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If you are a shareholder in HMT Limited’s (NSEI:HMT), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
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An interpretation of HMT’s beta
HMT’s five-year beta of 1.09 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, HMT will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could HMT’s size and industry cause it to be more volatile?
HMT, with its market capitalisation of ₹34.38B, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, HMT also operates in the machinery industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of HMT’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is HMT’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 HMT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. HMT’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of HMT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, HMT’s beta value conveys the same message.