For Indowind Energy Limited’s (NSEI:INDOWIND) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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 market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
Check out our latest analysis for Indowind Energy
What does INDOWIND’s beta value mean?
Indowind Energy’s five-year beta of 1.37 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. Based on this beta value, INDOWIND can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does INDOWIND’s size and industry impact its risk?
A market capitalisation of ₹631.78M puts INDOWIND in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, INDOWIND operates in the renewable energy industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap INDOWIND but a low beta for the renewable energy industry. It seems as though there is an inconsistency in risks from INDOWIND’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is INDOWIND’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 INDOWIND’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, INDOWIND 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 INDOWIND 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. Similarly, INDOWIND’s beta value conveys the same message.