U.S. Visa Rules To Hit IT Companies’ Profits, Margins In FY20, Says Crisil
Profitability of Indian IT companies is likely to be impacted by changes in U.S. visa rules, specifically for H1-B visas, with margins estimated to narrow by up to 0.80 percent in 2019-20, a Crisil report said on Monday.
Revenues are set to rise by 7-8 percent in dollar terms for the over $180 billion IT industry in 2019-20 on the back of faster growth in digital services, ratings agency Crisil's research wing said in a note.
The IT industry's operating margins will narrow by 0.30-0.80 percent, largely on account of an increase in mandatory local U.S. hiring, the report stated.
According to the Crisil note, the Indian IT industry has traditionally relied on labour arbitrage—getting the same work done cheaper than the developed markets—but the gap is narrowing, crimping margins.
Nearly 65 percent of the operating expenses for an IT firm are towards employees, it said. Operating margin grew 17 percent for Tier-I IT companies in 2018-19 as against 6 percent earlier, the note said.
"Such an increase in employee costs can be attributed to tightening of U.S. visa norms for Indian players, resulting in higher onsite costs for them," the note said.
Ever since the U.S. government tightened its H- 1B visa policy in 2017, challenges have mounted for the sector as Indian-origin employees were the largest consumers of H-1B visas at 63 percent of initial employment.
It can be noted that the US reduced both the number of visas available and also set a minimum floor of salary to be offered, making it difficult for the Indian IT sector. Typically, an Indian-origin employee with an H1-B visa would cost 20 percent lower than hiring the same talent locally, it said.
Additionally, lower unemployment of under 2 percent in the U.S. technology sector as against an overall unemployment of under 4 percent means talent availability is limited and it will lead to higher costs, the Crisil note said, adding that profits will continue to be under pressure in the future as well.
It said margins have been declining for the last five fiscals due to factors such as stabilising utilisation levels and billing rates. The rise in employee costs is only aggravating the problem.
The note suggested IT companies can try to optimise onsite costs by resorting to the pyramid model, wherein college graduates are hired at $50,000-60,000 in a higher proportion and the rest filled with a few domain experts at a higher cost.
Focus on moving up the value chain in digital services could also play a role to offset rising employee cost, it said.