Aman Chowhan Warns Crude Oil Prices Pose Major Risk to Indian Corporate Earnings

Abakkus Asset Manager’s Aman Chowhan highlighted crude oil as the dominant macroeconomic risk for Indian corporate earnings, citing potential 100–200 bps margin pressure despite near-term monsoon stability, according to a July 2024 analysis.

Why is Crude Oil a Major Concern for Corporate Earnings?

Crude oil prices remain the “real risk” for corporate margins, according to Aman Chowhan, head of portfolio management at Abakkus Asset Manager. Even with potential easing of geopolitical tensions, oil prices could stay elevated around $80 per barrel, he said. “March quarter was fine due to inventory. June will show the impact. We see a 100–200 bps hit from higher oil prices,” Chowhan explained during an ET Now interview.

This aligns with data from the International Energy Agency (IEA), which projected Brent crude prices to average $83 per barrel in 2024, up 12% from 2023 levels. The Reserve Bank of India (RBI) has also warned that persistently high oil prices could erode corporate profit margins by 15-20% in the second half of the fiscal year.

How Are Sector Allocations Shifting in Response?

Chowhan’s team has rebalanced portfolios toward defensive sectors, emphasizing renewables, pharma, and domestic manufacturing. “We are buying renewables—solar, wind, ethanol. That is a key theme,” he stated. This mirrors broader market trends: the Nifty Renewable Energy Index has risen 22% year-to-date as of July 2024, according to BSE data.

Meanwhile, the IT sector remains underweight. “We exited IT six months ago. No hurry to re-enter. Upside is limited,” Chowhan said. This caution reflects concerns about AI-driven efficiency gains undermining India’s low-cost IT advantage, a theme echoed in a June 2024 Morgan Stanley report on global tech sector risks.

What Does This Mean for Investor Strategy?

Chowhan’s approach prioritizes sectors insulated from input cost pressures. “Demand is holding up well,” he noted, but margins face “key pressure” from rising metal prices. This has led to increased allocations in capital market-linked businesses like wealth management and broking, which offer “strong business models,” according to the analyst.

Foreign institutional investor (FII) activity remains a critical factor. While banking fundamentals are “good,” FII selling continues to weigh on sentiment. Chowhan emphasized FCNR (Foreign Currency Non-Resident) deposits as a positive currency driver, citing potential 12-15% returns with leverage.

What Sectors Offer Tactical Opportunities?

Chowhan identified chemicals, defense, and select engineering stocks as “areas of interest” supported by currency benefits and valuation comfort. This aligns with recent sector rotation trends: the Nifty Chemicals Index gained 18% in the first half of 2024, outperforming the broader Nifty 50 index, according to Bloomberg data.

Infrastructure remains “neutral” due to fiscal pressures from higher oil prices, while NBFCs and private banks are favored over public sector banks. This mirrors the RBI’s June 2024 Financial Stability Report, which highlighted stronger balance sheets in private banks compared to state-owned institutions.

What’s the Outlook for Earnings Revisions?

Visibility on FY27 earnings remains limited, with companies still assessing impacts. “Earnings revision is yet to happen. Companies themselves are unsure of the impact,” Chowhan said. This uncertainty comes as the Nifty 50 earnings revision index has shown mixed signals, with 42% of companies revising forecasts downward in Q1 FY2024, according to S&P Global Market Intelligence.

Despite near-term margin pressures, Chowhan maintains a “constructive view on demand,” particularly in discretionary and durable goods sectors. However, he warned that higher metal prices could weigh on profitability in the short term, a concern echoed by the Federation of Indian Chambers of Commerce and Industry (FICCI) in its June 2024 industrial outlook.