IT industry braces for uncertain times as Britain decides to exit EU

Industry fears delay in spending decision by clients while GBP devaluation to hit immediately

As Britain votes in favour of exiting the European Union, the Indian Information Technology (IT) services industry is bracing up for another phase of uncertainty in the short to mid-term.

The United Kingdom is the second-largest IT spending country in the world after the United States, accounting for over 20% of the overall IT services exports from India. Most of the large Indian IT services companies, especially Tata Consultancy Services, Tech Mahindra, HCL Technologies and Infosys have strong presence in the country.

With the referendum results in the country going in favour of exiting the EU, those companies who were using Britain as their main base for serving other European countries will have to start establishing local presence in these countries. This does not make much of an economic sense because of the scale of the business from those countries.

The major shock, however, would come from a depreciating British Pound (GBP) which has now slipped to almost a 1985 level. That means Indian IT firms who are earning higher revenues in GBP will take a hit. Experts say that among the top three Indian firms, TCS and Wipro have relatively higher degree of exposure to GBP as both the companies derive around 14% of its revenues each from that currency. On the other hand, Infosys’s revenue from GBP was 6.6% in FY16 though Europe as a market accounts for 23% of its overall revenues.

“While currency will be an immediate concern area, that is not that big a concern in the longer term as the economic and political instability in the entire region is,” said top executive of a large Indian IT services firm. “Larger impact would be if European clients postpone their investment decision which typically happens in such scenarios. Obviously, they will not take any decision till the dust settles,” the person added requesting anonymity.

“Wipro watches with deep interest the unfolding developments in the United Kingdom and its potential impact on a host of factors including mobility of labor, changes in the financial system, and the currency,” Bengaluru-based IT services company said in a statement. Wipro has been present in the UK for over two decades and today employs over 4,000 people there.

Apart from TCS, other Indian companies that are expected to take a hit due to Brexit decision are HCL Technologies and Tech Mahindra. They have a relatively higher degree of exposure to the region. More than 31% of HCL Technologies’ total revenue comes from Europe. For Tech Mahindra, Europe accounts for around 27% of its overall revenues though the proportion of revenues from GBP is relatively lesser at around 12%.

Clearly, the Brexit announcement will lead to a “phase of uncertainty in the near term,” though it will throw “a mix of challenges and opportunities in the longer term”, industry body Nasscom said in a statement on Friday.

Among others, Nasscom said, the decline in value of GBP could render many existing contracts losing propositions unless they are renegotiated. Indian IT companies may require to establish separate headquarters/ operations for EU, may lead to some disinvestment from the UK. And also, the decision would also impact free movement of skilled manpower across EU countries and the UK, a must requirement for the tech services companies. “Nasscom urges policy makers in Brussels and London to provide greater clarity and guidance on the next steps as soon as possible, so that our businesses have the certainty they need to continue to invest in UK and Europe,” said R Chandrashekhar, president of Nasscom.

"Indian IT companies with significant operations or subsidiaries in the UK are likely to be most impacted by the Brexit decision. This impact is likely to take the shape of enhanced uncertainty over their ability to seamlessly access and deploy teams across European markets — a concern that may result in eroding their share prices together with related shareholder wealth,” said Sanjoy Sen, a Doctoral Research Scholar at Aston Business School in the UK.

On the positive side, the decline of the Sterling Pound will bring in some benefits in terms of reducing UK costs relative to the Indian Rupee. Also appreciating US dollar and deprecating rupee is expected to favour the export-driven IT services companies in the shorter term.

Indian IT stocks on Friday reacted sharply to the Brexit decision with sectoral index declining 2.13% at the end of the day’s trading in the BSE. Shares of Tech Mahindra dropped the highest by 4.86%, followed by HCL Technologies with a decline of 3.46% and TCS 2.81%.

Companies	Revenue from Europe (in %)	Revenues earned in GBP (% of total revenue)
TCS	27	13-14
Infosys	23	6.6
Wipro	27.8	14
HCL Tech	31	NA
Tech Mahindra	29	12

Source: Company websites, press releases