India’s $146-billion IT industry has no idea what will happen to its European business now

The Indian IT outsourcing industry is bracing itself for some major challenges following Britain’s vote to exit the European Union on June 23.

Europe is the second-largest market for India’s $146 billion IT outsourcing industry, generating around 30% of its revenue. Many IT companies have their EU headquarters in the UK and use the country as a gateway for business across the EU. Some 800 Indian IT companies currently have exposure to the UK, and employ around 110,000 people there.

Major challenges for Indian companies could arise from the volatility of the British pound, uncertainty about future policies between the UK and Europe, and changes in financial and banking systems.

There could be a “decline in the value of the British pound, which could render many existing contracts losing propositions unless they are renegotiated”, Indian IT industry body Nasscom said in a statement. “The uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with EU could impact decision making for large projects.” The pound dropped to a 30-year low against the dollar following the vote.

Indian IT companies may need to establish separate offices and hire different teams for the UK and the EU after the fallout, putting heavy expenditure burden on IT companies in the near-term, Nasscom said.

“We foresee significant uncertainty and reprioritisation of business and IT priorities across companies in the UK and the EU,” said Rostow Ravanan, CEO of Bengaluru-based Mindtree. “We are closely observing the developments, and will take the necessary steps to align our plans with our clients’ priorities.”

Officials have told the BBC that Morgan Stanley has already started moving 2,000 investment banking jobs from London to Dublin and Frankfurt. Morgan Stanley has denied these reports, but a company spokesperson told Bloomberg that the referendum “will have a considerable impact, the extent of which will not be known for some time”. Morgan Stanley is among the many multi-national clients of Indian IT companies.

Near-term impact

Shares of most Indian IT companies fell when Brexit became a reality last week. The benchmark S&P BSE Information Technology index ended down 2.1%, with shares of most sector heavyweights like Infosys, Tata Consultancy Services, Wipro and HCL Technologies closing between 1% and 4% lower.

The immediate fallout for Indian IT companies would be due to the weakness and volatility in the British pound. On Friday, the currency saw its worst-ever one-day decline, falling around 11% against the US dollar and over 8% against the Indian rupee.

Indian IT outsourcers – who get between 85% and 90% of their revenue from outside India – typically hedge against currencies to protect themselves from sudden shocks. The hedging cycle for each company is different, and may vary from 90 days to 12 months or even more.

“We could see a mark-to-market impact on our receivables which could impact the current quarter,” CP Gurnani, CEO of mid-sized IT outsourcing company Tech Mahindra, said in a statement.

Waiting and watching

Overall, it is mostly a wait-and-watch situation for Indian IT players, as they await clarity on UK’s future business policies.

India’s third-largest IT outsourcing firm Wipro said that it is assessing the potential impact of Brexit “on a host of factors including mobility of labour, [and] changes in the financial system.” Wipro has around 4,000 employees in the UK.

“This is a long-term adjustment that needs to be done across trade and other policies…We will have to wait and watch,” Gurnani of Tech Mahindra said.

Infosys, India’s second-largest IT company, did not share comments post-Brexit, but in a speech (pdf) on June 18, CEO Vishal Sikka had said that the company’s business may see some impact if UK decides to exit EU.

“There could be small time short-term effects on currency and also potentially on business, we are watching those very closely… A lot of these macroeconomic conditions like the US elections and so forth these are elements of our environment that we have to operate in and my general sense is that these kinds of things have an effect on business from time to time,” Sikka said during Infosys’ annual general meeting in Bengaluru.

However, some hope that UK’s strained relationship with the EU may result in the strengthening of the India-UK economic relationship, which may lead to more business for Indian companies.

UK may seek to compensate for the loss of preferential access to EU markets, Nasscom said. “Additionally, with UK less dependent on intra-EU immigration into UK, it could become more open to high-skilled immigration from other non-EU countries including India,” it added.

This article first appeared on Quartz.