For Gujarat NRE Coke Limited’s (NSEI:GUJNRECOKE) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures GUJNRECOKE’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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An interpretation of GUJNRECOKE’s beta
With a five-year beta of 0.97, Gujarat NRE Coke appears to be a less volatile company compared to the rest of the market. This means that the change in GUJNRECOKE’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. GUJNRECOKE’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could GUJNRECOKE’s size and industry cause it to be more volatile?
A market capitalisation of ₹1.54B puts GUJNRECOKE in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, GUJNRECOKE also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap GUJNRECOKE but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by GUJNRECOKE’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is GUJNRECOKE’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine GUJNRECOKE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, GUJNRECOKE seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of GUJNRECOKE indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what GUJNRECOKE’s actual beta value suggests, which is lower stock volatility relative to the market.