For Sun Pharmaceutical Industries Limited’s (NSEI:SUNPHARMA) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as SUNPHARMA. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels of market risk. A popular measure of market risk for a stock is its beta, 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 Sun Pharmaceutical Industries
What does SUNPHARMA’s beta value mean?
With a five-year beta of 0.09, Sun Pharmaceutical Industries appears to be a less volatile company compared to the rest of the market. 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. SUNPHARMA’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.
Does SUNPHARMA’s size and industry impact the expected beta?
A market capitalisation of ₹1.12T puts SUNPHARMA in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. Furthermore, the company operates in the pharmaceuticals industry, which has been found to have low sensitivity to market-wide shocks. Hence, investors should expect a lower beta for larger companies operating in a defensive industry in contrast with higher beta for smaller firms in a more cyclical industry. This is consistent with SUNPHARMA’s individual beta value we discussed above. Next, we will examine the fundamental factors which can result in a more defensive nature of a stock.
Is SUNPHARMA’s cost structure indicative of a high 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 SUNPHARMA’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, SUNPHARMA seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect SUNPHARMA to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto SUNPHARMA. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Sun Pharmaceutical Industries’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for SUNPHARMA’s future growth? Take a look at our free research report of analyst consensus for SUNPHARMA’s outlook.
- Past Track Record: Has SUNPHARMA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SUNPHARMA’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.