Indian firms to gain from Brexit only in the long run, say analysts

Auto, pharma, IT, chemicals among sectors with significant reliance on UK and European nations with Tata Motors, Motherson Sumi, Tata Steel, TCS, Wipro, Infosys and Tech M among key names.

The United Kingdom (UK) and European Union (EU), last week, struck a historic Brexit deal that cheered global markets, including investors back home.

Though most market experts remain bullish on the prospects of companies that do business with the region, they caution that any benefit will be visible over the long term.

The UK and the EU have been in complex negotiations since March to try and 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.

This will help them avoid being impacted by the tug of war that continued between the UK and EU.

Indian auto, pharma, information technology (IT) and chemicals sectors are among those having significant reliance on UK and European nations.

Tata Motors, Motherson Sumi, Tata Steel, TCS, Wipro, Infosys and Tech Mahindra are the key players there.

“We understand that it will be a gradual exit versus the push for a hard exit, earlier.

"It is a positive for companies with exposure to UK and EU as they will continue to enjoy the benefits of free trade of goods (zero tariffs),” said Siddhartha Khemka, vice-president - head of research (retail) at Motilal Oswal Financial Services.

“There are multiple facets to the deal and we continue to await finer details as well as updates from companies before making any revisions to our earnings estimates,” added Khemka.

Following the development, shares of Tata Motors jumped nearly six per cent on Monday, while Motherson was up 4.5 per cent and Tata Steel gained 1.7 per cent, as compared to 0.8 per cent rise in the BSE Sensex.

“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.

Around 16 per cent revenue for Tata Motors comes from the UK while Europe accounts for a fifth, according to latest estimates.

But, more than Brexit, GDP growth and other domestic and international factors are likely to influence the prospects of companies.

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

“In 2021, the European economy is expected to grow at 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 auto companies and they are unlikely to outperform, going ahead,” he said.

Among other firms, Shah 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.

This is because the auto component maker has diversified its operations over the last few years.

Among top IT firms, TCS, Infosys and HCL Technologies earn 24-31 per cent of revenue from Europe and UK.

Pharma firms such as Aurobindo Pharma, Biocon and Dr Reddy's get 6-26 per cent of their revenue from the region.

“Orders are picking up for IT companies and the stocks are likely to move up as we head into 2021.

"Most IT firms are well placed to capitalise on the global and domestic opportunities,” said Prabkahar.

Shah said the Indian IT sector is not a geographically concentrated sector in the US or Europe.

It has got a much larger piece of the pie for the entire globe.

And, India itself is a big opportunity.

“Consensus on the Brexit deal will remove overhang of slower decision making on large IT deals in the UK region.

"We expect acceleration in tech demand, specifically from BFSI and public services vertical in the UK region.

"This is likely to benefit the Indian IT industry in the medium term,” said Suyog Kulkarni, research analyst, Reliance Securities.

On year-to-date basis, shares of Infosys have gained 70 per cent, TCS is up 35 per cent and Wipro by 56 per cent.

Even for the pharma sector, the outlook remains positive.

“India is pharmacy to the world. Brexit will not have any adverse impact on companies supplying to Europe or UK, and we are extremely bullish on the sector,” Shah said.

Commenting on Tata Steel, Chokkalingam said he has a negative view on the stock and the sector in short term.

“If the Eurozone economy shrinks, the steel sector would also be impacted.

"But, beyond 2021, if growth returns, steel companies can make a comeback,” he added.

Photograph: Toby Melville/Reuters