Nomura believes the most damaging provision of the US Immigration Bill for Indian IT remains the restriction on outplacement of H1 B visa holders at client locations, which hurts outsourcing in a big way
Nomura Equity Research hosted a conference call on Tuesday, with Ameet Nivsarkar (VP,
NASSCOM) to understand how the new immigration bill unveiled by the “gang of eight” US senators could potentially impact India’s IT industry. The proposed Immigration Bill aims to reform border security, employment verification, legalization of illegal immigrants and legal immigration and temporary visas.
Key negatives of the proposed Immigration bill
1. No access to visas from 2015 for employers who have high share of foreign staff: According to the Bill, in 2014 companies will be banned from obtaining further visas if more than 75% of their staff are H-1B or L-1 employees. In 2015, the ban applies to companies if more than 65% of their workforce is H-1B and L-1 workers. In 2016, the ban moves to 50%.
Most Indian IT companies have 50%-80% of their staff as H-1B or L-1 visa holders currently, according to Mr Nivsarkar.
2. Reduced ability to place employees at customer site: According to the Bill, “an H-1B-dependent employer may not place, outsource, lease, or otherwise contract for the services or placement of an H–1B non-immigrant employee”. This means that employees on H1B visas may be restricted from working at the customer sites, although they can work from global delivery centres. This would require a business model change for Indian IT companies and raise the cost on onsite staffing for projects, according to Nomura.
3. Increased visa fees: The bill proposes to significantly increase the fees for employers who are H-1B dependant compared to normal users of the program. Specifically, if the employer has 50 or more employees, and more than 30% but less than 50% of staff are H-1B or L-1 employees (who do not have a green card petition pending), the employer must pay a $5,000 fee per additional worker in either of these two statuses. Similarly, if the employer has 50 or more employees, and more than 50% are H-1B or L-1 employees (who do not have a green card petition pending), the employer must pay a $10,000 fee per additional worker in either of these two statuses.
4. Increased lead time for hiring: The bill stipulates that employers post a detailed job opening on the Department of Labour's website for at least 30 calendar days before hiring an H1B applicant to fill that position. This would increase lead times for execution and would reduce competitiveness of Indian IT compared to MNC IT, Nomura believes.
Key positives of the Bill:
1. Higher H1B cap limit: The Bill proposes to raise the cap of 65,000 H1B visas (annual) to 110,000 which could go to as high as 180,000 in future years. This is a positive as against the current cap of 65,000, there were around 125,000 visa applicants this year—this forces the Immigration authorities to resort to a lottery system to decide who will receive visas.
2. Green card reform: The Bill proposes to exempt certain categories of skilled labour from annual numerical limits on employment-based immigrants—e.g. doctoral degree holders in STEM (science, technology, engineering, and mathematics) field would be exempted. In addition, 40% of the worldwide level of employment-based visas would be allocated to a certain set of people which include holders of a master’s degree or higher in a field of science, technology, engineering or mathematics from an accredited US institution of higher education.
According to Mr Nivsarkar, the Bill has been introduced in the Senate and it will first go to a judiciary committee and post that a mark-up committee. At every stage there could be amendments. Post that it is put to vote in the Senate and has a high chance of being passed there since the ruling Democrats have a majority.
If passed in the Senate, then the Bill is sent to the House where it goes through the same process. The final compromise bill, which has amendments from both Senate and the
House, is sent back for vote one more time at the Senate and House. If passed, it will then be sent to the president who can either sign it into a law or veto it. There is a possibility for the language to be changed at every stage.
If everything goes fine, the Bill can be made a law by October 2013 at the earliest, according to Mr Nivsarkar. The Bill, however, has less chance of being passed at the House since Republicans have a majority there. As well, Mr Nivsarkar noted that the bigger concerns in the Bill are around the fate of the 11 million illegal immigrants and not temporary work visas.
According to Mr Nivsarkar, the Bill, if passed, would require a change in the way Indian IT does business currently. Indian IT will have to consider one or a combination of the following options to continue doing business normally:
1. Acquire companies based in the US and increase local staff percentage.
2. Start onsite development centres in Tier2/Tier-3 cities, where costs are lower,
3. Tweak the onsite offshore model so as to increase offshore proportions.
Mr Nivsarkar thinks the Bill creates an unfair advantage for MNC vendors against Indian IT players. This is as they would already be in compliance with the 50% local staff provision and hence will not have to do material local hiring or bear increased visa fees with which the Indian IT would have to contend.
Top five Indian IT players which secured around 29,000 H1B visas in 2012 (Cognizant Technology Solutions – 9,281, TCS – 7,469, Infosys – 5,600, Wipro –- 4,304, HCL Technologies – 2070) compared to around 6000 for MNC players (Accenture – 4,037 and IBM –1,846).
Rejection rates continue to remain high especially for L1 and B1 visa and there has been no material decline in the same, even after the US elections, says Mr Nivsarkar.
Nomura believes the most damaging provision for Indian IT remains the restriction on outplacement of H1 B visa holders at client locations, which hurts outsourcing in a big way. This would be followed by the need to comply with the 50% local staff requirement by 2016 in terms of severity. For most of tier 1 IT, it would not be a stretch to meet the 2015 target of 35% local staff in the US. The brokerage believes the visa fee increase of usd10,000 per incremental application for companies having less than 50% local staff, is a minor depressant on margins and could also be potentially passed on to clients. Overall passage of the bill in the current form would be negative for the sector and weaken competitiveness versus MNC IT players and depress margins.
Net Interest margin (NIM) of 4.5% is the highest recorded by the bank in the last three years, according a Nomura Equity Research’s Quick Note on HDFC Bank
HDFC Bank delivered another 30% PAT growth quarter (at Rs18.9 billion), in line with Nomura’s estimate and consensus at Rs19 billion and Rs18.9 billion, respectively. Profit after tax (PAT) growth was supported by a healthy 20 basis points (bps) q-o-q improvement in NIM and stable asset quality. Loans grew 22.7% y-o-y supported by strong traction in retail loans. GNPLs (gross non-performing loans) declined 4% sequentially with GNPL ratio of 0.97%. These observations were made by Nomura Equity Research in its Quick Note on the private lender’s performance.
The bank restated some line items (with no impact on the overall PAT) as explained below. The restatement (on RBI's instructions) was driven by the following: the origination cost associated with garnering retail assets which was earlier adjusted from the loan yield is now taken in the opex line and recovery from written-off loans will now flow into non-interest income as against the earlier practice of being adjusted against provisions.
Margins at the upper end of three-year range: Net Interest margin (NIM) of 4.5% is the highest recorded by the bank in the last three years. The 20 bps sequential improvement in NIM is driven by a sharp 205bps q-o-q improvement in CASA (current account saving account) ratio and increase in the loan mix towards retail loans at 56.9% compared to 53.8% in 3Q13.
Retail loans continue to drive loan growth: Robust loan growth (up 22.7% y-o-y against Nomura’s estimate of 24.8% y-o-y) was supported by strong retail loan growth (up 27.3% y-o-y), taking the retail loans’ share up by 308 bps q-o-q. Retail loans growth was supported by personal loans (up 26% y-o-y), credit cards (up 45% y-o-y) and gold loans (up 64.5% y-o-y). LAS portfolio also registered a sharp uptick in 4Q, up 13.8% q-o-q. CV loan growth was understandably sluggish, given asset quality pressure in that segment.
For FY14, the bank looks to grow 5%-6% above the system average, with retail loans growing faster than corporate loans. Within corporate loans, the bank expects a relatively higher growth in FY14 than in FY13, partly from management's strategy of focusing on project loan refinancing market.
CASA improves, helped by both savings and current deposits: CASA growth picked up in 4Q with savings deposits growing 7.7% q-o-q (19.2% y-o-y) and current deposits growing 11.3% q-o-q (15.2% y-o-y). This led to a 205 bps sequential improvement in CASA ratio to 47.4%. The bank added 193 branches of the total 518 added in FY13 in deeper geographies. These are micro-branches with two to three employees per branch. Over the medium term, the operating leverage should kick in from these branches. The bank is now present across 1,845 cities in India, with 53% of its 3,062 branches in semi-urban & rural areas.
Asset quality remains rock steady: GNPLs declined 4% q-o-q with a GNPL ratio of 0.97% (1% in 3Q). Provision cover is at 79.9% and in addition to that the bank has a floating provision book of Rs18.4 billion (of which roughly Rs500 million of floating provision is added in the current quarter). CAR stands at a healthy 16.8% (Tier-1 at 11.1%).
At Nomura’s TP, HDFC Bank trades at 3.9x FY14F ABV of Rs175.5 and 20.1x FY14F EPS of Rs34.3 for an ROA of 1.8% and ROE of 21% for FY14F.
With increased focus on cost reduction and operational efficiency, 45% of the organisations have reduced office space per employee, according to a survey report “Real estate cost optimisation: The road less travelled” by Jones Lang LaSalle India
In the services industry, real estate cost is the second largest cost component after human resources and can be considered significant for other industries as well. India has been seeing a steady increase of real estate costs over the last few years This survey was conducted to reiterate the known facts of cost saving and to make corporate India aware of real estate cost saving opportunities, says Jones Lang LaSalle on its CFO (Chief Financial Officer) survey.
The report predicts that by end-2014, India office rents will grow by 24% over the trough levels of end-2009. The report cautions that real estate cost is expenditure that must be relooked at. Currently, CFOs tend to ignore cost-saving opportunities that could lead to significant value creation in real estate. CFOs also concede the need to build robust information infrastructure for decision making before acquiring offices on rent.
According to Jones Lang LaSalle, one of the common strategies followed by corporates to achieve cost reduction and operational efficiency is to relocate and consolidate/ expand operations to more cost-effective suburban locations. This move not only allows cost optimisation but also provides opportunity for organisations to give better amenities to employees and more space per individual, which in turn improves the operational efficiency within the organisation. On the other side, a substantial 45% of the organisations have also reduced office space per employee recently.
The concept of Alternative Workplace Strategy (AWS) taps into organisational prerequisites, creating an environment that supports and enables employee needs.
This strategically bundled concept results in increased cost savings, more efficient space utilisation, higher productivity and reflects the organisation’s brand value, according to the CFO survey report. In addition, work place Strategies are emerging as a global imperative for optimal employee productivity, satisfaction and retention. Mapping AWS can drive an organisation towards ultimate success, and is essential to overall portfolio and expense management. But despite of these factors and other benefits, only a minority of organisations in India have incorporated an AWS.
The survey reports caution that anticipated growth in office rents across all markets in this uncertain phase has compelled organisations to lease out spaces at a relatively attractive price compared to existing rates. One of the real estate strategies that organisations should consider is early renewal and extension of lease agreements. Most organisations in India have still not explored significant savings which could arise out of restructuring leases. It is also vital that developers and tenants confide in each other whilst renegotiating or restructuring a lease agreement. This amalgamation of extension and early renewal of lease agreements gives the occupier an immediate rental relief.
The report concludes that with 68% of organisations planning to expand their operations in the next five years, occupiers can focus more on structuring their lease agreements when they expand, whilst property owners can possibly look at identifying the sale and leaseback opportunities present to raise funds when they expand.