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If you are a shareholder in Shree Renuka Sugars Limited’s (NSE:RENUKA), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. RENUKA is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. 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 RENUKA’s beta
Shree Renuka Sugars’s five-year beta of 1.83 means that the company’s value is expected to be more volatile than average. Based on this beta value, RENUKA may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could RENUKA’s size and industry cause it to be more volatile?
With a market cap of ₹24.13b, RENUKA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, RENUKA operates in the food industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of RENUKA, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests RENUKA should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How RENUKA’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test RENUKA’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, RENUKA appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect RENUKA to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This is consistent with is current beta value which also indicates high volatility.