Mumbai: Even as fears of Britain’s exit from the European Union (EU) are receding, in the event that Brexit—as the term is called—becomes a reality, apart from the repercussions on the market, a few Indian companies also stand to be hit, due to their exposure to the UK.
According to CLSA, accounting for $48 billion in merchandise exports (18% of FY16) and $65 billion in merchandise imports (17%), the EU (including the UK) is India’s largest trading partner.
CLSA’s report on 16 June points that trade with the UK alone is worth $9 billion, or 8% of that with the EU, engineering goods and textiles are India’s largest exports to both the EU and the UK, while the main imports are machinery and autos.
Also, 25% of India’s $82 billion software exports in FY15 were destined for the EU region, with the UK accounting for $10 billion, the CLSA report said.
The companies with either significant revenues dependent on the UK or the EU, or presence in the country could be affected, if the UK electorate opts to leave the EU at a decisive referendum on Thursday.
“If Brexit happens, market will go into risk-off mode for some time. Money will move out of riskier assets to safer ones. Our equity market may fall by 2-3%, and the rupee will be hurt too, though it is difficult to estimate the quantum right now,” said Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities Ltd.
“We saw the Raghuram Rajan impact on the rupee. There will be more outflows if Brexit happens, further pressurising the rupee,” said Ravi Sundar Muthukrishnan, co-head of research at ICICI Securities Ltd.
In a note on 16 June, CLSA pointed that the Indian companies with specific exposures to the EU/UK that could be affected include Tata Motors Ltd, Tata Steel Ltd, Motherson Sumi Systems Ltd and Bharat Forge Ltd.
Britain’s exit from the EU may impact the operations of Jaguar Land Rover Automotive Plc., the UK subsidiary of Tata Motors, Mint reported on Monday, pointing that the subsidiary accounts for 90% profits for Tata Motors.
“Jaguar Land Rover supports continued UK membership of a reformed EU. Access to our customers and suppliers is important to us—any changes could impact our sales, our costs and the skills base,” a JLR spokesperson had said in an email response to Mint.
For companies such as Tata Steel, which have operations in the UK, the impact of Brexit could be manifold.
“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,” Care Ratings said in a note on Monday
For Tata Steel, 12% of the volume of foreign subsidiary Corus is exported from the UK to the EU and this might face higher import tariffs with Brexit, and demand would also be affected, CLSA analysts Mahesh Nandurkar, Abhinav Sinha and Alok Srivastava said in a note, adding that higher costs may be partly alleviated by depreciation of the British pound.
The Asia Pacific-focused brokerage firm CLSA said that auto ancillary firm Bharat Forge could also be hit as it draws 30% of consolidated revenues from the EU, while auto components maker Motherson Sumi, which derives around 60% of consolidated revenues from the EU, could also face the brunt of Brexit.
Aluminum producer Hindalco Ltd, which attracts 9% of consolidated revenues from the EU, is also a key stock that is at risk from Brexit in CLSA’s coverage.
According to Muthukrishnan of ICICI Securities, in the pharmaceutical space, IPCA Laboratories Ltd also had a sizeable exposure to the UK in terms of revenue, which could see near-term impact.
Separately, there was also a thought process that if Britain does exit EU, London may cease to be the financial hub of the continent, and other locations in Europe may gain prominence in the financial world, pointed Dhanajay Sinha, head of research at Emkay Global Financial Services Ltd.
According to data from respective companies, India’s largest software services exporter Tata Consultancy Services Ltd (TCS) had 26.8% revenue exposure to Europe and 15.8% to the UK in fiscal year 2015-16, while peer Infosys Ltd had an exposure of 23% from the continent, and HCL Technologies Ltd, Tech Mahindra Ltd and Mindtree Ltd garnered around 31.2%, 29% and 24.5% revenues, respectively, from Europe.
“For IT companies, the current business flow from UK and Europe may continue even if Brexit happens. But new business orders may be delayed, and subsequently the order growth from the region may be impacted. One impact of Brexit will be the pound which will likely weaken, and will be negative for IT companies, having exposure to Britain,” added Prasad.
