If you are a shareholder in Orchid Pharma Limited’s (NSEI:ORCHIDPHAR), 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 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 Orchid Pharma
What is ORCHIDPHAR’s market risk?
Orchid Pharma’s beta of 0.96 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in ORCHIDPHAR’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, ORCHIDPHAR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could ORCHIDPHAR’s size and industry cause it to be more volatile?
ORCHIDPHAR, with its market capitalisation of ₹983.06M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the pharmaceuticals 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 ORCHIDPHAR, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from ORCHIDPHAR’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can ORCHIDPHAR’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 ORCHIDPHAR’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%, ORCHIDPHAR 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 ORCHIDPHAR 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. However, this is the opposite to what ORCHIDPHAR’s actual beta value suggests, which is lower stock volatility relative to the market.