Margin Squeeze Triggered By New H-1B Visa Regime Will Be Credit Neutral
Costs of I.T. companies have increased significantly in the past eight quarters.
The margins of information technology companies will come under further pressure, in the event of the new U.S. bill titled ‘Protect and Grow American Jobs Act’ gets passed, says India Ratings and Research.
The key proposal in the bill is to increase the salary of H1-B visa holders to $100,000 (Rs 66 lakh) from $60,000 per annum and the cessation of an exemption of having a master’s degree.
The cash cushion and low debt levels that I.T. companies enjoy however will mean the squeeze on margins will be credit neutral.
The salary level that has been proposed is significantly higher than the average employee cost of Indian I.T. companies of under Rs 10 lakh (ranges between Rs 3,00,000 to Rs 50 lakh).
Further the removal of the exemption of possessing a master’s degree to qualify for a H1-B visa if implemented will reduce the talent pool qualifying for such visas and in turn result in either increased employee cost for hiring employees with higher qualification or subcontract work, both of which would increase the cost of operations and pressurise margins.
The U.S. starts accepting the visa application under H1-B typically from April 1 every year and issues around 65,000 visas to highly skilled professionals. A bulk of these visas are issued to technology companies belonging to various nationalities. Indian I.T. companies incur visa related costs in the first quarter of the financial year.
India Ratings notes that the employee cost of I.T. companies has increased over the past eight quarters and has impacted margins negatively.
The passage of the bill would impact operations of the I.T. companies and might lead to further increase in the onshore efforts and subcontracting expenses.
Indian I.T. companies generate around 55-60 percent of the revenue from the U.S. The onsite proportion of revenue exceeds the offshore portion and the subcontracting expenses as a percentage of revenue has increased by around 50-100 basis points over the last eight quarters for the top I.T. companies.
(India Ratings and Research a wholly owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)