The huge blow to British Prime Minister Theresa May’s Brexit deal in the House of Commons has further complicated an already-uncertain environment for Indian IT services firms.
The UK is the second-largest market for the Indian IT industry after the US, and accounted for 17 per cent of its $167 billion revenues in 2017-18, according to industry body Nasscom. On Tuesday, the UK Parliament voted overwhelmingly against May’s Brexit deal, in a 432-202 margin.
“The options now are that the Brexit deal goes through; the deal does not happen; or a second referendum. It is clear the deal in its current form won’t go through. We will wait for Plan B on January 2 and there could possibly be an extension of Article 50,” said Shivendra Singh, Vice-President (Global Trade Development), at Nasscom.
In case there is no deal by January 21, the UK government will have to make a statement within five days on what it intends to do. Article 50 of the Lisbon Treaty, in a nutshell, spells out how an EU member may leave the union voluntarily.
While Nasscom supports the proposed changes to the immigration policy after Brexit, Singh flagged ‘passporting and equivalence’, which will impact banks and the financial services markets.
“They could, until now, operate from the UK and serve the entire EU. However, the regulatory framework in the EU may not allow for such operations to continue. BFSI (Banking, financial services and insurance) is one of biggest verticals of IT companies and clarity on this issue is critical,” he added.
In the December quarter, the two top IT majors Tata Consultancy Services and Infosys resisted from providing a long-term outlook for their businesses, in spite of giving a healthy short-term growth guidance.
This was majorly because of macro uncertainties, including Brexit and the US-China trade war. While TCS reported 25.1 per cent and 17.6 per cent YoY growth in its UK and Europe markets, respectively, during the quarter, the company said some customers, especially banks, were still waiting for Brexit to play out before making big spending decisions.
“Some customers have already figured out what they will do irrespective of the outcome, but there are some who are undecided about the outcome and are on a wait and watch mode,” said TCS chief operations officer, N G Subramaniam.
Infosys also said the company is watching out for these developments before commenting on its long-term outlook. The situation is no different for smaller IT firms. “There is a lot of uncertainty. So, we don’t have a view yet on the recent developments,” said Rostow Ravanan, CEO of Mindtree after the company’s Q3 earnings.
Industry experts say that with any possible outcome still sometime away, these companies will go slow on their European investment possibly losing out business as clients also hold on to their budgets due to lack of clarity.
Brexit going through would also mean additional costs towards various investments. “With the UK mulling its own data protection policy to rival GDPR, Brexit would mean that companies will have to invest more in infrastructure, compliance, policies and procedures to ensure they continue to be in business across both EU and UK,” said Sanchit Vir Gogia, chief analyst and CEO at Greyhound Research.
According to Bendor-Samuel, founder & CEO at research firm Everest Group, Brexit, is having an adverse effect on the UK and the broader EU economy and this could negatively impact discretionary spend. However in the longer term, he said, Europe and UK would continue to be strong for Indian IT services companies. “With regard to their investment position in Europe, the Indian firms have been investing steadily and this could provide them with a strong foundation for ongoing growth”.