A cost surge is imminent in the Indian IT sector because of higher US visa fees, increase in visa rejections and declining utilisation due to reducing fungibility vis-à-vis H-1B holders, says Edelweiss
The US immigration draft bill to be introduced in the Senate will, without doubt, be detrimental to the Indian IT business if implemented. However, brokerage firm Edelweiss, in its sector update said that its impact would be more in the long-term rather than short-term and less dilutive than commonly perceived. Though the draft has not been released, a few of its proposals published in media, if implemented, can impact profits and margins of Indian IT players.
The brokerage believes that a cost surge is imminent on account of higher visa fees and increase in visa rejections and declining utilisation due to reducing fungibility vis-à-vis H-1B holders.
According to Edelweiss analysis, these factors along with hiring locals (including sub-contractors) will impact Infosys’, TCS’ and Wipro’s net margins 88 basis points (bps), 148 bps and 73 bps, respectively.
In the worst case scenario, the impact on margins of Indian IT companies will be three-fold. First, visa fees will catapult almost 100% (from around $5,000 to around $10,000). Second, employee fungibility will be reduced due to lower onsite employees (H1-B holders) and companies will have to maintain a bench of local hires, reducing utilisation level. Third will be the higher average cost of local hires vis-à-vis visa holders. The timeline for local hiring is 25% by FY14, 35% by FY15 and 50% by FY16.
Edelweiss analysis of the above three factors indicates that increase in visa fees can inflate
Infosys’, TCS’ and Wipro’s absolute costs by $13 million, $33 million and $11 million, respectively, while the net margin impact would be 60 bps, 101 bps and 73 bps, respectively, on current FY15 estimates.
Similarly, while increase in bench will spike absolute costs by $3 million and $8 million for Infosys and TCS, respectively, on the margin front, the impact will be 14 bps and 24bps, respectively. Third, the higher local hire cost will inflate Infosys’ and TCS’ absolute costs by $3 million and $7 million and margins by 14 bps and 23 bps, respectively. Wipro’s 36% onsite employees are local hires and hence only visa cost will impact its costs and margins, Edelweiss said in its report.
The brokerage believes, incrementally, top tier Indian IT companies will move up the value chain. This will increase the consultancy component which anyway requires higher onsite resource coupled with higher local talent to fill skill set gaps. Hence, the proposed draft will only fast forward the phenomenon rather than introducing it anew. And probably, the impact would have been more gradual had it not been enforced via legislations. Also, it is worth highlighting that Indian companies have been increasingly hiring local talent since the past few years. According to Edelweiss, escalating visa costs and rejection rates, declining utilisation rates along with higher local hiring will dilute net margins of Infosys, TCS and Wipro 88bps, 148bps and 73bps, respectively. But, at the same time, one would have to wait and watch on-the-ground execution of the bill as a severe talent crunch in developed markets may hinder its strict implementation.
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