Brexit forces Tata group to review UK business strategy

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Mumbai: As Britain voted to leave the European Union (EU), the Tata group is reviewing its UK strategies, a group spokesperson said on Friday, as spooked investors sold shares of group companies.

Tata Consultancy Services Ltd (TCS), Tata Motors Ltd and Tata Steel Ltd are the leading Tata companies that have a significant exposure to Europe, especially the UK.

On Friday, as the outcome of the previous day’s British referendum emerged in favour of an exit from the EU, shares of all three companies plunged.

TCS fell as much as 4.8% to Rs.2,517.10, Tata Motors dropped 12.9%, its steepest fall since 4 September 2009, to Rs.425, and Tata Steel retreated 10.9% to Rs.297.40.

They pared some of the losses, with TCS ending 2.78% lower at Rs.2,570.70, Tata Motors closing 7.99% down at Rs.449.00 and Tata Steel retreating 6.37% to Rs.312.50.

“Each company continuously reviews its strategy and operations in the light of developments, and will continue to do so. Access to markets and to a skilled workforce will remain important considerations,” the Tata group spokesperson said.

Harish H.V., a partner at consulting firm Grant Thornton, said Brexit impact’s on companies will be guided by how the UK negotiates with the EU on immigration laws and trade.

Nineteen independent Tata companies have a presence in the UK, with diverse businesses, said the group spokesperson.

Of these 19, Tata Motors and Tata Steel are two companies with significant revenue exposure to Europe, specifically the UK.

Analysts tracking Tata Motors said any hit from Brexit to Jaguar Land Rover Automotive Plc, the company’s UK subsidiary that contributes 90% of its profit, will be felt only after two years when trade negotiations between the UK and other members of the EU conclude.

Europe contributes roughly half of Tata Steel’s total revenue. In a bid to cut losses, Tata Steel in March announced its decision to shut Tata Steel UK operations. At the time of the announcement, the company said it had about 7 million tonnes of steel-making capacity in the UK alone. EU is a major market for Tata Steel UK.

“Not easy to know the impact on Tata Steel UK operations. It will depend on the trade negotiations between UK and the remaining countries in the European Union. In addition, if Britain makes its own laws in terms of international trade, it may look to support its domestic steel industry,” said Goutam Chakraborty, an analyst at Emkay Global Financial Services.

In a separate announcement on Friday, Jaguar Land Rover said it doesn’t see its operations or investment commitments being impacted by the UK exiting EU. Europe accounts for one-fourth of Jaguar Land Rover’s sales by volume; the auto maker also sources 35-40% of its component requirements from the region.

With the exit, goods sold to and bought from the EU may attract duties, making Jaguar Land Rover uncompetitive vis-à-vis its German rivals.

Some analysts say Tata Motors could even benefit from Brexit.

“The Brexit will put Jaguar Land Rover in a favourable situation,” said Mahantesh Sabarad, deputy head-research at SBI Cap Securities.

Jaguar Land Rover exports 80% of its total production and imports around 30% of the parts it requires.

A weaker British pound (GBP) will bump up the company’s export realizations and offset the inflation in its import bill.

A weak GBP could make the auto maker cost-competitive and efficient in most of the markets it exports to, including China, which is critical both in terms of profitability and volumes, he said.

Joseph George, an analyst at IIFL Ltd, wrote in a research note that the actual hit from Britain’s exit won’t be immediate.

“The impact on Jaguar Land Rover’s business (if we rule out an immediate sentiment-driven impact on the economies) is at least two years away,” wrote George.

Moreover, the company’s proposed manufacturing unit in Slovakia will hedge it against Brexit, he said.

JLR has signed an agreement with the Slovakian government. to build a new plant with an initial capacity of 150,000 units. Construction will commence in 2016 and production in 2018. Jaguar Land Rover is investing £1 billion in the plant.

Equity markets and currencies around the world felt the tremors from Brexit on Friday.

“The Brexit referendum has created a volatility in financial markets which are basically short-term tremors that are bound to subside,” Gopichand P. Hinduja, co-chairman, Hinduja Group, said in a statement. “The world economy will face headwinds in near term but will eventually rebalance itself to newer opportunities and newer realities.”

The EU could become weaker, with each member-state forced to assess its stand vis-à-vis the Union, Hinduja said.

“Britain would see a revival of its manufacturing and SME (small and medium enterprise) base which had got eroded over the years of its association with EU,” he said