25 June 2016 10:03:01 IST

Uncertainty to hit order flows for IT companies

25-30% of revenues come from Europe, with UK contributing a significant portion

The Indian IT sector makes a large chunk of revenue from Europe. With UK’s referendum in favour of leaving the EU and the uncertain business environment now, Indian IT outsourcing companies may feel the heat.

Of the $108-billion dollars of the IT industry’s estimated exports in 2015-16, 17 per cent was to the UK and about 11.4 per cent to other nations within the EU. Nasscom says that Brexit impact will emerge only slowly as terms of exit and future relationship with the EU is worked out.

For large Indian IT companies, about 25-30 per cent revenues come from Europe with a significant portion of it from the UK.

With uncertainty in the economic and political climate, companies may delay decisions and put on hold the large projects which will hit new order flows for Indian IT companies. Pareekh Jain, Research Director, Engineering Services at HfS Research, says, “Brexit verdict signals anti-immigration sentiment and companies and government all over Europe will be more cautious, it might translate to hesitation on offshoring and Indian IT companies might be at a disadvantage…”

Many Indian IT companies keep the UK as the centre to cater to other EU countries, but now this may get difficult and companies can end up losing business to domestic players. Stepping foot into countries such as Germany may not be easy for all Indian players as there could be challenges on the language front, indicate experts.

However, large companies such as Infosys and TCS may not find it tough to adjust to the new normal as they have presence outside the UK, within the EU.

Arup Roy, Research Director at Gartner, says the impact of Brexit will be felt only by companies which have a higher degree of exposure to UK through GBP contracts and are focused on BFSI segment within UK.

Currency impact

The British pound revenues make for almost 10-15 per cent of the overall revenues in case of TCS, Tech Mahindra and Wipro. For Infosys, GBP revenue makes for 6.7 per cent of the overall revenue and Euro revenues are 9.6 per cent.

With depreciation in pound, dollar revenues of Indian IT companies may drop and this is a worry as the Indian IT industry is already expected to see a slower revenue growth in 2016-17 given the tough global economic conditions and increasing competition from MNC peers in the digital space. The other impact of a drop in the pound is that companies may also have to re-negotiate some of their contracts.

Dinesh Goel, partner at ISG, a consulting firm, says, “The rupee may not fall as much as pound is falling, so net-to-net pound will become cheaper versus the rupee, which will reduce cost arbitrage for companies outsourcing to the UK as the cost is incurred in rupee while the revenue is in pounds. But this is only in case where the pound falls significantly lower to the rupee.”