If you are looking to invest in Tamilnadu Telecommunications Limited’s (NSEI:TNTELE), 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. 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. 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.
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An interpretation of TNTELE’s beta
Tamilnadu Telecommunications’s beta of 0.5 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. TNTELE’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does TNTELE’s size and industry impact its risk?
With a market cap of INR ₹61.21M, TNTELE falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, TNTELE’s industry, communications equipment, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the communications equipment industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both TNTELE’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can TNTELE’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 test TNTELE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, TNTELE seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect TNTELE 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 outcome contradicts TNTELE’s current beta value which indicates a below-average volatility.