NBFCs and Private Banks Outperform PSU Banks, Says Abakkus Asset Manager

In a recent market assessment, Aman Chowhan of Abakkus Asset Manager highlighted a shifting landscape for Indian financials, noting that Non-Banking Financial Companies (NBFCs) and private banks are better positioned than Public Sector Undertaking (PSU) banks. While the broader economy shows resilience, macro variables like crude oil prices are set to become the primary driver of corporate earnings volatility.

Crude Oil: The Dominant Macro Risk for Earnings

While many investors focus on monsoon patterns, Chowhan argues that crude oil is the more significant threat to the Indian economy. He suggests that even if geopolitical tensions subside—such as through a potential deal with Iran—oil prices could remain stubbornly high around the $80 mark.

This sustained pricing poses a direct threat to corporate profitability. While the March quarter remained stable due to existing inventory, the impact of higher energy costs is expected to manifest in the June quarter. Chowhan estimates a potential 100–200 bps hit to margins due to elevated oil prices. Consequently, the primary risk for many sectors is not a decline in demand, which remains robust, but rather a squeeze on margins.

Sectoral Shifts: Preference for Private Banks and NBFCs

Within the financial services sector, Chowhan maintains a constructive view on fundamentals, though he notes that Foreign Institutional Investor (FII) selling remains a significant headwind for sentiment. When comparing banking sub-sectors, he explicitly favors NBFCs and private banks over their PSU counterparts, suggesting they are better equipped to navigate the current macro environment.

In the consumption space, he remains bullish on discretionary spending and durables, driven by strong demand. However, he warns that rising input costs, particularly in metals, may weigh on short-term profitability. Conversely, he has turned neutral on the infrastructure sector due to the fiscal pressures that higher oil prices inevitably impose on government spending.

Defensive Plays and the AI Challenge in IT

As volatility increases, Chowhan’s portfolio positioning has shifted toward structural and defensive themes. He highlights renewables—specifically solar, wind, and ethanol—as key growth drivers. Additionally, he sees increased value in pharmaceutical stocks and domestic manufacturing.

In contrast, the IT sector remains a point of caution. Having exited IT positions six months ago, Chowhan sees limited upside due to valuation pressures and the structural disruption caused by Artificial Intelligence. He notes that while AI improves efficiency, it directly challenges India’s traditional competitive advantage: its low-cost labor model.

Tactical Opportunities and Currency Outlook

For investors seeking tactical plays, Chowhan identifies chemicals, defense, and select engineering stocks as attractive, benefiting from favorable currency movements and reasonable valuations. He also pointed to FCNR (Foreign Currency Non-Resident) inflows as a positive catalyst for the Indian Rupee, noting that attractive yields could draw significant foreign capital.

Key Takeaways