If you are looking to invest in Reliance Communications Limited’s (NSEI:RCOM), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures RCOM’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed 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.

See our latest analysis for Reliance Communications

What is RCOM’s market risk?

Reliance Communications has a beta of 1.13, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, RCOM 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 RCOM’s size and industry impact its risk?

With a market cap of ₹39.55B, RCOM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the wireless telecom industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of RCOM, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests RCOM should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can RCOM’s asset-composition point to a higher 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 RCOM’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%, RCOM 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 RCOM 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, RCOM’s beta value conveys the same message.