Stocks with exposure to UK, Europe bear the brunt

It was mayhem in the markets with stocks from sectors such as auto, tours and travel, airlines, pharma and metals reacting negatively to the news of Britain’s exit from the European Union.

Stocks such as Tata Motors, Motherson Sumi took it on the chin, closing the day with an 8 per cent fall. Metals were close behind too.

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 vs the Euro post Brexit could be positive for the company, the verdict brings uncertainty on the competitiveness of exports, once the tariffs are renegotiated. Secondly, as JLR imports about 30-40 per cent of its components from European countries, the company may face a squeeze in its costs and hence the margins.

While the exact numbers may vary depending on how the UK negotiates its trade agreements, reports available in the public domain suggest that JLR could face a decline of £1 billion in its pre-tax profits by 2020 if Britain returned to World Trade Organisation rules for trade with Europe.

That JLR has already taken steps towards setting up a plant in Slovakia, to cater to European demand offers some solace. It is expected to start production in late 2018. For Motherson Sumi, challenges come from the several manufacturing facilities and clients it has across Europe and the UK.

A slowdown in these regions could dent its prospects as the company receives about 50-60 per cent of its consolidated revenues from the Europe and UK.

Tata Steel closed 6 per cent lower as Brexit can adversely impact the UK steel industry’s favourable access to the EU. EU accounts for half of its exports. 

Tata Steel Europe has a big presence in the UK and derives substantial revenue from sales in the EU. Losing access to the European single market when steel demand has been growing at a modest rate, can be a further dampener for UK steelmakers. The World Steel Association has forecast EU steel demand to grow at 1.4 per cent this year, down from 2.8 per cent in 2015. 

 The uncertainty following the vote for Brexit, may also delay the sale of Tata Steel’s loss-making UK business.

The company recently sold its Scunthorpe plant (and other facilities) in the UK and is in the process of short listing a buyer for its Port Talbot plant. 

Tour operator Cox & Kings slipped more than 5 per cent. Europe is the company’s largest market, contributing more than two-thirds to its consolidated sales and profit. Woes in the continent — severe weather in the UK, terror attacks in Paris and Brussels, and now Brexit — have taken a toll on the stock over the past year or so.

Timeshare provider Mahindra Holidays too fell 3 per cent on the bourses. This seems to be due to worries about the Brexit impact on Finnish timeshare major Holiday Club Resorts in which Mahindra Holidays increased stake last year from about 23 per cent to 86 per cent.

Only recently has Holiday Club Resorts’ performance been on the mend; the uncertainty now in Europe seems to have renewed jitters.

Among the airline stocks, Jet Airways lost more than 4 per cent.

The airline derives the chunk — close to 60 per cent — of its revenue from international operations.

While the share from Europe is not specified, Jet Airways is the only Indian carrier besides Air India that operates long-haul international flights from India to Europe and beyond.

Shares of aluminium-major Hindalco closed 5 per cent lower on Friday, although aluminium prices were stable. Shares of Vedanta also dipped 7 per cent, possibly over concerns about its parent entity, UK-listed Vedanta.  

But the impact on domestic metal producers is likely to be minimal, particularly in the long run, due to the following factors.

One, while global demand does impact prices, many producers have seen a revival in local demand and hence improving revenues in spite of steep fall in realization.

Two, more than the EU and UK, China continues to be the main driver for global metal demand and prices.

With weak Chinese demand worries already factored in, room for further downside is limited.

Three, a strong dollar may be positive for metal producers and may boost earnings in rupee terms.

The pharma space showed nervousness too, with Aurobindo Pharma dropping 3.5 per cent. Besides UK, Europe is the second largest pharma market in the world.

Among the large sized pharma players, Aurobindo Pharma, Divis Laboratories and Torrent Pharma have a meaningful presence in this market, deriving over a sixth of their revenues from this region. Hence, weakness of the Euro may have an adverse impact on these companies.

However, given that most of these companies have a strong presence in the US market, the appreciation of US dollar against rupee and other major currencies may spell some relief to Indian pharma players.

Besides, while the exposure of large Indian pharma companies to the UK market may not be very significant, smaller players such as Dishman, Strides Shasun derive notable revenues from this market.

Steep depreciation of GBP against US dollar may have a negative impact on these companies.