Brexit: Indian firms may have to take a hit

Britain's exit, if it happens, would have a negative impact on the $108-billion IT sector

Brexit or referendum on Britain’s exit from European Union (EU) is likely to impact many Indian companies’ earnings, as British pound could fall sharply if the vote is in favour of exit. It could impact Indian companies’ revenue from the UK and the EU in the medium to long-term. Some estimates say pound could fall up to 20 per cent, impacting rupee though US dollar is rupee’ main anchor in the international currency market.

Tata Steel, Tata Motors, Tech Mahindra, Bharat Forge, Motherson Sumi, Infosys. Hindalco, Wockhardt, Mindtree, Indian depository receipts (IDR) of Standard Chartered Bank are the securities that could face an adverse impact of Brexit as they have their business operations in the UK and the European Union.

Jaguar Land Rover (JLR), the UK subsidiary of Tata Motors, estimates its annual profit could be cut by $1.47 billion by the end of the decade if Britain leaves the European Union, Reuters reported quoting two sources “familiar with the company’s thinking.”

The worst-case-scenario estimate is in internal document that were prepared by the firm’s chief economist, David Rea, to outline the possible consequences if Britons vote to leave the world’s biggest trading bloc in Thursday’s referendum. It gives an insight into the level of concern at a major company about the uncertainties of a future outside the EU, Reuters said.

According to analysts, rich valuations of Indian companies may see foreign portfolio investors getting extra cautious about their Indian portfolios in adverse situation created.

Anish Vyas, senior research associate, Choice Broking, said, “Basically rupee will be impacted due to Brexit’s impact on British currency pound. If pound falls, Indian companies dealing in pound would see their revenue fall.”

Madan Sabnavis, chief economist and Rucha Ranadive, associate economist, Care Ratings, in research note said, “Indian companies in Britain will be impacted and hence have to be watched. Several companies have set up shop in Britain for leveraging not just the local market but also the European markets for which Britain was a base camp. This will mean reworking business plans.”

IT industry body Nasscom said, “A negative implication of Brexit is that Indian IT companies may need to establish separate headquarters/operations for EU, leading to disinvestment from the UK and diversion of activity from the UK to EU,”.

Britain’s exit, if it happens, would have a negative impact on the $108-billion Indian IT sector in the short term, it added

“An initial analysis indicates that the impact on India’s technology sector may be mixed; clearly negative in the short-term and harder to discern in the longer-term with either scenario having some positive and some negative points,” Nasscom added.

Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities, in a strategy note said, “Indian market’s valuations are rich, the Indian market has done well versus other markets over most time periods. Most foreign portfolio investors view India as a preferred and stable market in an uncertain world given the powerful appeal of its macro-economic stability, ongoing economic and social reforms and long-term growth prospects. They will now have to grapple with India’s ‘Rexit’ and a possible ‘Brexit’ in the next few days.”

“Many emerging market investors believed that they could leave the India portion of their EM portfolios on auto pilot. They will now have to navigate through these implications,” Prasad said.

Reuters adds: JLR, which traces its history back to1922 and is headquartered in Coventry, central England, has also looked into opening a European office were Britain to quit the bloc, both sources said.

It has also put on hold starting major work on a plant in Slovakia announced in December as well as negotiations on a deal to lease property at Silverstone race track because of the uncertainty surrounding Thursday’s vote, they said.

The 1 billion pound decline in pre-tax profit by 2020 would apply if Britain returned to World Trade Organisation rules for trade with Europe, involving a 10 per cent tariff on exports and an in bound tariff of roughly 4 percent on components, the sources said.

“It may at worst cost us about 1 billion pounds,” said one of the sources when asked how Jaguar Land Rover (JLR) had phrased the wording in the 89-page report

A second source said the number had featured in an internal presentation shown to the board.

JLR, which sold almost a quarter of its over 520,000 cars in its largest market Europe last year, confirmed it had looked into the impact of Brexit.

“As part of our standard business planning process, we regularly look at macro-economic and geo-political developments around the world,” a JLR spokesman said.

“Like any other responsible global business, we have analysed the impact of any potential UK departure from the EU. However, we are not discussing details of any internal business analysis.”

The work, which has been updated several times since it was first prepared for the board with input from the company’s sales, marketing and tax departments last summer, features three other scenarios, including Britain remaining in the single market, the second source said.

The two other post-Brexit scenarios look at Britain taking several years to negotiate a deal to remain in the single market or agreeing a trade deal imposing low tariffs costing JLR in the low hundreds of millions, the source said.

JLR fully funds its investments without support from parent Tata Motors, executives have said. The cost of investment contributed to a 40 per cent decline in its 2015/16 pre-tax profit. “They are deeply worried about being outside of the EU. They have been holding off on meaningful expenditure,” the second source said.

JLR could open an office in Brussels were Britain to leave the EU to maintain influence with European policymakers, both sources said, with the first source saying Luxembourg was also an option.

That source said JLR could make the office its European headquarters but the second source said JLR would retain its British HQ.

A spokesman at the firm said: “Jaguar Land Rover is a British company and our headquarters will remain in the UK.”

“Having an office close to Brussels would allow them to maintain influence post any deal,” the second source said.

CEO Ralph Speth, who has consistently spoken out in favour of continued EU membership, wrote to workers on Monday warning of the possible consequences of a Brexit on the firm. “It is inevitable that we would face increasing and higher tariffs, making our products less competitive in Europe,” he said in a copy of the letter seen by Reuters.

(This story originally appeared on Financial Chronicle)