1. Brexit won’t have long-term impact on Indian companies’ profits

Brexit won’t have long-term impact on Indian companies’ profits

Two wheeler companies are expected to report robust numbers if the monsoon is good as per predictions.

By: | Published: June 30, 2016 9:45 AM
brexit, UK firm, financial markets, sensex Brexit proved to be a unique event which rocked the global financial markets.(Reuters)

Brexit proved to be a unique event which rocked the global financial markets. The negative connotations of the Brexit referendum are far more profound for Europe than Britain even as the latter, owing to its split from Eurozone, will lose its special trade status and will need to negotiate with other EU nations for trade agreements. There has been no meaningful impact of Brexit on the Indian economy.

In a global economic environment where a sharp fall in the British Pound and China’s Yuan continues to send jitters in the currency markets, India’s forex has touched an all-time high of $364 billion.

Historically, global market turbulence used to impact the Indian market due to India’s dependence on FII flows. But presently, the impact is very low. India has been one of the least impacted markets post Brexit. India’s macros are in a sweet spot and the prospects for the economy are improving. The government is pushing ahead with reforms.

Reforms allowing 100 per cent FDI in defence, civil aviation and food retailing sectors and 74 per cent FDI in brown field pharmaceuticals are welcome initiatives. Increased possibility of passing of GST in the Rajya Sabha and its implementation, favourable monsoon, turnaround in Indian corporate earnings, lower current account deficit and inflation and an upsurge in forex reserves are a few of the key positive highlights of Indian economy.

Reports of the US Federal Reserve, not likely to hike rates, owing to Brexit, is positive news for emerging markets like India and help the rupee sustain at a feasible level. The Indian stock markets may witness an upside owing to lower commodity and oil prices on the back of weak demand from UK and Europe.

Currency fluctuations could have some impact on around 800 Indian-owned businesses in UK with companies in the IT, pharma, metals and automobiles verticals bearing a larger brunt in terms of weaker GBP and Euro compared to rupee. Tata Motors numbers may take a hit owing to sales of Jaguar and Land Rover (JLR) though in retail sales terms, JLR recorded a 25 per cent rise in April 2016 as compared to the same period last year. With manufacturing units in UK, Tata Motors will benefit from unexpected GBP depreciation. A considerable impact on account of currency volatility will also be seen on companies like Atul Auto and Amtek Auto. Since these companies are operationally diversified in other geographical areas, the currency fluctuation will not have a long term effect.

Two wheeler companies are expected to report robust numbers if the monsoon is good as per predictions. In conclusion, one can say that the full-scale implementation of Brexit will happen over 12-18 months and this factor will be conclusive in these companies not taking any hit over the next 3 quarters.

There is a lot of uncertainty regarding the consequences of the referendum: the process of adjustment and how trade treaties between the UK and other countries evolve, will have to be closely watched.

(The author is market strategist at Geojit BNP Paribas Financial Services)

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