Brexit will create uncertainty but may not hit IT cos much: Pros

Brexit is a minor hiccup and it does not pose any significant threat to the Indian information technology companies in the long term, feels Vineet Nayyar, Executive Vice Chairman of Tech Mahindra. Particularly in the banking, financial services and insurance (BFSI) space right now, emergence of advanced technology in the Fintech space is a major trend which could pose a challenge, he adds. 

Speaking to CNBC-TV18 Nayyar says Brexit cannot really be blamed for Infosys losing out on the Royal Bank of Scotland (RBS) deal. “The only thing that can hit technology right now is technology itself,” he says.

Sudin Apte, CEO & Research Director of Offshore Insights also shares the same opinion. He believes the next 2-4 quarters could be tough for the IT industry.

UK and European banks have already been under tremendous cost pressure and Brexit creates uncertainty resulting in slower initiatives and consequently fewer IT projects, Apte says.Below is the verbatim transcript of Vineet Nayyar and Sudin Apte’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: Is this the first of more such casualty? How should we understand this one Royal Bank of Scotland (RBS) order cancellation?Nayyar: I don't know whether we can blame Brexit entirely for this. Insofar as I am concerned I do believe Brexit is a minor hiccup. I know this is again the view held by most people because essentially trade will continue. Britain will require German cars and Germany will require British products, their Scotch and Britain would require the vine from Portugal and France. It is a process of adjustment which I believe will take place. The only major thing in this is free migration of people that has its own implications and mercifully it does not impact IT stocks per se.The major trend which is taking place and which is being ignored and which is impacting Banking, Financial services and Insurance (BFSI) is the emergence of the fintech company where automation is taking place, big platforms are being set up and at this point of time they are eating into what was traditionally IT preserved. But I don't see it as a change. That is also technology which is coming in. So, net-net my view is yes, we will have uncertainty for few months, possibly a year but it will settle down. I don't think Brexit will per se impact technology. What will impact technology is paradoxically technology. New technology emerging and it is for us folks to absorb technology and be able to provide the services which fintech companies are providing now.Sonia: Are IT companies or large IT companies finding it difficult to move step in step with this new technology or is a very seamless process?Nayyar: No, I don't think it is difficult. It is something we should have done earlier, we are now doing it and very soon fintech will become a part of technology. It can't stay as a separate stream because there is so much of synergy between us and these new technology platforms which are coming.Latha: After all the banking sector is expected to suffer because of Brexit. It is quite possible that the amount of financial jobs that the city of London generated would not be as many now with there being the EU hinterland not available it could be that finance jobs migrate to mainland Europe. Are there any such fears in the BFSI space itself, should IT companies be prepared for fewer jobs from the banking companies in London?Apte: Let me first say that somewhat I agree with what Mr Nayyar said. But let me put a little different perspective as well especially from next two to four quarters perspective. Point number one, a lot of European and especially UK Banks had been under tremendous cost pressure for some time now and Brexit has been just another layer of pressure on them. Maybe you can say that it is last straw to break the camel's back, I am not exaggerating but that sort of impact. So, point one remains that cost pressures have been already there. It just makes it little bit more difficult.Point two, while we say that the trade will continue between Germany and UK, UK and France like Mr Nayyar mentioned just now, However in a shorter term when things get settled it is going to be an impact on slow initiatives, lesser projects coming on IT side and things like that. So, surely we will have an impact in two to four quarters of lesser activity. Some of the transactions that we talked about like RBS or a couple of other earlier ones very clearly shows that less risk appetite of executives especially in UK when it comes to expansion, when it comes to going back to the growth story and things like that which will again impact on scale and ramping up of projects will slow impact.Point three, even from Indian IT industry perspective the UK business has become little difficult to do. Why, because the currency has seen a huge fluctuation. So, same billing rate which was very profitable six months back is now somehow difficult to bear with. So, unless the contracts are renegotiated lot of these deals will be difficult to deal with or difficult to bear at that currency rate of a pound to rupee. And clients are in no mood to negotiate on a billing rate or increase the billing rate. So, this is the third factor that one needs to see.So, Brexit is one of the aspect. There are other two aspects of maybe one of that is a fallout of Brexit itself is currency fluctuation and ongoing European economic turmoil has been there for some time now. All in all I feel that Indian IT industry will get impacted to the tune of 0.25 to 0.3 percent overall. So, one can say it is not a big deal, one can say 0.3 may result into USD 300-400 million worth risk for the entire industry. So, that is how I look at it. The timing has been another dynamic because it has happened when overall industry was somewhat facing challenge of growth and transforming itself.Sonia: We don't have the exact numbers in terms of what the exposure is that each company has to UK BFSI but in your assessment where do you see the largest pressure come in? Will it be for a company like Tata Consultancy Services (TCS)?Apte: I don't want to single out companies because that will depend on what their client's risk profile is and whatever their plans are to isolate UK risk. But however the companies which have got sizeable business in Europe and more so in UK obviously are TCS and Infosys. Cognizant has ramped up quite well in last couple of years in UK and of course in financial services space but lesser compared to TCS and Infosys. There are few mid tier providers who also work with Barclays and RBS as well as Lloyds Bank type of financial services institutes and there are other players who work with utility companies and some of the other verticals like manufacturing etc in that geography for whom also currency fluctuation will be an impact.Latha: I just wanted to read to you what the Financial Times wrote about the impact of Brexit on banks in UK and in Europe. I am just reading out a couple of points. 1. It says, Uncertainty over business model could hurt in the short term. Overseas banks currently base themselves in London and ‘passport’ in to the other 27 EU member countries. Now they are facing months of uncertainty over whether they will need to get new EU banking licences that apparently is not yet clear. The second point they mention is relocation costs. Brexit is expected to reduce the number of bank staff working in London and could accelerate process of shift to cheaper locations. There are fears of lower trading volume in the long term. Though now of course trading volumes have increased, their assets in Sterling could go down. They expect fewer investment banking earnings because people will not want to do M&A until the terrain is clear. Therefore BFSI on both sides of the English Channel could suffer. Therefore I am asking you again are you worried about the amount of orders that will come from Britain in particular and Europe in general to Indian IT?Nayyar: I don't think there is any contradiction between what I said and what you folks are saying. You folks look at it on a month by month basis. We as companies don't look at anything on a month by month basis. There will be ups, there will be downs, that will be a part of life. We take it for granted. What I am looking at it is a secular trend. What is going to happen two years from now, what is going to happen three year from now. Next quarter results are of interest to me but what is of greater interest to me is am I in the right direction. There what I am looking at it is what are the technology trends, am I there or not, will I be obsolete next year or two years from now. It is that against which I have to guard.What Sudin has said is right and what Financial Times has said is right that in the short term there will be relocation problems, there will be issues, whether London will continue to be the heart of the financial sector of Europe or some things will move back to Frankfurt of Paris etc. Those little things will happen. But long term insofar as I am concerned BFSI will continue to be the life blood of technology. It is going to continue as an important sector. But within this sector there are going to be incredible technological changes. So, I from Tech Mahindra look at that not so much as what is going to happen next quarter, whatever will happen will happen, that doesn't bother me.