Decline of IT Stocks after Brexit

What is Brexit?

It is a word that has turned out to be utilized as a shorthand method for saying the UK leaving the EU - combining the words Britain and exit to get Brexit.


Brexit and Indian IT Industry

Indian IT industry is worth USD 108 billion. Majority of Indian IT companies utilize Britain as the center of their operations in Europe and are growing their business in mainland Europe utilizing Britain as the portal.

The UK has customarily been the portal for Indian IT firms to enter Europe. Indian IT organizations have set up an extensive nearness in UK to serve the UK market and constructed profound connections and relationships. As a result of which, Europe is the second largest market with almost 30 per cent of the industry’s export revenue for the Indian IT industry. 

For the FY 16 overall IT exports was about $110 billion of which 62 per cent was contributed by the US, UK contributed 17 per cent and continental Europe contributed 11 per cent. However, due to the exit of UK from EU IT firms would now have to have separate headquarters for both EU and UK. Other factors that led to decline in the IT industry is the decline of British Pound as many IT related contracts lost their propositions.

Impact of Brexit on:

1. Infosys Share Price

One of the victims of Brexit is the India's second largest software company, Infosys Ltd. After the Royal Bank of Scotland suspended plans to set up a separate bank in the United Kingdom, for which Infosys was a technology partner, the company incurred a loss of $50 billion. 

After this decision, Infosys decided to relocate 3000 people from this to other plans in order to avoid laying off people. This resulted into low profit - a 4.5 percent on-quarter fall to Rs.3436 crore in consolidated net profit, for first quarter and Rs.3476 crore for the 2nd Quarter. The consolidated revenue for the first quarter was up just 1.4 percent at Rs.16782 crore, from Rs.16550 crore in previous quarter and up by 3.14% to Rs.17310 crore in the second quarter. Thus, Infosys who’s 6.6% of its total revenue comes from UK, it sees negative 3.3 percent impact to its FY17 EPS. 

Chart showing decline in share price of Infosys from June to December 2016

The decline of share price is clearly seen from the graph. The day before the result of Brexit were announced, i.e. on 23rd June, 2016 the share price was Rs.1211.60 which has never being touched post Brexit.

Infosys has not been able to recover itself since Brexit and further more decreased the forecasted revenue from 10.5-12% from 11.5-13.5%, due to high selling pressures and unclear policies of EU as well as UK post Brexit.

2. TCS Share Price

As the decision was made by The Britain to leave the European Union (EU), the Tata group started reviewing its UK strategies, as spooked investors sold shares of group companies. 

India's largest software services firm Tata Consultancy Services (TCS) has a significant exposure to Europe, especially UK. It gets 26.3% of its revenue from Europe. So, the stock was the biggest loser among Sensex stocks on 27th June, 2016, Monday, down by 2.93% to close at Rs.2495 from Rs.2573.95.

Chart showing decline in share price of TCS from June to December 2016

As we can see from the graph, the TCS share declined after Brexit. Post-Brexit, in August, the share price increased to Rs.2783.45 and the stock has reached to its lowest in December Rs.2101 after demonetization. 

Conclusion

The IT sector is affected to a great extent by Brexit. Apart from Infosys and TCS, Wipro by 1.29%, HCL Tech by 1%, Tech Mahindra by 1.6% immediately after Brexit. This will remain for a short period of time due to major challenges like uncertainty in future decisions related to policies, trade between UK and Europe, changes in financial and banking system, cut in short term IT spending, contracts suspension from European banks, given the fact that Indian IT firms’ revenue from Europe ranges from 10 to as high as 26%. Overall, it is mostly a wait-and-watch situation for Indian IT players, as they await clarity on UK’s future business policies. 

References
http://www.business-standard.com/article/companies/brexit-will-affect-infosys-tcs-116071500839_1.html
http://www.livemint.com/Money/KMml79rjObhf5k5GAkvTrM/Brexit-impact-Top-5-IT-firms-lost-Rs50000-crore-market-val.html
http://economictimes.indiatimes.com/tech/ites/nasscom-sees-mixed-impact-of-brexit-on-it-sector/articleshow/52838760.cms
http://www.thehindu.com/business/Industry/Brexit-to-impact-Indian-IT-in-near-term/article14399338.ece
http://www.livemint.com/Money/KMml79rjObhf5k5GAkvTrM/Brexit-impact-Top-5-IT-firms-lost-Rs50000-crore-market-val.html
http://profit.ndtv.com/news/market/article-tcs-shares-fall-for-fourth-straight-day-infosys-wipro-also-hit-1424308
https://in.finance.yahoo.com/q/hp?s=INFY.BO&a=4&b=2&c=1995&d=11&e=10&f=2016&g=d&z=66&y=66
https://in.finance.yahoo.com/q/hp?s=TCS.BO&d=11&e=10&f=2016&g=d&a=0&b=14&c=2002&z=66&y=66

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About the Author

This report has been prepared by Jeel Dalal and published by Jayant Gupta, pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

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