Brexit effect: What’s in store for Indian firms?

Unlike last year, when news of Britain’s exit from the European Union created panic in the market, British Prime Minister Theresa May signing the letter to trigger Brexit did not rankle the Indian bourses much.

While it is still early days to gauge its real effect, Indian companies and sectors such as auto, metals, IT and tours, and travel, that a have a notable exposure to the region are likely to see some impact in the days to come.

The Indian IT sector, faced with multiple challenges, is already bracing itself for a tough ride with US tightening its visa norms. Brexit only adds to the growing uncertainty in the business environment for the IT companies. Of the $108-billion of the IT industry’s estimated exports in 2015-16, 17 per cent was to the UK and about 11.4 per cent to other nations within the EU. For large Indian IT companies, over a fourth of their revenues come from Europe, in particular from the UK.

Currency has always been a wild card for the IT sector. Wild swings in the pound vis-à-vis dollar and the rupee, will also impact revenues and profits for Indian IT companies. The British pound revenues make for 10-15 per cent of the overall revenues in the case of TCS, Tech Mahindra and Wipro. For Infosys, GBP revenue makes for 6.7 per cent of the overall revenue.

With pound depreciating sharply over the past year, dollar revenues of Indian IT companies have been under pressure. The pound has also depreciated over 20 per cent against the rupee. This can reduce cost arbitrage for companies outsourcing to the UK.

Indian auto manufacturers exporting to the UK and Europe, and some auto component manufacturers having manufacturing facilities and clients in the region, may also have to brace themselves for some uncertainty in their businesses.

Tata Motors and Motherson Sumi are a case in point. With the Jaguar Land Rover (JLR) business based in the UK, concerns arise for Tata Motors on two fronts. For one, Europe contributes about 25 per cent of the global sales for JLR. Although a depreciation of the pound versus the Euro is a positive, there is uncertainty, post Brexit, on the competitiveness of exports, once the tariffs are renegotiated.

Motherson Sumi, on the other hand, receives about 50-60 per cent of its consolidated revenues from the Europe and the UK. A slowdown in these regions could impact earnings.

Aside from IT and auto, pharma companies that have a meaningful presence in the region, can be impacted. Besides UK, Europe is the second-largest pharma market in the world. For companies in the travel and tours space such as Cox & Kings, Europe is the largest market, contributing more than two-thirds of its consolidated sales and profit.

With Brexit adversely impacting the UK steel industry’s favourable access to the EU, Indian companies such as Tata Steel could see some impact. Tata Steel Europe has a big presence in the UK and derives substantial revenue from sales in the EU.