Brexit deep impact: Which sectors, stocks will take the hardest knock

NEW DELHI: The BSE Sensex took a 1,000-point knock while the Nifty50 dropped below the 7,950 level after breaking many support levels in reaction to the Brexit vote.

Experts on Dalal Street said the event might not only hit overseas portfolio flows, but also impact several domestic industries such as IT, pharma, metals, auto and capital goods.

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Here is a look at sectors that can potentially take a big knock as a result of the Brexit vote:

Information technology: IT companies are expected to take the biggest hit, as clients in the UK and the EU may postpone spending because of the uncertainty over how things pan out from here on. This could have a negative impact on revenue growth from Europe, which accounts for up to 30 per cent of top lines for top five IT firms. The UK alone accounts for 10-15 per cent of revenues for these companies. The numbers could jeopardise the Nasscom projection of 10-12 per cent growth for the sector in FY17.

IT companies may also need to establish separate headquarters/ operations for the EU, which may lead to some disinvestment from the UK, the industry body said on Friday.

The uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with the EU would create difficulties for the IT firms.

“With the potential depreciation of the pound and euro (against the rupee), revenues from these economies will take a hit. However, the depreciation of the euro and pound to the dollar will make the cross-currency impact favourable for companies that convert their euro and pound revenues into dollar,” Kotak Securities said in a note.

Also read: Get news, views and all the updates about Brexit here

Bofa ML in a note said, “Our India IT analyst Kunal Tayal estimates a nearly 3-8 per cent hit on our FY17 EPS estimates for the five large Indian IT companies.”

Automobile: Tata Motors will be hit the most in the auto space. It’s subsidiary JLR is seen losing 1 billion pounds ($1.47 billion) in profit by the end of the decade as a result of Brexit. The company though has maintained that ​JLR will manage the long-term impact and implications of Brexit. ​For Tata Motors, nothing will change for company or automotive industry.

Bharat Forge’s revenues from Europe stood at 39 per cent. Auto component maker Motherson Sumi has its Netherland-based subsidiary Samvardhana Motherson Automotive System Group BV (SMRPBV) accounting for more than 80 per cent of its revenues and 45 per cent of consolidated profits.

Apollo generates around 30 per cent of its revenues and 25 per cent of profits from Europe through its Netherlands-based subsidiary Apollo Vredestein Apollo Vredestein. There could be translation gain or loss depending on currency movement.

Pharmaceutical: Drugmakers such as Sun Pharma, Lupin, Cadila Healthcare, Torrent Pharma and Alembic Pharma are unlikely to have any major impact due to Brexit, but others like Natco Pharma and Dr Reddy’s Labs may take up to 4 per cent hit on FY17 profit after of tax (PAT), Kotak Securities said.

“It is time to start looking at the pharma sector and focus on largecaps, specifically the ones that are exposed to the USFDA or those which having problems over the past two to three quarters. Once these problems get sorted out, the sector will be back to its earlier growth trajectory and it should attract a lot more investor interest. That probably implies that there will also be a rise in the PE multiples,” said V Srivatsa, EVP & Fund Manager (Equities), UTI MF.

Metals: Among the metal stocks, Tata Steel has significant exposure to the UK and the European Union via its subsidiary Tata Steel Europe. The arm accounts for 25-30 per cent of the company’s total volume.

“Besides sales in the UK, 12 per cent of the (Tata Steel Europe) steel volume is exported from the UK to Europe. The exports volume may face hit in terms of higher tariffs. In addition, the event is significant for a potential buyer, as company has already put its UK assets on the block. We also believe metal prices would also be under pressure and can have a negative impact on the companies operating in the sector, as the dollar appreciates,” said Kotak Securities.

There were reports that Thyssenkrupp and Tata Steel are discussing a possible merger of the company's European assets, under which both the parties will hold 50 per cent stake in the merged entity.

Capital goods: Among the capital goods names, Cummins India generates 20 per cent of overall sales from Europe and roughly 3-5 per cent from the UK. But the company is unlikely to see any major impact from the event.

“Cummins’ manufacturing plants are located in India and Cummins Inc (parent company) sources products (mainly mid/high KVA engines) from Cummins India to sell in Europe and elsewhere,” said the Kotak Securities note.