IT sector Analysis

IT sector Analysis

Last updated: 06 Jul, 2020 | 05:40 pm

IT sector Analysis
  • US President Donald Trump recently suspended H1-B, H-2B, L-1 and J entry in the USA till December 2020. 
  • As per the bill, all visa-holders outside of the US will not be permitted to enter the country until December 2020. Visa holders currently inside the country can continue living and working. 
  • However, it is still unclear as to how the renewal and fresh visa processing will happen. 
  • We believe there is no major impact on Indian IT businesses due to this visa restriction.
  • The table below shows revenue, and cost as a percentage of sales.

The IT sector has been preparing for this

  • Indian IT companies have been continuously reducing their dependence on H1-B Visas to fulfil onsite demand in the last 2-3 years due to sharp decline in visa approval rates (Refer chart below). 
  • Companies have focussed more on local hiring and subcontractor hiring to augment H1-B resources. For HCL, Wipro and Infosys, on an average, 60-65%% of their total employees in the USA are local residents
  • Companies are hiring freshers in the USA to reduce cost and have set up training centres to help freshers get onboarded. Infosys in the past few quarters have hired ~10,000 freshers in the US. 
  • In addition, a majority of the existing visa holders are still inside the U.S. Therefore they can continue to work and business can function as usual. 
  • These tech giants have also developed processes and systems that allow them to operate a significant portion of their business remotely. This helps lower dependency on visas and reduces cost significantly.

How is business shaping up in the sector?

  • Companies in this sector witnessed a 5 - 9% QoQ fall in revenue in the most recent quarter that was attributed to the drop in business confidence caused by the Covid-19 pandemic. 
  • However, given the response of central banks and the government towards supporting business, there has been significant improvement in business confidence.
  • Further, the Covid-19 pandemic has forced a tectonic shift in businesses processes to move towards greater digitization.
  • India is well-placed to take advantage. With immense scale and cost advantages, domestic IT service companies are well entrenched and should see demand increase as the world recovers from Covid.
  • Although the INR is expected to remain volatile, significant appreciation in rupee compared to dollar is not expected anytime soon. This would eventually aid the profits of IT sector as the majority of their revenues come from the USA and other foreign countries.The table shows Currency-wise revenues mix for these IT firms.
  • The IT sector in India is expected to witness high growth in the coming few years. TCS, Infosys and HCL are expected to benefit the most from this surge in demand. The table below shows sector-wise revenues for the IT firms.

IT sector is overall expected to perform well in the coming future.

Our VGQM stock analysis model has the following recommendation:

BUY: HCL, Wipro

HOLD: TCS, Infosys, Tech Mahindra