Brexit to benefit select Indian firms, but only in the long-run: Analysts

The United Kingdom (UK) and the European Union (EU) last week struck a historic Brexit deal that cheered global markets, including investors back home. Though most analysts remain bullish on the prospects of companies that do business with the region, but caution that the benefit, if any, will be visible only over the long-term.

The UK and the EU have been in complex negotiations since March to try to keep their trade in goods flowing from January 1, 2021. The deal announced on Thursday means that this goods trade – roughly half of the $900 billion of annual EU-UK commerce - will remain free of tariffs and quotas. Analysts believe that since the Brexit vote was first cast in 2016, the companies have had enough time to diversify their operations across the globe, in order to avoid being impacted by the tug of war that continued between the UK and EU.

Indian auto, pharma, IT and chemicals sectors are among sectors having significant reliance on UK and European nations with TCS, Tata Motors, Motherson Sumi, Wipro, Infosys and Tech Mahindra among key names.

Following the development, shares of Tata Motors jumped 4 per cent on Monday. But analysts have a mixed view on the company.

“Tata Motors would benefit from the Brexit deal as it has got enough exposure as far as Jaguar Land Rover (JLR) is concerned,” said Gaurang Shah, head investment strategist at Geojit Financial Services, who has a BUY rating on the company. The stock has gained over 8 per cent in past two trading days.

Jaguar Land Rover has not seen any impact so far from issues at UK ports, its parent Tata Motors said on Thursday, even as many countries cut transport ties with Britain due to a fast-spreading new variant of the coronavirus. Around 16 per cent revenue for Tata Motors comes from the UK, according to latest estimates.

However, G Chokkalingam, founder and chief investment officer at Equinomics Research has a negative outlook on the auto sector, including for Tata Motors.

“In 2021, the European economy is expected to grow at around 4 per cent, which will be 2 per cent lower than the 2019 GDP growth of Eurozone in absolute terms. I believe these are the best prices one can get for the auto companies and they are unlikely to outperform going ahead. Moreover, in European markets, car models change very fast, and there is a focus on the switch to electric vehicles (EVs). With the absolute GDP growth expected to be lower, there will be an impact on consumer demand. Hence, we are negative on the auto sector,” he said.

Among the related companies, Shah of Geojit and A K Prabhakar, head of research at IDBI Capital are bullish on Motherson Sumi and don't see any negative impact of the deal on the stock, as they believe the company has diversified its operations over the last few years.

Another sector analysts remain bullish on in the backdrop of the development is information technology. “Orders are picking up for IT companies and the stocks are likely to move up as we head into 2021. Most IT companies are well placed to capitalise on the global and domestic opportunities that come their way,” Prabkahar said.

Shah, too, is upbeat on the outlook for Indian IT companies. “The Indian IT sector is not a geographically concentrated sector in the US or Europe. It has got a much larger piece of pie for the entire globe. And India itself is a big opportunity for IT companies and we are extremely positive on the IT sector,” he believes.

Infosys won its largest deal ever from German automotive manufacturer Daimler, estimated at $3.2 billion. Infosys and Daimler AG deal is much bigger than the $1.5 billion Vanguard deal that was signed in August 2020.

On YTD basis, shares of Infosys have gained 70 per cent, those of TCS have risen 35 per cent and Wipro has moved up 56 per cent.