BEYOND the beating that Indian stocks took after Britain’s vote to leave the EU, the biggest hit in India Inc was 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 forex 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% of total revenue), Motherson Sumi (86%), Tata Motors (31%) and Mahindra CIE Automotive (68%) were the worst-hit with share prices declining up to 8.5 per cent.
Tata Motors, which owns British marquee auto brand Jaguar Land Rover, saw its share price fall 12.9 per cent during intraday trading, before closing the day with a fall of 8 per cent. Motherson Sumi Systems, which has a couple of European subsidiaries catering to 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, “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 CFO, Mahindra Group, saying that there is “no impact” on M&M Limited and that the impact on 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 as experts said they are exposed to currency risk, which was the first to play out after the voting results were out.
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 pharma 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 FDI equity investments of $23.1 billion from April 2000 to March 2015 — accounting for eight per cent of total FDI 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 pounds in 2014 to 26 billion pounds 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.
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.
He added that Indian businesses focused on purely tapping the UK domestic markets are unlikely to face many challenges, but those intending to leverage the UK as a base to gain access into European markets might have to rethink plans. “A looming risk is that of an imposition of trade barriers, scrapping of preferential rates and higher taxes between UK and rest of the EU, which might pose a hurdle for foreign companies to invest in the UK,” he said.
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.
The External Affairs Ministry asserted that it values its ties with both the UK and EU and will strive hard to strengthen these relationships in the years ahead. “We have seen the results of the British referendum on EU membership reflecting the choice made by the British people on the issue. We value our multifaceted relationships with both the UK and the EU and will strive to further strengthen these ties in the years ahead,” spokesperson Vikas Swarup said in Tashkent.
In Hyderabad, US Ambassador to India Richard Verma said it (the decision) was a democratic process and one has to now see the implementation part. “It is a democratic process and we now have to see how the implementation rolls out in the weeks and months to come. This is something for the people of Great Britain to judge now how best to take this forward,” Verma said on the sidelines of a conference.
(With inputs from Shubhajit Roy/New Delhi)
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