US visa ban will have minimal impact on Indian IT firms: Crisil

The recent work visa ban by the US administration will have minimal impact on the Indian information technology (IT) services firms, amounting to only Rs 1,200 crore in the current financial year, as per credit rating agency Crisil Ratings.

The knock-on effect for profitability will not be more than 25-30 basis points, as firms have increased local hiring in the US to tide over the visa shortage, a statement from the Mumbai-based firm said. As the largest market, the US makes up nearly 50% of the revenue for most top-tier IT firms.

Typically, IT projects have an onsite (customer location) component and offshore (serviced from India or other low-cost locations) component, with the onsite (US, in this case) being around 15-30%, depending on customer preference and margin structure. A higher onsite component translates to higher deal value, but lower margins for the firm as the salaries are higher in the US.

However, the impact of the visa ban will be over and above the 200-250 bps decline expected due to the Covid-19 pandemic and will beat down operating profitability from an average 23% witnessed last fiscal, the Crisil report, which analysed 15 large IT firms that account for almost 70% of the IT service sector revenue, said. The companies have strong balance sheets with no debt, cash balances and good margins to help them tide over the crisis, it added.

Additionally, the visa ban is applicable only for new H-1B and L1 visas issued until December 2020. Applications for renewal of existing visas, which on an average are three to four times the amount of new H-1B requests, remain unaffected, Crisil noted.

Meanwhile, over the past three years, Indian IT firms have gradually reduced dependence on the H-1B route due to increasing denial rates – from about 6% in financial year 2015-2016 to 39% in the first half of financial year 2019-20.

“New H1-B (sic) visa issuances contribute less than 5% of the US onsite workforce of the top 5 listed Indian IT firms, which account for 60% of the industry revenue. On the other hand, the share of local hires in their US onshore employee mix has steadily increased from 30-35% in FY 2017 to about 55-60% in FY 2020. And with firms aiming to increase the share of local talent, especially with digital skills, the transition impact is expected to be marginal for them,” Anuj Sethi, senior director of Crisil Ratings, said.

The US government has also proposed a transition of the existing H-1B visa issuance to a merit-based programme, with the criteria for capping new visas at 85,000, which will be decided on the quantum of salary rather than the lottery system that is currently deployed, or a potential increase in minimum salary floor.

According to Crisil, if the employee requirements through new visa approvals (6,137 units in FY 2019) are completely met through local hiring and considering a 25% premium for local hiring over the H-1B route, the additional cost burden on IT firms may not exceed Rs 1,200 crore. However, some mid-sized IT firms with higher reliance on H-1B visas and lower onsite presence may face challenges, it said.

“Additionally, with a higher share of employees working from home and with continued restrictions on mobility due to the pandemic, the onshore requirements of IT firms are likely to be lower. Further, IT firms are expected to renegotiate the onsite requirements with clients until the industry witnesses a recovery in discretionary IT spending,” Sameer Charania, director, Crisil Ratings, said.

The increased technological intensity, induced by the Covid-19 pandemic, will help Indian information technology (IT) services firms tide over the crisis, according to a research report by stock brokerage firm Motilal Oswal Financial Services.  

The $190 billion IT industry is looking at first ever year-on-year decline in revenue during the current financial year as Covid-19 pandemic wreaked havoc with most major western economies.