For Monnet Ispat and Energy Limited’s (NSEI:MONNETISPA) 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 every stock is exposed to the same level of market risk, and the market as a whole represents a beta value 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.
View our latest analysis for Monnet Ispat and Energy
An interpretation of MONNETISPA’s beta
With a beta of 1.51, Monnet Ispat and Energy is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, MONNETISPA 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 MONNETISPA’s size and industry impact its risk?
With a market cap of ₹2.98B, MONNETISPA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, MONNETISPA’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 is consistent with MONNETISPA’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can MONNETISPA’s asset-composition point to a higher 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 examine MONNETISPA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. MONNETISPA’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. Thus, we can expect MONNETISPA 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.