If you are a shareholder in Uttam Galva Steels Limited’s (NSEI:UTTAMSTL), 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 every stock is exposed 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.

See our latest analysis for Uttam Galva Steels

What does UTTAMSTL’s beta value mean?

Uttam Galva Steels’s beta of 0.91 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. UTTAMSTL’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

How does UTTAMSTL’s size and industry impact its risk?

A market capitalisation of ₹2.16B puts UTTAMSTL in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, UTTAMSTL also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by UTTAMSTL’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Can UTTAMSTL’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 test UTTAMSTL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. UTTAMSTL’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 UTTAMSTL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what UTTAMSTL’s actual beta value suggests, which is lower stock volatility relative to the market.