This Risk Should Have You 200x More Worried Than Terrorism

Dec 8, 2015

In this issue:
» Cement prices to fall more?
» Which companies have the largest MF portfolio?
» ...and more!
Ankit Shah, Research analyst

Last evening, I was returning home from a Mumbai suburb. Usually, I prefer to commute by train. But a friend offered to give me a ride on his motorbike, and I agreed. By the time I reached home, my head was hurting, my eyes were burning, and I felt very fatigued.

I wonder how many others in chaotic, congested, highly polluted cities around the world go through this ordeal. I am alarmed every time I read news reports about escalating health risks and premature deaths on account of air pollution.

As per the revised estimates released by the World Health Organization (WHO) in 2014, exposure to air pollution was responsible for more than seven million deaths in 2012. In other words, air pollution is the cause of one in every eight deaths globally. These findings confirm that air pollution is the world's largest single environmental health risk.

Air pollution is a much bigger threat to mankind than terrorism. Consider these statistics:

In 2014, 32,727 people were killed by terrorists. Between 2006 and 2014, the total number of fatalities due to terrorist attacks worldwide was 161,834 (Statista 2015).

This is not to undermine the threat of terrorism. But shouldn't a threat 200 times more fatal get more attention?

And we should worry even more, as Asia faces the worst air pollution hazards, with China and India witnessing the highest number of fatalities.

It is estimated that air pollution leads to one-sixth of all Indian deaths. As per WHO, India accounts for 13 of the world's 20 most polluted cities. And the leader of the pack is Delhi.

As the pollution levels have reached alarming levels, the air pollution debate is getting louder in the capital city. And the capital's government may soon have to take drastic measures to bring air pollution levels under control.

While air pollution harms us as individuals in a society, it would be a serious mistake to ignore this threat as an investor. Remember, businesses do not operate in isolation. They are engaged in a continuous, dynamic interaction with various factors and stakeholders in an economy.

Have you considered how the threat of air pollution could have a direct or indirect impact on your stock investments? Here are some questions that may be worth probing when you evaluate a potential investment...

  • Do the company's business operations cause air pollution?
  • Is the management actively taking steps to adopt cleaner and greener technologies and manufacturing processes?
  • Does your company belong to an industry that has restrictions on capacity expansions due to its highly polluting nature?
  • Does the industry face the risk of tighter regulation and restrictions due to its polluting nature?
  • Can government policies and regulations aimed at curbing air pollution affect the business dynamics of an industry? Consider the auto industry for instance. If governments take measures to boost public transportation and create disincentives to own and drive private vehicles, how would that alter the dynamics of the auto industry? How would it impact car sales? How would it impact investments in railways and public transport?
  • Which businesses will benefit on account of greater public and government awareness of the risks of air pollution?

These are some preliminary questions that you must start to consider. Be on the lookout for visionary promoters and managements who are preparing to proactively respond to the challenges arising in the business environment. In the coming weeks, I will write about more such risks that are transforming the business landscape and are likely to impact your stock returns.

How do you think the increasing threat of air pollution could directly or indirectly impact your investments? Let us know your comments or share your views in the Equitymaster Club.

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2:25 Chart of the day

Stocks of cement majors ACC and Ambuja Cements are hovering around their 52-week lows; down by about a fourth and third from their respective yearly highs. As the Mint reported, a dealer survey conducted by Karvy Stock Broking indicates that average cement prices have declined to levels of Rs 300 a 50 kg bag. This is largely on the back of weak demand from the rural markets (which forms about 40% of the market). Poor monsoons coupled with the slowdown in real estate construction are other key factors that have led to this.

Cement prices: Which Way Will They Go?

Today's chart of the day indicates the trend in cement prices over the past six quarters. The decline has been sharp in the year till date, with prices falling by about 6%.

In the July-September quarter, most cement players saw their cement sales volume decline significantly. The sector capacity utilization rates averaged around 65%, which is significantly lower than optimal levels. The ongoing sluggishness in the housing sector is likely to keep the short term growth prospects muted. But once the economy rebounds, cement demand picks up and utilisation rates improve, cement companies are expected to witness a substantial rebound in profitability.

When it comes to valuations, stocks of cement majors are trading in the range of 20x to 38x their trailing twelve month earnings. However considering that earnings have been depressed in the year gone by and the cyclical nature of this business, this would not be the right metric to use. As per us, the enterprise value per tonne is an ideal indicator (enterprise value = market capitalisation + net debt). This metric we use as consolidation is imperative in this sector. And if a company were to be bought over, the likely price at which one would be interested in acquiring this business would be dependent on its replacement cost. Thus, evaluating a cement company on the basis of EV/tonne does bring in a lot of clarity. As a ballpark figure, one can presume the replacement cost to be around US$ 130 per tonne of capacity.


We recently visited a company which very much impressed us; one that has a very strong track record, an asset light model, and possesses market leadership in the business it is present in. What is a slight concern however is its cash and cash equivalent position. It stands at about three-fourths of its balance sheet. On asking the company's plans on utilizing the same, the response we got was not one that was very convincing. It may seem that there is no immediate plan in place. While such high cash holding does put the company in a very strong position to shield itself from any slowdown, it also would have a toll on its overall return ratios. Not to mention that such cash accumulation could also lead it to make a move that would hamper the quality of its existing core business. While this particular company's management seems to be clear on sticking to what it knows (a very good sign indeed), investors would do well to be concerned about such cases for their investment prospects. Here's a list of companies which have the largest mutual fund investments (in terms of size).

Companies with largest MF investments


At the time of writing, the Indian equity markets were trading weak with the Sensex down by about 90 points or 0.4%. Stocks from the mid and small cap segments were not in favour as well as their representative indices were marginally lower. While energy and metal stocks were least favoured, those belonging to the FMCG and IT spaces were amongst the preferred lot.

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"Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and it's price fluctuations is a key factor in his or her ultimate investment success or failure." - Seth Klarman

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2 Responses to "This Risk Should Have You 200x More Worried Than Terrorism"

R Tayal

Dec 10, 2015

The problem is primarily this: State Governments in India can't run anything efficiently & honestly. Left to the private sector alone, profit/greed motive puts paid to an economical delivery to the public at large. PPP model fails because good & honest private sector will find it impossible to work with governments. This in a nutshell is the crux of poor public transport in India, which is the biggest cause of spiraling pollution. Lest I am regarded too cynical, let us explore how to beat this vicious circle - to my mind ultimately it boils down to improving Indians' character, which unfortunately will not happen overnight. It can only happen over a period of time, that too if we have at least a certain minimum number of honest & committed politicians who are willing to fight against all odds & persevere in making governments' working clean so as to attract the good & honest private sector to participate in creating an efficient public transport having substantial capacity.


Balakrishnan R

Dec 8, 2015

I feel comparing deaths due to terrorist attacks and that due to environment pollution is meaningless. You have to keep in mind that the terrorist deaths happened after so many governments spending enormous money in safe guarding against terrorist attacks. In the case of pollution, most of polluting industries has come out of western countries. For your information, their energy requirement is reducing year by year. You have to compare per capita consumption of energy by western countries and that of China and India. That does not mean that we should not take any steps against pollution. Of course, we should employ pollution control means to reduce emission levels.

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