Brexit to hurt Indian businesses with UK arms the most

The biggest hit in India Inc from the UK's vote to leave the European Union will be taken by manufacturing companies in sectors that have set up base in the UK while having substantial exposure to mainland Europe.

These include firms in the services sector, especially IT companies with unhedged foreign exchange exposure.

The stock market reaction, which mirrored the crash across global bourses before edging up in late trade, saw firms in both these categories take the biggest hit.

Companies with significant revenue exposure to the European markets such as Tata Steel (52 per cent of total revenue), Motherson Sumi (86 per cent), Tata Motors (31 per cent) and Mahindra CIE Automotive (68 per cent) were the worst-hit with share prices declining up to 8.5 per cent.

Tata Motors lost 12.9 per cent during intraday trading on Friday, before closing the day with a fall of 8 per cent. Motherson Sumi Systems, which has a couple of European subsidiaries catering for Europe and exporting to other countries, saw its share price fall 12.3 per cent during the day before closing with a fall of 8.5 per cent.

Maintaining that Tata Motors is committed to manufacturing in the UK, a company spokesperson said told The Indian Express, ''There will be a significant negotiating period, and we look forward to understanding more about that as details emerge … negotiations between the UK government and the EU will continue to recognise the importance of car manufacturing to the UK and European economies.''

While the Tata Group has 19 independent Tata companies in the UK, with diverse businesses, Tata Sons said each company continuously reviews its strategy and operations in the light of developments, and will continue to do so. It said that access to markets and to a skilled workforce will remain ''important considerations''.

The Mahindra Group's Mahindra CIE Automotive, which receives close to 70 per cent of its revenue from Europe, played down the impact of the UK vote, with V S Parthasarathy, group chief financial officer, Mahindra Group, saying that there is ''no impact'' on M&M Limited and that the impact on the Mahindra Group will be muted.

 ''The result is uncertainty in the immediate aftermath and will moderate over time … Brexit will throw up many opportunities as well and we are poised to take advantage of any opportunities that may emerge,'' he said.

All major Indian IT companies, too, came under pressure at the stock markets even as experts said they are exposed to currency risk, which was the first to play out after the voting results.

While a Bank of America Merrill Lynch report said Brexit could dent IT demand further, hurting the 10-14 per cent revenue growth forecast for the UK businesses of Indian IT companies in FY'17,  the revenue break-up for top five IT companies show that the European market accounts for 11-29 per cent of their revenues.

Pankaj Pandey, head of research at ICICI Securities, said, ''There is no clarity on when the currency will stabilise, so there will be uncertainty on the operational front for companies. We are not going to chase companies having significant exposure to UK and Europe even though they may witness price correction.''

Even several pharmaceutical companies have sizeable exposure to UK and Europe and may continue to remain under pressure.

The UK is the third-largest inward investor into India, after Mauritius and Singapore, with cumulative equity investments of $23.1 billion from April 2000 to March 2015 - accounting for eight per cent of total foreign direct investment inflows into the country.

India, on the other hand, is the third-largest investor in terms of number of projects in the UK.

The number of Indian companies in the UK, growing at more than 10 per cent, has nearly doubled from 36 to 62 firms in a year. The combined turnover of these businesses has increased from £22 billion in 2014 to £26 billion in 2015, according to Grant Thornton UK LLP-Confederation of Indian Industry (CII) estimates.

There is a counterview of those who feel that the Brexit will potentially open up new trading opportunities for India at a time when UK's share in India's global trade is declining.

In 2014-15, UK's share in India's global trade declined to 1.89 per cent from 2.07 per cent a year ago. Trade in services has also eased, with UK service imports from India slowing and making up only about 2 per cent of the total, much lower than with the US and Asia.

According to The Indian Express, experts say that Brexit will open up new trading opportunities with Britain as the UK will seek trade agreements with non-EU partners, including India.

''This will require the UK to sort out its post-exit arrangement with its main trading partner, i.e., the EU, first. Thereafter, for India, a bilateral trade agreement with the UK might become viable as an alternate to the tough and drawn-out negotiations on the EU Free Trade Agreement,'' said the India research head of a leading global financial services firm, on condition of anonymity.

Meanwhile, RBI governor Raghuram Rajan looked to calm the markets. ''The Indian economy has good fundamentals, low short term external debt, and sizeable foreign exchange reserves. These should stand the country in good stead in the days to come. The Reserve Bank of India is continuously maintaining a close vigil on the market developments, both domestically and internationally, and will take all necessary steps, including providing liquidity support (both dollar and INR), to ensure orderly conditions in financial markets,'' said Rajan.