Understanding Beta, Equity Risk Premium, and Company Risk Premium

In equity valuation, three key concepts often create confusion for investors: beta, the equity risk premium (ERP), and the company-specific risk premium (CRP). Together, these drive the cost of equity, which directly impacts how we value stocks.

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1. Beta – Market Risk

Beta measures a stock’s sensitivity to the overall market. If the market goes up by 1%, a stock with:

• Beta > 1 usually rises by more than 1% (more volatile than the market).

• Beta < 1 usually rises by less than 1% (less volatile than the market).

• Beta ≈ 1 tends to move in line with the market.

Important: Beta captures systematic risk (linked to the market), not company-specific problems. A stock can underperform massively over 5 years and still have a beta above 1 if it tends to move sharply with market cycles.

Understanding the Gordon Growth Model (GGM) Through Shriram Finance & IndusInd Bank

Investors often struggle to evaluate whether a bank or financial stock is cheap, fairly valued, or expensive. Traditional valuation metrics like P/E ratios can be misleading in financials, where Return on Equity (ROE) and Book Value (BVPS) growth drive long-term value. This is where the Gordon Growth Model (GGM) provides an elegant framework.

In this article, we’ll:

• Break down how GGM works for banks.

• Use Shriram Finance (FY22–FY25) as a real-world case study.

• Apply the model to project potential IndusInd Bank valuations by FY27 under different ROE scenarios.

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🔹 The Gordon Growth Model Refresher

The GGM is derived from the Dividend Discount Model but adapted for banks, where P/BV multiples are closely linked to profitability.

The formula for justified P/B multiple is:

$P/B = \frac{ROE - g}{r - g}$

Where:

• ROE = Return on Equity

• g = Sustainable growth = ROE × Retention ratio

• r = Cost of Equity (typically 12% in India)

👉 The intuition: Banks that deliver higher ROE relative to their cost of equity deserve higher P/B multiples.

Can Rajiv's Background help Indusind Bank recover its Valuation multiple

Rajiv Anand’s background is actually a quiet but important edge for IndusInd right now. Let’s break it down point-wise:

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1. Equity research background

• Early in his career, Rajiv spent time in equity research and capital markets before moving into banking/AMC.

• This gave him direct exposure to how analysts and investors model banks: what line items they reward (e.g. ROA, ROE, NIM stability, fee income quality, provisioning discipline) and what red flags crush valuation (e.g. weak governance, opaque disclosures, asset-quality surprises).

• That lens is not common for most career bankers — but it is second nature for Rajiv.

Oil discovered in hell

Warren Buffett Warns Markets Aren’t Always Rational, Says If There Was ‘Oil Discovered in Hell’ Then ‘All of the Oil Men’ Would March There.

Warren Buffett, the chairman and CEO of Berkshire Hathaway (BRK.B) (BRK.A), has often used parables and anecdotes to illustrate deeper truths about markets and human behavior. One of the more memorable is the story passed down from his mentor Benjamin Graham: “Oil discovered in hell.” The phrase comes from an old story Graham told to explain why investment professionals often act in ways that defy rational analysis. In the tale, an oil prospector arrives at the gates of heaven, only to be told by St. Peter that the compound reserved for oil men is already full. The prospector asks for permission to say just four words to those inside. Granted the chance, he shouts, “Oil discovered in hell.” At once, the entire group of oil men rushes off, leaving heaven’s gates open. When St. Peter offers the prospector a place inside, the prospector hesitates, saying he may as well join the others — after all, there might be some truth to the rumor. 

Will Durant's 10 Greatest Thinkers

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🌏 Confucius (551–479 BCE) – Chinese philosopher

• “It does not matter how slowly you go, so long as you do not stop.”

• “Our greatest glory is not in never falling, but in rising every time we fall.”

• “When it is obvious that the goals cannot be reached, do not adjust the goals, adjust the action steps.”

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🏛️ Plato (427–347 BCE) – Greek philosopher

• “The greatest wealth is to live content with little.”

• “An unexamined life is not worth living.”

• “Courage is knowing what not to fear.”

CAN INR appreciate to 65 vs USD

Considering the shaken confidence of the world in USD, all thanks to its gigantic money printing and Trump policies, INR appreciating to USD is not a fiction and can be a reality even though everyone alive today has seen only the opposite of this phenomenon. But given the backdrop of whats happening with USA and its 37+ trillion debt going out of hand why can't a country like India which is growing the fastest, is politically stable and ticking the right policy boxes get stronger relatively on currency front or at least get disparity to its PPP a little less. 

In terms of PPP USD is 21 while on exchange rate it is 88. This results in a disparity factor of ~4.2. China has diparity factor of 1.8x, Japan 1.1x, Germany similar.

Rank	Economy	Economic Type	Estimated Ratio (PPP ÷ Market)
1	India	Emerging	≈ 4.0×
2	China	Emerging	≈ 1.8×
3	United States	Advanced	≈ 1.0×
4	Japan	Advanced	≈ 0.9–1.1×
5	Germany	Advanced	≈ 1.0–1.2×
6	UK	Advanced	≈ 1.1×
7	France	Advanced	≈ 1.0–1.2×
8	Brazil	Emerging	≈ 2.0–3.0×
9	Italy	Advanced	≈ 1.0–1.2×
10	Canada	Advanced	≈ 1.0×