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The healthcare vertical has been the fastest-growing vertical and has done heavy lifting for growth in recent times. However, with the potential return of Mr. Donald Trump as US President and the prospect of new healthcare reforms, there could be some short-term uncertainty in healthcare spending. In this note, we explore how these potential changes might impact the healthcare sector and what it could mean for the vertical’s growth trajectory. We also examine the implications for Indian IT companies with significant exposure to this sector, assessing how their performance might be influenced by the shifts in the US healthcare landscape.

US healthcare: Bracing for impact

* Mr. Trump's second term is likely to bring many changes to US healthcare policy, with a focus on repealing the Affordable Care Act (ACA), altering Medicaid funding mechanisms, and potentially reshaping drug pricing regulations.

* The healthcare industry is bracing for these shifts, indicating expectations of a more favorable environment for private insurers and Medicare Advantage plans.

* Mr. Trump's reelection is likely to have a mixed impact on providers and hospitals, which face challenges from reduced reimbursements and rising costs.

* The life sciences sector has a mixed outlook, with expedited FDA approvals boosting revenues but increased scrutiny on drug pricing pressuring margins.

Indian IT: Healthcare structurally strong, could have short-term snags

* Persistent Systems (PSYS) has the highest reliance on the healthcare vertical with 28% revenue contribution, followed by HCL Tech (16%) and Wipro (14%).

* PSYS has achieved impressive growth, averaging 51% YoY, in its healthcare vertical over the last four quarters on the back of the ramp-up of large deals. While this has to moderate going forward as the initial ramp-up recedes, we believe the company could continue to deliver growth as BFS and Hi-tech, its two other key verticals, recover in FY26.

* HCLT’s healthcare vertical has been slightly erratic (down 4% QoQ in 1QFY25 followed by ~3% growth in 2QFY25), whereas for Wipro it has clocked an ~8.5% CAGR over the past two years, underscoring structural tailwinds in the sector.

Plotting the recovery: Healthcare ranks one

* As highlighted in our recent thematic report (Bounce-Back! Charting the path to revival for the IT services), we expect healthcare to be the fastest-growing vertical over the medium to long term due to neutral tailwinds from rate cuts, a low threat of insourcing, and stable spends backed by the need for investment in drug discovery, biotechnology and clinical trials.

* However, we would watch out for commentary on the vertical in the upcoming earnings season and a potential impact from the new administration in the US. While we expect growth to moderate in the short term, it should resume once policy clarity emerges in 1HCY25.

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