Kotak Institutional Equities sees negative implications of ‘Brexit’ and the resultant economic uncertainty on sectors such as IT and metals. These sectors have a reasonable weight in the broader indices and thus, the brokerage house expects a moderate negative impact on overall earnings.
The brokerage house expects earnings of the Nifty-50 Index to grow 16.5 per cent in FY2017 and 20.9 per cent in FY2018. It also expect a cut in auto, IT and metals sectors.
Below are Kotak’s take on auto, metal and IT sectors.
According to Kotak Institutional Equities, software companies have meaningful exposure to EU and UK. The immediate impact could be through the currency route (weaker Euro and GBP versus the INR although some of it could be offset by stronger USD against the INR) and the medium-term impact could be through lower revenues as companies, particularly banks, in EU and UK review their growth and investment strategies.
In the metal space, companies will see some earnings risks from weaker-than-expected metal prices due to weaker global demand. Although rupee weakness against the dollar will partly offset the impact of weaker global metal prices. Among the metal companies, Tata Steel could see medium-term negative impact if and when import duties (if any) emerge on trade between the EU and UK post the UK leaving the EU. The UK plants of Tata Steel Europe exports 30 per cent of its output to Europe.
In the automobile sector, Maruti Suzuki could be negatively impacted by a stronger Japanese Yen. A 10 per cent appreciation in Japanese Yen versus rupee will impact MSIL’s EBITDA margin by 90 bps and EPS by 6-7 per cent. Kotak’s current estimate for yen-rupee is 0.6 for FY2017 and FY2018. The yen-rupee is around 0.67 currently. Maruti Suzuki also has some exports to and imports from Europe, which balance out. Dollar and yen are widely seen as safe haven currencies.
Tata Motors (JLR) could potentially benefit from a weaker GBP versus Yen and dollar in the short term as a 5-10 per cent depreciation in the pound versus global currencies will lead to 2.8-5.7 per cent increase in its EBITDA margin. However, Kotak sees negative impact on volumes in the short term due to the uncertainty from ‘Brexit’ and in the medium term from possible imposition of import duty on JLR’s exports to the EU (18% of JLR’s volumes).