Indian IT sector faces risks beyond visas from Donald Trump
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The National Stock Exchange’s Nifty IT index rose 1.6% on Wednesday and recovered about 30% of its losses since the US election results came out. Investors seem to have concluded that the earlier 5.4% correction in the index was overdone. The bounceback on Wednesday might also be because the information technology (IT) sector is perhaps the only one which isn’t impacted at all by the demonetization process, causing investors to take refuge in it.
In any case, investors don’t seem overly concerned about the Donald Trump presidency. Of course, it’s too early to say how things will play out. Trump will assume office only in January, and it’s not clear if the rhetoric during campaigning will translate into drastic changes in regulations.
Also read: Donald Trump brings uncertainties for India
Even so, investors should note that the risks of a Trump presidency go far beyond just visas. For instance, Trump may repeal Obamacare and this can impact growth for the sector. “Healthcare has been the fastest growing segment for Indian IT. A big driver of growth in healthcare has been regulations such as Obamacare and if that is scrapped, there could be a negative impact on demand,” analysts at Nomura Research wrote in a note to clients.
They add that if Trump’s statements about reducing wasteful and unnecessary regulations actually translate into fewer regulations, the resultant cutback in regulatory and compliance-related spending by banking and financial services clients will hit revenues for the IT sector in the near term. “From a shorter-term perspective, a cut back in regulatory and compliance spending with Mr Trump looking to put a moratorium on further regulations in the banking space might be a negative for Indian IT companies that derive ~35-40% of revenues from this vertical”, they said in the note.
Of course, if these measures result in better growth for the banking and financial services industry in the US, it will be a long-term positive for Indian IT as well.
Risks related to new immigration rules are not trivial either. Tighter rules could result in an increase in the minimum wages for H-1B visas and higher visa costs, which would impact margins materially. Analysts at Kotak Institutional Equities pointed out in a recent note that the Democrats-founded immigration reform bill of 2013, if passed, would have impacted Indian IT’s earnings anywhere between 12% and 20%. The impact will vary depending on profit margins of a company.
In recent years, Indian IT firms have increased the proportion of local hires and on-site salaries have been raised as well. As such, the impact of tighter immigration rules may not be as severe as a few years ago. Still, depending on what the new government decides, the impact can be material.