Indian IT hit by tremors of Brexit

This could just be the start, as UK contributed to nearly $20 bn or 18 per cent of India's $108 bn software exports for the year 2016

Indian software exporters have begun to feel the tremors of Brexit as London becomes less attractive as the  financial capital of Europe. 

Cognizant Technology Solutions and Infosys, the second and third largest exporters, have seen revenue loss due to Britain's decision to exit the European Union. Cognizant has cut forecasts for the second time in six months citing uncertainty in banking and finance clients, besides healthcare.

Infosys will shift 3,000 people to other clients after Royal Bank of Scotland decided to sell a unit, for which it hired the Indian firm to build IT applications. Infosys is expected to lose $50 million in revenue this year, adding pressure on chief executive Vishal Sikka, who had to reduce forecast for the year ahead citing business uncertainty.   

This could just be the start, as the  United Kingdom contributed to nearly $20 billion or 18 per cent of India's $108 billion software exports for the year 2016, according to software industry lobby National Association of Software and Services Companies (Nasscom).  

India's software exporters also earn over a third of their revenue from banking and financial services clients, who will face fresh challenges as Britain emerges as an independent market, instead of being part of the larger European market. 

For most banks like RBS, running an independent entity is unviable in a relatively smaller market such as the UK. As the market shrinks, clients across  geographies decide to cut discretionary spending of building new software applications, mostly outsourced to  Indian vendors, and focus on maintenance to reduce costs. 

Routine maintenance of applications and servers are increasingly being sought to be automated by clients that impact margins and profitability for software vendors.

"It is a start of things to come because of the Brexit impact. There will be several banks that will re-evaluate UK operations.  It will have big impact not just on Infosys but also other Indian companies that have exposure to UK, Europe banking industry," says Pareek Jain, Vice President in the Bengaluru office of HFS Research, the technology outsourcing and researcher. "In Infosys case, we have got visibility. There will be many others which will not come out. More importantly, it is a sign of things to come (for the Indian IT sector)." 

The  tremors of the RBS deal loss were felt in the stock market. Infosys stock lost 3 per cent as trade began on Tuesday, a 8-month low, with the news impacting shares across software exporters, dragging the BSE IT Index by 1.06 per cent. 

“We see risks to Infosys’s revenue and margin outlook given the increasingly negative commentary across players,” Bloomberg quoted analysts at brokerage Emkay Global Financial Services led by Manik Taneja as saying in a report. The sector is heading for a “very rough” fiscal 2017 and also into next year, they wrote.