India’s largest technology companies may have to grapple with delays in IT spending and weaker earnings from a crumbling currency after the UK voted to leave the European Union, a historic move that convulsed global markets.
Once the dust settles, companies from Tata Consultancy Services to Infosys could play a pivotal role in helping banks and corporations re-tool their systems in a newly configured European market, said Arup Roy, a research director at Gartner.
India’s $110bn IT services export industry is scrambling to assess the fallout as global markets tank in the wake of one of the most dramatic 24-hours in modern British history. The UK and Europe together account for 28.5% of the country’s IT services exports, worth an estimated $30.7bn in 2016.
A crumbling pound – the sterling plummeted to its lowest levels since 1985 – will erode earnings while companies are expected to postpone spending on computing services while they plot their next moves.
“Discretionary spends will take a hit and those companies with a higher exposure to those services and the deals they will be pursuing will be impacted,” Roy said. “In the longer-term, Brexit could emerge as an opportunity as regulatory changes and compliance will yield more systems integration work.”
Those with a larger roster of financial clients – such as TCS and closest rival Infosys – could benefit from the work a ‘Brexit’ entails for financial systems and currency markets across the European Union and the UK. The two companies, who both get more than a fifth of their revenue from the region, declined to comment on the outcome of the vote. Infosys chief executive officer Vishal Sikka told shareholders last week he would keep a close eye on potential currency and business impact.
“There is going to be significant amount of uncertainty due to exchange rate fluctuation,” said R Chandrasekhar, president of India’s IT industry body, Nasscom. With the pound already slumping, “there is turbulence ahead.”
“The terms of exit are not clear and there may not be clarity for months and even years. After terms become crystalised, only then the precise impact can be quantified,” he said from London, where he was monitoring the historic vote.
The UK is the industry’s largest market after the US, accounting for about 17% of total IT export revenues, according to Nasscom estimates. Many large and mid-sized Indian companies have set up operations and made acquisitions in the UK to serve that market as well as Europe. The country is also a vital destination for talent as about 800 Indian companies employ 110,000 workers there.
Wipro, which employs 4,000 workers in the UK, said it’s monitoring the potential impact on mobility of labour, the financial system and the currency. India’s fourth largest IT services company is optimistic that new opportunities will open up for it in the country, the company said in a statement.
The UK will now have about two years to negotiate the terms of its exit, with talks to unwind agreements in areas as diverse as fishing quotas and financial-services legislation. It will also have to start negotiating its own trade deals with the rest of the world.
“Longer term, the exit will necessitate that the UK look for other trading partners to compensate for the loss of privileged access to the European market,” Chandrasekhar said. “India could figure very high if not at the very top of that list. The possibility of greater linkages with India in terms of trade is a positive for the IT industry.”