Brexit spells trouble for Tatas, IT giants

It was a sombre mood in the boardrooms of Indian companies with a lot of exposure to Britain and the European Union (EU).

Tata Motors, Tata Steel Europe, Motherson Sumi, Tata Consultancy Services (TCS) and Infosys are expected to face the brunt of Brexit, due to their exposure to the region and volatility in currency value.

Though the actual exit of Britain is still two years away, Jaguar Land Rover (JLR), the UK-based arm of Tata Motors, and Tata Steel will have to make alternative arrangements to sell their products in the EU or face increased trade barriers. Based on revenues from Europe, here are some companies likely to face a negative impact due to Brexit.

Tata Steel: Among all Indian companies, Tata Steel earns the highest, 57.5% of its revenue, from its European operations — thanks to its 2007 acquisition of Corus Steel. The acquisition did not make any money for the group and to make matters worse, it faced competition from cheaper Chinese imports. Increased costs in its UK operations due to a costly pension plan expedited the financial mess.

The company is now in the process of selling its British plants and merging its European operations with ThyssenKrupp in a 50-50 joint venture, a German magazine reported on Friday.

Brexit will come as a serious risk. In fact, just before the voting, Tata Steel Europe (TSE) had cautioned its staff, saying the relationship between the UK and the EU was very relevant for the company. "The EU is by far our largest export market, with over a third of our UK steel heading there... (and) access to that market is fundamental to our business," Tim Morris, head of public affairs at TSE, had said. Tata Steel shares fell by 6.3% on the BSE on Friday.

JLR: Profit churning subsidiary of Tata Motors, it sells 25% of its Made-in-UK products in Europe. It had planned another plant in Slovakia but that is on hold. Parent Tata Motors earns 25% of its revenues or Rs 67,000 crore from the European operations. JLR would lose a billion pounds by the end of this decade if Britain imposes a 10% tariff on exports and inbound tariff of 4% on components, in line with World Trade Organization rules, a Reuters report warned early this week.

JLR, however, put on a brave face on Friday, saying it was business as usual. Tata Motors shares were down 8% on the BSE.

TCS: India's largest software exporter, it earns close to 27% of its revenues from Europe. Information technology analysts say the fall in pound versus other currencies will lead to lower income from exports. TCS did not comment on the Brexit impact.

A Nasscom (apex sectoral body) statement warned the fall in the pound could render many existing contracts into losing propositions, unless renegotiated. It also warned Indian IT companies might need to establish separate headquarters for the EU and might lead to some disinvestment from the UK. It also raised red flags on the mobility of labour in Europe, as both the EU and UK will set up immigration controls on their borders. TCS shares were down 2.7%.

Motherson Sumi: The automobile parts maker was punished by investors on Friday. Its shares fell 8.5% after the voting result. The company earns 70% of its revenue from Europe.

However, VC Sehgal, the chairman, said Brexit will not impact so much. "We have seen a knee-jerk reaction and there is a huge job ahead (for Britain) to go out of Europe... There are many aspects which must be done and it will be almost two to three years; conditions have to be agreed upon mutually. So, it will be business as usual and I do not see any (substantial) changes as England is still (for quite a while) a part of the EU and does not cease to be because of a referendum."

The company has two plants in the UK and plans to set up a third to cater to British customers.

Infosys: Apart from TCS, Infosys is another IT giant which might get impacted. The Bengaluru-based company earns 23% of its revenues from Europe and any volatility in currency would negatively impact it. Though IT companies hedge their currencies, the 10% fall in pound's value on Friday was unexpected, say sector analysts. Infosys shares fell 1.4%.