India’s IT stocks are likely to remain under pressure for some more time to come, particularly in view of US President-elect Donald Trump’s stance and recent comments on US visas.
Experts, however, believe that the market has priced in all the possible headwinds of foreseeable future and no further price correction in IT stocks is expected.
“We feel IT earnings will remain somewhat tepid in the short term or for the next 2-3 quarters. But actually all companies and Nifty IT – an aggregate IT index – have hit the lowest point of their valuation band and bounced immediately after 9th November. Projected industry growth by Nasscom of 9% is the lowest in the decade, and therefore the valuations have already been adjusted,” says Jimeet Modi, CEO, SAMCO Securities.
The market has, in fact, priced in all the possible headwinds of foreseeable future and moved on. “The market expects that there can be further time lapse. but no further price correction is expected,” says Modi.
Experts feel that whenever the Trump administration propels infra push, Indian IT companies will have on their horizon ample opportunities to support the technological base, and the growth will shift to double digit. Short commentaries from Mr Trump will be probably change to more sensible business policies at the ground level, which would be a win-win for both the countries.
Edelweiss Securities believes that Indian IT companies may get impacted in following 3 ways:
1. Visa fee hike.
2. Increase in minimum wages only in the H1B category, and
3. Execution inconvenience.
(1) Visa fee hike
As far as visa fee hike is concerned, the simplest way to find out the impact will be to estimate the number of employees on H1B visa. Edelweiss Securities estimates TechM, HCLT and Infosys’ employees of H1B visas to be ~3,000, ~4,000, and ~12,000 respectively. It have assumed 100% increase in H1B visa fees from current USD4,000 to USD8,000 for Infosys and TechM and from USD3,000 to USD6,000 for HCLT (as its local talent is more than 50%).
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(2) Minimum wage increase
Indian companies are paying in line or slightly above wages than recommended as per US labour law. While Edelweiss Securities disagrees with the argument that US lawmakers will hike minimum wages without considering its impact on profitability of US companies and significantly lower tech unemployment data, it agrees with the fact that increasing minimum wages will be the easiest mode to discourage import of H1B skill set. While UK has increased minimum wages from GBP25,000 to GBP30,000, implying 20% increase, it believes the scope for a such sharp jump in the US is limited given already higher minimum wages.
(3) Execution inconvenience
Execution challenge could be the biggest negative outcome of stringent H1B laws and may be one key reason for Indian IT companies still resorting to usage of H1B other than lack of talent in the client market. The simple reason is: a) lack of flexibility in moving local resources versus H1B hires; and b) lack of availability of skill set in client market. While it is difficult to quantify the actual impact in financial terms, the execution inconvenience will be significant and may gobble up management bandwidth and trigger a half-hearted approach to onsite projects, leading to lower growth.
Outlook: Risk of increase in cost of doing business
“Implementation of the H1B regulation in the above format (35% increase in minimum wages and doubling of visa fee) will wipe away EPS of our preferred picks like Infosys, TechM and HCLT by 6-13%. HCLT’s high (~55%) local workforce implies only ~6% EPS impact on FY18E and for Infosys and TechM the impact will be between 12% and 13%, assuming zero relief on pricing and
no offshore shift, which looks unlikely,” says an Edelweiss Securities’ research report. Edelweiss Securities, therefore, reiterates its ‘BUY/OP’ recommendation/ rating on Infosys, and ‘BUY/SP’ for HCLT and TechM.
SAMCO Securities also believes that amongst frontline IT stocks, Infosys and HCL Tech are the two best buys available.
“Infosys is trading at 15 times its estimated F17 earnings and HCL Tech is trading at 14 times its estimated F17 earnings. To add to attractive valuations, as Mr. Sikka repeatedly has mentioned about the progress of the company in cloud computing and AI, the company will benefit from these initiatives also. HCL Tech is going to take advantage out of its predominant portfolio of energy and mineral solutions,” says Modi.
According to Modi, IT stocks are into a bear market from 2015 and are trading lower. Therefore, one must have a positive view on IT stocks for the long term, but should take care of possible headwinds in the short term.