Stricter H-1B visa norms can impact margins of IT firms: Brokerages

Just as investors thought the rising noise around stricter US H1B visa issue was dying down, the United States Citizenship and Immigration Services (USCIS) issued a guidance memo that will likely lead to higher scrutiny and possibly higher rejections for such applications by Indian information technology (IT) companies. The memo states entry-level computer programming positions cannot be deemed as “specialty occupations” as against the prevailing practice of considering all computer programming jobs as “specialty occupations”. Notably, classification under “specialty occupations” is a must to get a visa. Now, the employer will be required to submit evidence that the job qualifies as a “specialty occupation” via copies of past positions and a detailed description of the said position, among others. Industry body Nasscom has said this legislation will not have a meaningful impact on Indian IT firms. While most brokerages, too, echo this view, some are a little more concerned. The BSE IT Index, too, remained under pressure and fell 0.8 per cent on Wednesday against a flattish Sensex.

Here’s what leading brokerages say on this matter:

Ambit Capital

We are worried as this event shows that protectionist measures can be put in place even without passing new legislation and impact IT companies as early as in FY18. Cognizant, which is most exposed to US protectionism (about 80 per cent of revenues from the US), is our top “short” and TCS (about 50 per cent) is our top “Buy”.

As the supply of talent is squeezed, the cost of all onsite workers will go up, hurting margins for all IT services companies. Some of this will be offset by higher prices, more offshoring and more automation. Unfortunately, it is not possible to quantify the net impact at this stage. With this memo, the outcome will likely be the same as if the minimum wage provision for H1B visas were increased, as some recently proposed legislations intended to do. Further, this will be applicable to visa applications made for FY18 and so Indian IT companies could feel the heat earlier than expected by consensus.

IDFC Securities

We do not see any risk of revenue disruptions for Indian IT companies due to their resilient business models and sticky revenue profiles. We believe the new regulations would increase the cost of doing business for Indian IT companies and increase the lead time for project ramp-ups. However, we do not expect a major impact on margins as Indian IT companies have already started implementing multiple measures to mitigate similar anticipated risks.

Motilal Oswal Securities

Recent overrule of programming jobs’ automatic qualification under “specialty occupation” may not have a substantive impact on Indian IT companies, but does call for more scrutiny going forward.

Nomura

We view the immigration tightening being seen in the UK, the US and Singapore as negative for Indian IT, both from a margin and a near-term growth perspective, given the uncertainty. We believe while the actual passage of a Bill could take three-four quarters at minimum, interim measures to increase scrutiny, plug loopholes and executive actions could lead to Indian IT companies having to change their onsite staffing/salary levels pre-emptively, which could have a negative impact on margins.