Investors in IT stocks took the news of US visa restrictions in their stride. The Nifty IT index gained 1.5% on Tuesday, in line with the rise in the broad market.
To start with, the restrictions, applicable till the end of the year, were not entirely unexpected. Given rising unemployment in the US and the political rhetoric ahead of the presidential elections, analysts were expecting some curbs.
Since US is the biggest market for Indian IT services companies, such measures typically impact sentiment for IT stocks. But the reason the latest restrictions have been brushed aside is that they will have limited impact on large IT companies in the immediate future.
Travel is anyway restricted due to the covid-19 pandemic. Most IT vendors have transitioned to the work-from-home delivery model, fulfilling onsite work demands from remote locations. Even project transitions have been handled from remote locations.
Besides, as Nitin Padmanabhan, analyst at Investec Capital Services (India) Pvt. Ltd said, “It does not impact existing H-1B visa holders, so underlying capacity is likely intact."
In addition, because of the tepid business environment, the need for augmenting onsite resources is limited. Emkay Global Financial Services Ltd estimates dollar revenues to fall at most frontline IT companies in the current fiscal, reflecting subdued demand in general and cuts in discretionary spends by clients.
Infosys Ltd’s management alluded to this in their recent interaction with analysts. “(Infosys thinks) that the impact from a fulfilment perspective is likely to be lower, given FY21 is likely to see impact on demand, which reduces the need for new H-1B visas as new projects are delayed," Nomura research said in a note.
And as it typically happens during downturns, customers recalibrate their expenditure and outsource work to cheaper offshore locations, point out analysts at Kotak Institutional Equities and Emkay. This reduces the demand for greater onsite workforce force immediately, mitigating the impact of visa restrictions.
“Interestingly, Infosys’ offshore revenues/volumes have been outgrowing onshore revenues/volumes despite its much touted claims of localization and hiring over 10,000 local resources in the US since mid-CY17," analysts at Emkay said in a note. “Given a weak macro environment and potential reset in client businesses due to Covid-19, we see a case for greater offshoring in the sector over the medium term," add analysts at Emkay.
Finally, since curbs on visas have increased in recent years, Indian IT companies have stepped local hiring in the US.
According to Kotak Institutional Equities more than half of Infosys, Wipro Ltd and HCL Technologies Ltd’s workforce deployed in the US are hired locally. This reduces the dependence on visas, although it does impact margins. “This transition has come with its own set of challenges such as limiting flexibility of moving resources offshore (when not on project) and hit on utilization and thus, some adverse impact on margins," add analysts at Emkay.
Consequently the dependence on H1-B visas by IT majors has steadily reduced over the years, even though reliance on such visas can vary for smaller firms.
"While not completely immune to potential visa related tightening, Indian techs have been reducing their dependence on H1B visas significantly by hiring more people locally. This transition has come with its own set of challenges such as limiting flexibility of moving resources offshore (when not on project) and hit on utilization and thus, some adverse impact on margins," add analysts at Emkay.
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