 "Cheaper pound hope for Tata group firms")
The UK's exit from the European Union, popularly known as Brexit, and the resulting fall in the value of the pound would benefit the Tata group, the largest Indian investor in the country.
A sharp fall in the British currency since June 23, when the UK voted to exit the EU, is likely to benefit Tatas' manufacturing operations in the UK, such as Tata Motors and Tata Steel.
On the other hand, exporters such as Tata Consultancy Services (TCS), Tata Communications and Tata Global Beverages could face headwinds from lower margins. The pound has lost nearly 19 per cent of its value against the rupee since the Brexit referendum
During the same period, the pound lost 18.3 per cent against the dollar, making UK's exports more competitive.
At the Tata group, the five biggest companies with exposure to the UK - Tata Motors, Tata Steel, TCS, Tata Communications and Tata Global Beverages - together generated nearly Rs 1 lakh crore revenue from the UK market during the financial year 2015-16 (FY16), accounting for nearly a fifth of their consolidated revenues.
Tata Motor's Jaguar Land Rover unit is among the top exporters from the UK, with exports accounting for nearly 80 per cent of its revenue. Jaguar Land Rover reported revenue of Rs 1.82 lakh crore in FY16, according to Tata Motors' annual report.
In comparison, the UK is a minor trading partner for India taking in around $8.8 billion (about Rs 58,000 crore) of India's merchandise exports in FY16, accounting for 3.4 per cent of India's total exports.
The UK's share in India's imports was even lower at 1.4 per cent in FY16, worth $5.2 billion (Rs 34,300 crore).
Among individual companies in the Tata group, the biggest impact would be on Tata Motors, which generated around 17 per cent of its consolidated revenue from the UK market - nearly Rs 46,000 crore.
Tata Motors expects a weaker pound to improve the competitiveness of Jaguar Land Rover (JLR).
"More than 80 per cent of JLR's revenue comes from exports to the rest of Europe, China, the US, and other markets. We do source about 40-50 per cent of our components from the EU. Therefore, if you take a combination of these, JLR would benefit from a continued weaker pound," said Tata Motors group CFO C Ramakrishnan during the analysts' conference call for the April-June 2016 quarter result.
A cheaper pound increases JLR's revenues in its home currency (pound sterling) in the same manner as Indian IT exporters reported higher revenues and profits (in rupee terms) after the 2013 fall in the value of the Indian currency.
Analysts agree, but they also say gains to Tata Motors would be gradual and a part of it could be taken away by the pound-rupee conversion.
"Indian companies with manufacturing operations in the UK, such as Tata Motors and Tata Steel, would benefit from a weaker pound but gains will accrue over a period of time as their past currency hedges mature. There could, however, be some translation losses as they convert their revenues in rupee for reporting purposes," said Jinesh Gandhi, auto analyst, Motilal Oswal Securities.
For Tata Steel, some tailwinds are expected from the pound depreciation.
"Weaker pound versus euro is expected to improve the UK operations' short-term competitive position," said Tata Steel during its analyst presentation for the first quarter result.
The UK accounted for nearly 27 per cent of Tata Steel's consolidated revenue (around Rs 31,500 crore ) in FY16.
Thus, with Tata Motors and Tata Steel accounting for 64 per cent of Tata group's UK revenue, the group is expected to benefit from the pound depreciation, even after considering the negative impact for the exporting firms from the group.
Analysts expect the country's top information technology exporter TCS to face margin pressures and growth headwinds after the economic upheaval unleashed by Brexit, besides the immediate impact of depreciation.
TCS' revenues from the UK market was flat on a year-on-year basis during the July-September 2016 quarter, compared to 7.4 per cent y-o-y growth during the first quarter. UK accounted for 15.8 per cent of TCS consolidated revenues in FY16 - Rs 17,000 crore.
The UK is also a significant market for Tata Global Beverages and Tata Communications.
The depreciation in the value of the British currency could negatively impact them.
In FY16, the UK was Tata Global's second biggest market after India, accounting for 17.4 per cent of its consolidated revenue.
For Tata Communications, the UK accounted for over 15 per cent of its revenue last financial year.
Some experts said any impact of the pound depreciation would be short-lived and transient.
"As we saw in the case of Indian IT companies, currency impact lasts for a few quarters but doesn't change the business fundamentals. What matters in the long and medium term is the trend in secular growth in the economy," said Dhananjay Sinha, head, institutional equity, Emkay Global Financial Services.
The jury is still out on the long-term impact of Brexit and pound sterling on UK's economy.
However, given that most businesses in UK, including Indian-owned companies, were backing the "stay" campaign, Brexit is likely to have an adverse impact on growth plans of Indian companies for the UK market as business leaders will take time to understand the Brexit impact.
