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Now that the dust has settled following the US elections, we analyze the potential impact of the incoming Trump administration on major client industries in the US, their technology spending behaviors, and the subsequent effects on IT services’ revenue growth rates. Our analysis focuses on three key vectors: 1) immigration policies; 2) corporate tax rates; and 3) trade war. Our findings indicate that IT services vendors are now largely immune to immigration shocks. While there could be a definite gross positive push from corporate tax cuts, a more intense trade war could offset some of these benefits, in our opinion. We also analyze how IT services companies fared in the earlier term. While the quantifiable impact of these initiatives may be debatable, we expect technology spending to trend upwards for CY26/CY27, led by a business-friendly administration and declining interest rates.

Impact of Visa and immigration

* The first term of the Trump presidency did lead to an outsized increase in rejection rates, as depicted in Exhibit 2. The rejection rates for H1B visas surged from an average of 4.6% prior to 2016 to 15.4% during the presidency.

* This was a blessing in disguise for the IT services sector; however, the companies fundamentally altered their hiring strategies and increased localized on-shore hiring.

* Exhibit 1 shows that IT services’ hiring plans are now decoupled from the H1B regime; the number of applications has dipped by 51% 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.

Corporate tax cuts: good in isolation, marred by tariffs

* Trump's Tax Cuts and Jobs Act (TCJA, Dec’17) reduced the federal corporate tax rate to 21% from 35%, along with a few other tax sops for the US corporates.

* As portrayed in our exhibits, this correlated with a bump in earnings growth across major industries.

* The key industries that benefitted were BFSI, IT and software, Energy, and Industrials.

* 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.

Indian IT services: Correlation with tax cuts only tangential

* The top 5 Indian IT services companies posted an average revenue growth of 7.5% during 2016-20 when Trump was in the helm of the White House, while the growth was 7.9% 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.

* The technology spending has been depressed over the past two years, and we believe a new regime along with continued rate cuts augur 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.

* We are especially enthused by hi-tech's resurgence, which we believe is ahead of schedule.

* Our top picks are HCL Technologies (TP: INR2,300), LTIMindtree (TP: INR7,400), Coforge (TP: INR10,000), and Persistent Systems (TP: INR6,300). We estimate HCL to lead revenue growth among large caps over the next three years, driven by its resilient portfolio and engineering services. Our positive outlook on LTIMindtree is based on its best-in-class offerings in data and ERP modernization, with a recovery in US banks' discretionary spending expected to further support its growth. We believe Coforge’s healthy executable order book and a rebound in BFS client spending bode well for its organic business. Cigniti could prove to be an effective long-term asset. Persistent Systems, with its strong product engineering background, remains the fastest-growing IT services company in our coverage and is well-positioned to benefit from the long-term GenAI investments.

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