TCS, Accenture, Cognizant may feel Brexit pinch: Moshe Katri

Post the Brexit, both short-term and long-term impact on the UK and Euro Zone will have to be closely watched, says Moshe Katri, independent IT expert. The scenario for IT companies, post Brexit, looks pessimistic. The recovery in the second half for the sector could be challenging, Katri told CNBC-TV18.In Indian context, three major IT firms — Accenture, Tata Consultancy Services and Cognizant — are likely to be most impacted as their exposure to UK is high, Katri says. However, it is too early to cut down earnings expectation for these firms. “Investors will look at India as a safe heaven now,” he says, adding that rupee will strengthen in such a scenario. He expects 2016 to be slower. Below is the verbatim transcript of Moshe Katri's interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.Sonia: What did you make of the correction that we saw in some of the IT stocks post Brexit? How much of an impact do you think the pound fall would have on the revenue growth for some of these companies?A: You need to do two things. One, look at the near term impact and second, look at the long-term impact. However, from a near-term impact perspective you have to look at the UK, Euro zone and on the UK side of the business you definitely have Fx advance. You will have other issues related to transfer or IT personnel in and out of UK especially vendors that do or execute projects out of the UK. You have to focus on the possibility of project deferral or deferrals on large spending decisions in the UK. So these are two-three things that you have to focus on.In terms of the euro zone, you will have to focus on the possibility of uncertainty impacting also spending decisions and in terms of specific verticals that we typically look at, financial services which has been a difficult and challenged vertical to work in this year, will likely be facing even more challenges. I would say that from a long-term perspective any sort of disruption is ideal for any integrators with consulting expertise and that will be ideal for the likes of Accenture and Cognizant, but we are going to have some time until we get there, what does all this means from a big picture perspective. The calendar year 2016, we view it as slower than expected given the fact that budgets were finalised later than usual. We did expect to see a second half a recovery and given what has happened last week, it seems that the scenario could be somewhat pessimistic and given the challenges that I mentioned right now.Anuj: The immediate worry is on pound depreciation and the fact that some of these companies will see hit on dollar revenue growth. Which listed companies in India are more vulnerable? We have seen reaction in Tata Consultancy Services (TCS) for example; the stock was down 3 percent yesterday. How would you approach it?A: TCS, Accenture and Cognizant have the largest exposure to the UK. In terms of general exposure to Europe, that is roughly about 20-25 percent for most companies in the space, but in terms of specific UK exposures, these are three companies that have more exposure to the UK.Sonia: Would you scale down your target price or your earnings expectations for TCS particularly because of this?A: It's a leader now. However, this happened last week, there is some news out there that it is talking about a possibility of a second referendum. I think all this is dynamically changing by the hour. Anuj: The silver lining is that while we are fretting on the pound part, dollar is getting strong and there is a quite a bit of rupee depreciation. Do you think that will more than compensate and things could look better for IT companies over the next six-nine months?A: There is another scenario where investors would look at India as a safe haven and under that scenario you could see the rupee strengthening. So it's another possibility that could help the space as well.Sonia: The another focus this morning is HCL Technologies because there are some news reports which are suggesting that the company could have lost at least USD 1.5 billion worth of contracts in the last two years. This is a significant compared to HCL Tech's full revenues. How would you read into that and what is your call on the stock?A: We do not cover HCL Tech but all this is a real possibility given the Fx volatility that we have seen especially last week.