the answer is on the assumptions made by the analyst. The financing effect was effectively isolated because the same unlevered beta and market risk premium were used for all three firms, but this is based on the assumption that the three firms have the same level of business risk. Sensitivity analysis revealed that minor variations in input parameters do not alter the results, but a change of 150 basis points in the hurdle rate alters the acceptability of the project.  

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