Canada, Australia policies also likely to hurt Indian IT companies

Indian tech firms face greater challenges than ever before.

By R. Chandrasekaran

CHENNAI: Of late, there has been lot of news emanating on Indian IT companies, especially after the introduction of a comprehensive immigration reform bill in the US. Most of the news highlight the unfavorable effects of the bill and the resultant impact on Indian IT companies.

Apart from the concern about the effect of the immigration bill, there is growing consensus about an uncertain global economy resulting in reduction of spending on IT. Though ambiguity in economy is a global phenomenon, the fact that the immigration bill will pose a big threat to the bottom line of Indian IT companies is not ruled out either by the trade body, National Association of Software Service Companies or analysts.

Indian IT companies seem to be sensing the threat ahead. It is not the U.S. alone to introduce a new immigration bill; even the Australian and Canadian governments are toying with the idea of an immigration bill or tightening visa norms mainly to restore jobs to their citizens.

While India may charge these nations of indulging in protectionism and could take some issues possibly to World Trade Organization (WTO), each and every nation is concerned about their citizens and ensuring jobs to their countrymen. These nations could easily counter the argument that the same Indian companies can hire Americans or Australian or Canadian in their respective foreign soil rather than bringing in people from offshore.

While it is quite understandable that the U.S. had initiated such a move since more than half of the revenues of Indian IT companies are generated from the U.S., revenue generated from Australia is only in single digit for the subcontinent’s technology companies. For instance, Infosys and Wipro have been estimated to have earned 8 – 9 percent of their total revenues from Australia. Similarly, TCS could earn 7.5 percent of its total revenues from the Asia Pacific region.

In Canada, there has been a hostile response to Indian IT outsourcers and this has obviously forced four big banks to stop offering fresh outsourcing contracts immediately. The recoil comes on the heels of an increased number of jobless claims that is above the 2008 recession level apart from a controversy over Royal Bank of Canada employing foreigners on a temporary basis by replacing its permanent staff.

Though the RBC has reportedly came out with a clarification that it has not stopped all outsourcing and only adopted different strategies to make it a good business sense, its spokesperson also said that it will not outsource business at the cost of Canadian jobs though they will continue to outsource wherever necessary.

Therefore, effectively at least 60 percent of the top Indian IT companies revenue could come under a scanner once the immigration bill comes into effect. Similarly, companies like iGate, which depends more on Canadian clients, could face serious problems if the recoil continues to rock the nation. It will also be not a surprise if Canada follows the footsteps of the U.S. in initiating a fresh immigration bill aimed at protecting jobs for its citizens. In such a scenario, the operating margins are going to take a big hit if Indian IT companies choose to tap local talent.

While there may not be immediate threat to the IT companies, the proposed or planned actions by the various governments could likely impact Indian IT companies’ top and bottom line. It is predicted that the top five Indian IT companies’ profit could take a beating of anywhere between 12 percent and 25 percent if the U.S. passes the immigration bill in its current format. However, investors seem to be ignoring the threats ahead and going ahead in accumulating stocks based on the performance of the broader index, IT index and the top three stocks.

For instance, Bombay stock exchange’s 30-share index closed at 19760.30 points on May 31. At the end of July 4 trading, the Sensex had shed about 1.7 percent to finish at 19410.84 points. On the other hand, BSE’s IT index advanced about 2.9 percent during the same period driven by Wipro, TCS and Infosys by approximately 7 percent, 2.7 percent and 2.6 percent, respectively.

While it is a positive sentiment during the normal course of time to see IT stocks outperforming the benchmark index, especially on the back of weakening Rupee, the fact remains that investors seemed to have ignored the threats ahead and placed bets on short term gains. If the weakening of Rupee is a reason for IT stocks’ recent performance, it could have an impact only for few quarters as the companies normally hedge a portion of the currency.

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