Healthcare and the US banks will continue to lead growth; manufacturing (especially aero and automotive) may face short-term headwinds, as per the report
A new regime in America alongside continued rate cuts could augur well for tech-spending cycles which have been depressed over the past two years, Motilal Oswal said in its latest note underlining key takeaways for IT services sector from Donald Trump's election win in the US.
IT services vendors are now largely immune to immigration shocks, and while there may be definite gross positive push from corporate tax cuts, a more intense trade war could offset some of these benefits, the note by Motilal Oswal Financial Services said. IT services' hiring plans are now decoupled from the H-1B regime, it observed.
It expects technology spending to trend upwards for calendar years 2026/2027, led by a business-friendly administration and declining interest rates. The technology spending has been depressed over the past two years, and Motilal Oswal believes a new regime along with continued rate cuts augur well for tech spending cycle.
"Our analysis focuses on three key vectors: immigration policies; corporate tax rates; and trade war. Our findings indicate that IT services vendors are now largely immune to immigration shocks," it said.
The report also analysed how IT services companies fared in the earlier term.
Crunching the impact of visa and immigration, it said the first term of the Trump presidency did lead to an outsized increase in rejection rates; rejection rates for H1B visas surged from an average of 4.6 per cent prior to 2016 to 15.4 per cent during the presidency.
"This was a blessing in disguise for the IT services sector; however, the companies fundamentally altered their hiring strategies and increased localised on-shore hiring," it said.
IT services' hiring plans are now decoupled from the H-1B regime; the number of applications has dipped by 51 per cent from the peak of FY17.
"While the new administration may be incrementally positive about skilled immigration, we expect the impact to be neutral to marginally positive," according to Motilal Oswal note.
Trump's Tax Cuts and Jobs Act (TCJA of December 2017) reduced the federal corporate tax rate to 21 per cent from 35 per cent, along with a few other tax sops for the US corporates. The key industries that benefitted were BFSI, IT and software, energy, and industrials, the report noted.
"What is interesting, however, is that the ensuing trade war and tariff regime offset the gains from tax cuts for key industries. Our analysis suggests that semiconductors, automotive, steel, manufacturing, and retail companies experienced elevated manufacturing costs and significantly stressed supply chains, nullifying some of the impact from these tax cuts," it said.
The top-5 Indian IT services companies posted an average revenue growth of 7.5 per cent during 2016-20 when Trump was at the helm of the White House, while the growth was 7.9 per cent during the first three years of the presidency.
"While the fine print on immigration, tax cuts, or trade wars will matter, news reports suggest Trump's administration will be far more business-friendly as compared to the outgoing regime," it said.
Setting the context for penning the note, the brokerage said now that dust has settled following the US elections, it is analysing the potential impact of the incoming Trump administration on major client industries in the US, their technology spending behaviours, and the subsequent effects on IT services' revenue growth rates.
Noting that the technology spending has been "depressed" over the last two years, it said the new regime, along with continued rate cuts, augurs well for the tech spending cycle.
Healthcare and the US banks will continue to lead growth; manufacturing (especially aero and automotive) may face short-term headwinds, as per the report.