Wind-Fall?
In this edition: Analysing kahan upar aur kahan niche, windfall profits on the high? and as always moti vaato
Positive GDP figures and improved manufacturing PMI data for the first quarter of this fiscal year played a crucial role in bringing an end to a five-week losing streak for the benchmark indices. This positive momentum persisted despite concerns such as a weak monsoon, increasing crude oil prices, and a mixed performance in global markets.
During the week, the BSE Sensex saw a 0.77% increase, equivalent to a gain of 500.65 points, closing at 65,387.16. The Nifty50 also performed well, with a 0.87% increase, representing a rise of 169.5 points, and closing at 19,435.30.
What stood out in this period was the stronger performance of broader indices compared to benchmark indices. Specifically, the BSE Mid-cap index gained 2.3%, the BSE Small-cap index surged by 3.8%, and the BSE Large-cap index showed a more modest gain of 1%.
Indian stocks showed robust performance during the week. Major indices like the BSE-30 and the NSE-50 delivered weekly returns of nearly 1%. Interestingly, mid-cap and small-cap Indian indices outperformed their larger counterparts. In terms of sectors, the BSE Metals and BSE Realty indices saw significant weekly gains, surpassing 5%. Additionally, sectors like BSE Commodities, BSE Auto, BSE Capital Goods, and BSE Power also recorded healthy weekly gains. On a less positive note, the BSE FMCG index reported negative returns.
India's actual GDP growth for the first quarter of fiscal year 2024 stood at 7.8%. In the immediate future, market observers are expected to closely monitor the effects of a deficient monsoon in August and the increasing price of crude oil.
Looking at specific sectors, the BSE Metal index recorded an impressive 6% increase, followed by the BSE Realty index with a gain of 5.7%. The BSE Telecom index also showed a notable rise of 4.5%, while both the BSE Power and Auto indices registered gains of 3.4% each. Conversely, the BSE FMCG index experienced a slight decline of 0.5%. The BSE Small-cap index performed strongly, surging by 3.8%.
Market Movers
1. Coal India Output Up By 13% In August, Stands At 52.3 MT
In August 2023, Coal India produced 52.3 million metric tonnes of coal, marking a significant increase of 13.2% compared to the previous month's output of 46.2 million metric tonnes. The company also reported that coal supplies surged by 15.3% in August 2023, reaching 59 million metric tonnes, up from 51.2 million metric tonnes in the same month of the previous fiscal year.
For the fiscal year 2023–24 so far, the state-owned coal miner has produced a total of 281.5 million metric tonnes, reflecting an impressive 11.1% year-on-year growth.
Furthermore, the overall coal supply from April to August 2023 rose by 8%, totaling 305.5 million metric tonnes, compared to 283.1 million metric tonnes during the same period in the previous year. In August, coal supplies to the power sector increased by more than 8%, reaching nearly 47 million metric tonnes, compared to 43.6 million metric tonnes in the same month last year. The company supplied 1.515 million metric tonnes per day to the power industry, surpassing the mandated obligation of 1.44 million metric tonnes per day.
During the April–August 2023 period, coal-fired power plants received 248.7 million metric tonnes of coal from Coal India, a modest 2% increase from the 243.5 million metric tonnes received a year ago.
As of the end of August, Coal India's pithead coal inventory stood at a comfortable 45.3 million metric tonnes, which is a substantial 46% increase compared to the 31 million metric tonnes at the same time last year.
2. Gold Shines Bright As India's Forex Reserves Experience Slight Dip
According to the latest data from the Reserve Bank of India (RBI), India's foreign exchange reserves have slightly decreased for the second consecutive week. As of the week ending August 25, 2023, the country's foreign exchange reserves amounted to USD 594.85 billion, showing a decline of USD 30 million compared to the previous week.
This follows a significant drop in India's foreign exchange reserves during the week ending on August 18, 2023, when they fell by USD 7.28 billion to USD 594.90 billion.
A closer look at the data, as reported in the Weekly Statistical Supplement by the RBI, reveals that foreign currency assets (FCAs) decreased by USD 538 million during the week, bringing the total FCAs to USD 527.24 billion. FCAs encompass the value of foreign currencies like the euro, pound, and yen, and their fluctuations against the US dollar can influence India's forex holdings.
On a positive note, gold reserves increased by USD 530 million, reaching a total of USD 44.35 billion. This rise in gold reserves could offer some stability in light of the volatile currency markets.
Special Drawing Rights (SDRs) declined by USD 11 million, settling at USD 18.19 billion, while India's reserve position in the International Monetary Fund (IMF) decreased by USD 12 million, amounting to USD 5.06 billion.
3. Windfall Tax On Petroleum Crude Reduced; Export Of Diesel Tax Increased
The Indian government has made notable changes to the tax rates for petroleum products, which took effect on September 2, 2023.
In a recent notification, the Indian government confirmed a reduction in the windfall tax or special additional excise duty on petroleum crude from Rs 7,100 per metric tonne to Rs 6,700 per metric tonne. This adjustment is aimed at easing some of the financial burden on consumers who are dealing with higher fuel costs.
Additionally, the government has increased the windfall tax on diesel exports from Rs 5.50 per litre to Rs 6 per litre. This change is expected to boost government revenue by targeting exceptionally high profits in the energy sector.
Furthermore, there has been a substantial hike in the duty on jet fuel, also known as aviation turbine fuel (ATF), doubling it from Rs 2 per litre to Rs 4 per litre. This adjustment may impact the aviation industry, potentially leading to increased expenses for airlines and, consequently, air travel.
It's important to note that these tax rate adjustments are not fixed but will be reviewed fortnightly, with changes based on the average oil prices observed over the previous two weeks. The windfall profit tax is aimed at oil producers and imposes levies on profits earned above a specified threshold, which is currently set at USD 75 per barrel.
India's introduction of windfall profit taxes aligns with global trends targeting extraordinary profits generated by energy companies. This taxation policy, which was initiated on July 1, 2022, has resulted in significant government revenue, estimated at around Rs 40,000 crore in the fiscal year 2023.
Recent global oil prices have surged to their highest levels in over six months, exceeding $88 per barrel. This increase in prices is primarily attributed to supply cuts implemented by OPEC and its cooperating nations, collectively known as OPEC+.
Motabhai ni Moti Vaato
Following five consecutive weeks of declines, the market saw a significant turnaround on September 1, driven by several positive factors. These included a robust economic growth rate of 7.8% for the first quarter of the fiscal year 2023–24, a three-month high in manufacturing PMI at 58.6, and record-high auto sales for August. Additionally, China's efforts to stimulate its real estate sector and overall economy, along with growing optimism that the Federal Reserve might pause its rate hike cycle due to improving labour market data, contributed to the renewed positive sentiment in the market. It's worth noting that the benchmark indices experienced volatility with a negative bias in the first four sessions of the week.
Looking ahead to the week starting September 4, experts anticipate the market to trade within a range and maintain a consolidative mood, with more focus on individual stocks. This is in light of the ongoing momentum in the broader markets. Key areas of interest will include services PMI figures, US job data, oil prices, and institutional investments.
Following the release of strong manufacturing PMI data, which reached a three-month high of 58.6 in August (up from 57.7 in July), the focus now shifts to the upcoming services PMI data for August, scheduled to be disclosed on September 5. Analysts anticipate that the numbers may be lower than the impressive 62.3 reported in July. Additionally, composite PMI figures for August will also be unveiled on the same day.
Furthermore, on September 8, we can expect the release of bank loan and deposit growth data for the fortnight ending August 25, along with foreign exchange reserves data for the week ending September 1.
Global investors will closely monitor the US labour report in the coming week. The labour market has demonstrated resilience thus far, with non-farm payrolls for August coming in at 187,000 jobs, slightly above analyst expectations of 180,000. However, there have been indications that the economy might be slowing down. As job data for June and July were revised downward, the unemployment rate increased to 3.8% in August, surpassing estimates of 3.5%. Furthermore, the S&P Global Manufacturing PMI dropped to 47.9 in August from 49 in July, although it was better than the expected 47. Additionally, ISM manufacturing new orders for August stood at 46.8, down from 47.3 in the previous month and below expectations of 48.
As a result, many experts anticipate that the Federal Reserve will maintain its current interest rates at its upcoming policy meeting later this month. Market participants will also closely monitor the movement of the 10-year Treasury yields, which remained largely flat at 4.19 on a week-on-week basis, as well as the performance of the US dollar index, which rose by 0.67% to 104.26 week-on-week.
Experts anticipate that crude oil prices, which rebounded after two weeks of losses in the week ending September 11, are likely to remain elevated in the upcoming week. Several factors have contributed to this upward trend, including supply constraints, expectations of potential production reductions, OPEC countries and their allies extending production cuts, and China's better-than-expected manufacturing PMI figures. Additionally, stimulus measures aimed at bolstering the economy have fueled the recent surge in oil prices. Furthermore, a substantial drawdown of 10.6 million barrels in US crude oil inventories for the week ending August 25 provided further support to oil prices.
Brent crude futures surged by over 5.5%, reaching $88.99 per barrel, while WTI crude oil experienced a significant increase of 7.5%, reaching $86 per barrel. Market observers will closely monitor the movements in oil prices, recognising that higher oil prices pose a potential risk for oil-importing countries like India.
The increasing yields on US Treasury bonds and the strength of the US dollar index continued to have a negative impact on foreign institutional investor (FII) inflows in August. During this month, FIIs were net sellers in the cash segment, with net sales amounting to Rs 20,621 crore, following significant buying in the preceding three months. Experts believe that FIIs might shift back to being buyers if there are corrections in US bond yields and the US dollar index. However, such corrections are contingent on the Federal Reserve considering a pause in its rate hike cycle during upcoming policy meetings.
In contrast, domestic institutional investors (DIIs) offset the FII outflow by purchasing shares worth over Rs 25,000 crore in August. In fact, DIIs have played a crucial role in providing substantial support to the market.
Word Wise
Windfall Tax
A "Windfall Tax" is a levy imposed on businesses that are believed to have generated exceptionally high profits, often due to unusually favourable market conditions. These taxes are implemented by governments to boost their tax income for a specific year by retrospectively increasing taxes on companies or sectors that have unexpectedly benefited from these windfall gains.
A windfall A tax is a higher tax that the government levies on specific industries when they unexpectedly generate profits that are significantly above the norm. The term "Windfall" denotes an abrupt and substantial increase in earnings, while the term "Tax" signifies a charge imposed on this sudden surge in income.
When the government observes a sudden and substantial rise in a particular industry's earnings, it introduces this tax. However, these increased revenues typically cannot be attributed to the company's deliberate actions, such as its business strategies or expansion efforts. Instead, a windfall Tax is imposed on a sector's profits when they experience a sharp uptick in revenue due to external factors unrelated to the company's efforts.
To put it simply, when someone makes unexpected or unusually high profits, we call these profits "Windfalls." Taxes applied to these Windfall Profits are called Windfall Taxes. These taxes are designed to collect money from individuals or businesses that benefit from a new or unexpected situation or event. For instance, the ongoing crisis between Russia and Ukraine could be seen as such a situation. Importantly, this tax has nothing to do with a company's regular production processes or their carefully planned strategies.
It's worth noting that a Windfall Tax is typically a one-time tax and is applied retrospectively, meaning it's added on top of the regular tax rate. Traders often mention windfall taxes when discussing the stock market and products whose prices are highly volatile.
Companies and industrial firms that have seen substantial profit hikes, usually because of factors like war, scarcity of commodities, and other events that drive up prices, could face windfall taxes.
Similarly, individuals who come into sudden windfalls, such as inheritances or lottery winnings, may also be subject to taxation.
In recent years, there has been a substantial rise in prices for gasoline, crude oil, natural gas, and coal. Factors like the COVID-19 pandemic and the Ukraine-Russia conflict have intensified this price surge. Consequently, energy companies have seen significant profits, while consumers are now facing much higher energy costs.
In response to this situation, the UN Secretary-General has encouraged nations to introduce windfall taxes on companies that have greatly profited from the increased prices of fossil fuels. As a result, several countries, including the UK, Germany, India, and others, are contemplating the implementation of Windfall Taxes.
I hope you enjoyed this week’s edition!
Please don’t forget to Like and Share!
Much Love!
Aavta Rehjo!
Motabhai.