IT firms in a flux over H-1B visa fees, but levers exist to mitigate impact

Analysts say Indian IT firms can offset the impact of the $100,000 H-1B visa fee through higher offshoring, reduced new applications, and client cost sharing over the medium term

On September 19, the executive US presidential order to impose a one-time payment of $100,000 on new H1B visa applications sent on and after September 21, sent shockwaves through the IT industry. Analysts are trying to assess the likely damages and the long-term consequences. 

 

Earnings before interest and tax (EBIT) margins could be negatively impacted by anywhere upwards of 0.5 per cent and earnings per share (EPS) may reduce by close to 6 per cent for the highly exposed.

 

In the medium term, corporates and vendors could move away from visa dependency, shift more work offshore and share higher cost burdens with clients. Companies with lower US exposure, and/or lower onsite mix would be relatively better-placed.

 

Given rising immigration risks and higher acceptance for offshoring post-pandemic, visa dependencies have already reduced.

 

Subdued IT demand over the past three years has also resulted in a drop in new visa applications by Indian companies. The average annual salaries of H-1B visa employees is between $100,000 -110,000, so a hike could result in a shift to local hires.

 

The H-1B visa is valid for a three-year period and may be extended for another three years. One scenario is that a new H1B applicant will pay $100,000 which is to be amortised over a 6-year work horizon implying higher costs of $17,000 per annum. Some of this may be passed on, but it’s one benchmark for calculating impacts. 

 

Overall, companies claim their US-based workforces are 20-40 per cent visa-dependent, but this includes H-1B and other visa categories like L1 and employees based in Mexico and Canada. New visa applications are at between 15-20 per cent. However, it would be naïve to assume that applications would continue at the same rate. GCCs stacking and other modes of offshoring are all likely to increase sharply.

 

Doing an exact sensitivity analysis is difficult without knowing exact data about current H-1B deployment, new applications, and US exposure. IT companies don’t necessarily release details of the above. Analysts are taking North America exposure as a proxy for these calculations.  

 

Most likely companies would reduce visa dependence and this would likely trigger higher offshoring to reduce costs and they may attempt renegotiations to pass on costs. It’s estimated that the top 10 IT Services players have between 1-4 per cent of total employees based on H-1B. Higher offshoring could negate the impact. Players will likely apply for new petitions only for specific skill-sets where the client is willing to pay for the visa fee, making it margin neutral. No impact on existing H-1B visa holders means project delivery will not be affected. But wage inflation is also likely.

 

Net-net, it’s likely the financial impact of the changes in H-1B visa will not be very large in the short term and over the medium-to-long term, the operating models of Indian IT services companies will change to continuously lower dependence on H-1B visas. However, onsite talent costs may escalate over the medium to long term (due to higher demand). The initial panic and confusion may throw up some buying opportunities.

 

An analysis by Nomura which tracked 10 Indian IT companies, indicated that around 17 per cent of applications consisted of new petitions (3,077 out of 18,477). The impact on FY27 margins would range from a low 0.11 per cent for Coforge to 0.99 per cent for Persistent. Impact on EPS could range from 0.5 per cent for Infosys to 5.9 per cent for Persistent.