Brexit shaves Rs 14,800 crore off tech stocks

Investors ditch TCS, Infy, Wipro, HCL Tech, Tech M for second day.

Investors ditch TCS, Infy, Wipro, HCL Tech, Tech M for second day Information technology (IT) stocks faced heavy selling pressure for the second day on worries over the impact of Brexit, with investors citing uncertainty about the $30 billion exports to European Union, of which around $17 billion are to the UK alone.

The top five IT software companies lost Rs 24,757.26 crore in market capitalisation in Monday’s trading. India’s top company by market cap TCS alone lost Rs 14,847.17 crore on BSE at Rs 4,91,690.74 crore, down from Friday’s closing valuation of Rs 5,06,537 crore.

Infosys Technologies’ market cap too fell by Rs 7,145.99 crore to Rs 2,67,881.17 crore on Monday from Rs 2,74,027 crore last weekend. The BSE IT index fell the most on Monday, down 1.86 per cent, even as the broader market showed resilience and closed flat, absorbing the shock triggered by Brexit.

Europe is the second largest market for the Indian IT industry and constitutes almost 30 per cent of the industry's export revenue. Pankaj Pandey, head of research at ICICI Securities said, “In the IT sector, 10 per cent to 13 per cent dollar revenue growth was expected.

But with the currency volatility having increased, the IT sector is going to get impacted in the near term, as is evident in the knee-jerk reaction seen so far post Bruit.”

The sharp fall in British pound and the need to reorganise Europe’s mainland business led to more losses for the frontline Indian IT companies that have been managing their European operations from London.

Among the top losers were TCS (-2.93 per cent), Infosys (-2.37 per cent), Wipro (-1.23 per cent), HCL Technologies (-0.96 per cent) and Tech Mahindra (-0.49 per cent).

Rumit Dugar and Saumya Shrivastava, analysts at Religare Instituional Research said, “While volatility of the Great Britain pound and the euro is an immediate risk, we see bigger concerns on the demand front, as clients are likely to go slow on decision-making and defer new projects. This combined with an ongoing slowdown in the sector will weigh heavily on P/E multiples of the IT companies.”

“At the currency level, largecap companies have 7-13 per cent per cent exposure to the GBP,” Dugar and Shrivastava said.

Among top destinations for India’s software exports, UK is the second largest destination after the US in terms of percentage of total software exports, accounting for 17 per cent of India’s total IT export in FY 2014-15. The UK and European Union together constitute 30 per cent of the India’s exports.

Indian IT companies may need to establish separate headquarters/ operations for EU, which may lead to some disinvestments from the UK. Sara Anand and Anubhuti Sahay, analysts at Standard Chartered Bank said, “Indian companies invested $11.3 billion in the UK between January 2003 and August 2015.

These businesses are likely to be impacted, as the UK slows further, the attractiveness of the UK as a gateway to the EU declines, and companies rework their strategies and business models to trade with the EU, while factoring in higher compliance costs. These companies/manufacturers have set up offices in the UK and have benefitted from tariff protection for sales of goods to the EU.”