H-1B visa fee hike hits IT funds; investors urged to stay long-term

Fee hike could accelerate offshore delivery, improve competitiveness; AI adoption, re-skilling initiatives expected to provide medium-term growth opportunities

The imposition of a one-time $100,000 fee on each new H-1B visa application by the US administration has unsettled investors in information technology (IT) funds. These funds are down 11.4 per cent year-to-date. Altogether, 32 schemes currently manage ₹47,569 crore. Experts caution against knee-jerk reactions.

 

Limited impact 

The steep increase in H-1B costs will raise operating expenses for Indian IT firms with significant US exposure. “Around 60–65 per cent of large IT company revenues come from North America, with many projects reliant on visa holders,” says Rahul Bhutoria, director and co-founder, Valtrust.

 

Margins of firms heavily dependent on H-1B hires are likely to be affected. 

However, the fee applies only to new applications, and not to renewals or existing holders. “Margins and earnings for Indian IT services players will likely not be materially impacted. The potential effect, if any, will be seen only from FY26-27 onward,” says Shibani Kurian, head of equity and fund manager, Kotak Mutual Fund.

 

Market experts opine that the overall effect will be limited. “Large-cap IT companies are expected to take a 0.3–1 per cent hit to their earnings per share in FY27, while mid-cap firms may see a 1.5–4.4 per cent median impact,” says Feroze Azeez, joint chief executive officer (CEO), Anand Rathi Wealth.

 

Large players already balance the on-site–offshore mix. “Mid-sized and smaller firms, which depend more on H-1B talent, could face higher costs, which could potentially affect their margins and delivery timelines,” says Bhutoria.

 

Risk mitigation strategies 

H-1B applications by IT services firms have been declining, with such visa holders forming a shrinking proportion of the total workforce.

 

“Today, only 2–4 per cent of their global workforce is on H-1B visas, with 67–72 per cent of their US staff being local hires,” says Chakri Lokapriya, chief investment officer, LGT Wealth India.

 

Azeez adds that large-cap IT firms have already reduced H-1B dependence to 20–40 per cent of their North American workforce.

 

“Work can be executed from India, while local hiring in the US can reduce dependence,” says Siddarth Bhamre, head of institutional research, Asit C. Mehta Investment Intermediates. Incremental costs may also be shared with clients.

 

Other strategies include expanding in cost-effective nearshore centres. “Indian IT companies can boost offshore delivery from India, and invest in automation to cut costs and reduce visa dependence,” says Om Ghawalkar, market analyst, Share.Market.

 

Indian IT companies will also try to diversify their client base to Europe, Asia Pacific, and the Middle East.

 

Other headwinds 

The sector’s bigger challenge is muted discretionary tech spending due to macro and trade uncertainty. There has been a slowdown in discretionary tech spends by clients in geographies such as North America and Europe, especially in tariff-impacted sectors like retail, automobiles, and ER&D (engineering research and development). “Revenue growth trajectory in the near term for Indian IT services companies has been muted despite strong deal bookings, with the challenge being slower deal-to-revenue conversion,” says Kurian.

 

The sector is also facing testing times due to the rapid adoption of generative AI. “The bigger problem is advancement in technology and low to zero growth seen in the top line in the large-cap companies,” says Bhamre.

 

Regulatory pressures and compliance complexity are intensifying in key markets. “Increasing cloud costs, talent shortages, and retention challenges, especially in areas such as cybersecurity and AI skills, remain pressing concerns,” says Ghawalkar.

 

Legacy systems are slowing innovation, while domestic wage inflation and price competition in legacy services are squeezing margins further.

 

Structural positives 

Despite challenges, the sector has avoided major setbacks. “Widespread client deferrals or ramp-downs have been largely avoided. The deal momentum remains steady, especially in cost optimisation and vendor consolidation. The BFSI vertical remains resilient,” says Abhishek Pathak, vice president and institutional research analyst, Motilal Oswal Financial Services.

 

Once macro stability returns, discretionary tech spending is expected to revive. The medium-to-long-term outlook remains positive. “AI adoption at the enterprise level presents a meaningful growth opportunity for Indian IT companies. Companies are re-skilling their workforce to tap into AI-led opportunities,” says Kurian.

 

The recent 25-basis-point Fed rate cut has improved enterprise demand sentiment. “The possibility of up to two more rate cuts creates a favourable macro outlook,” says Pathak.

 

Valuations for the sector are now in line with long-term averages.

 

Firms are expected to develop delivery capacity. “The H-1B fee hike itself could boost offshore delivery models, improving competitiveness over time,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.

 

Avoid hasty exit 

Once macro certainty returns, discretionary tech spending is expected to revive. “AI implementation will create new medium-term opportunities in data and cloud migration, data stacks, and analytics,” says Kurian.

 

Lokapriya expects profit growth turnaround to happen by 2026 as global tech spending stabilises and AI integration deepens.

 

Kumar suggests staying invested and avoiding emotional exits amid near-term volatility. Investors should maintain a three- to five-year horizon. New investors, according to him, should consider a staggered entry over the next few quarters to optimise risk-adjusted returns. 

  The writer is a Mumbai-based independent journalist