US visa noise overhang to trigger volatility
The Indian information technology (IT) sector corrected sharply as on reports about the introduction of yet another bill in the US Congress – the High-Skilled Integrity and Fairness Act of 2017 – proposes to raise minimum wages for H-1B visas up to $130K from $60K currently. We believe the Indian IT sector will continue to face the overhang and will witness volatility until the noise around the visa issues wanes. However, barring a drastic step such as an executive action by the US president, a potential immigration law would need to go through the long-drawn legislative process of ratification by both the Houses as well as their judiciary committees.
We are not surprised, considering that immigration was the key election agenda of Donald Trump. It also underscores the noise that may remain as an overhang on the sector. Executive order could be the only near-term risk. With rising risks of visa availability, Indian firms have made conscious efforts in the past few years to reduce dependency on visas. We estimate Americans comprise Indian firms’ 30-40 per cent US workforce. Hence, risk to business models of IT firms could possibly be restricted to some margin impact. With most of the recently tabled bills focusing on raising H-1B wages, we would not be surprised if Indian firms focus on reducing visa dependency by training local US hires at salary levels lower than the proposed limits on H-1B ($130K). Worst-case impact on margins could be up to 420bps, ceteris paribus.
It is difficult to estimate the impact of various proposed visa changes due to lack of clarity and non-availability of details. We still estimate Ebitda margin impact of 180-420bps for our coverage, based on the assumption of a 60 per cent rise (to ~$130K per employee) in onsite costs for visa-based employees of the firms.
This is a hypothetical, worst-case scenario and it does not assume firms hiring locally at a much lower cost and pass-through of costs to clients.