Only marginal impact on profitability thanks to increased US hiring, says CRISIL Ratings.
President Donald Trump’s suspension of new H1-B and L1 work visas till December 2020 may increase Indian IT firms’ cost burden by $160 million, but would have marginal impact on their profitability, according to CRISIL Ratings.
This is so because Indian IT firms have gradually reduced dependence on the H1-B route and increased local hiring in the US, the Indian subsidiary of American company S&P Global said in a new report Monday.
Secondly, it pertains to just new H1-B and L1 visas issued till December 2020. Applications for renewal of visas, which on average are 3-4 times new H1-B requests, remain unaffected, CRISIL noted.
Trump ban itself may have only a marginal impact of 25-30 basis points (bps) on the Indian firms’ operating profitability this fiscal, a CRISIL Ratings analysis of 15 large IT firms, which account for almost 70% of the IT service sector revenue, shows.
However, it will be over and above a 200-250 bps decline expected because of the Covid-19 pandemic and will beat down operating profitability from an average about 23% seen last fiscal,
Credit profiles of IT firms will continue to be strong supported by healthy balance sheets and liquidity, CRISIL predicted.
Over the past three years, Indian IT firms have gradually reduced dependence on the H1-B route because of increasing denial rates – from about 6% in fiscal 2016 to 39% in the first half of fiscal 2020.
“New H1-B visa issuances contribute less than 5% of the US onshore workforce of the top 5 listed Indian IT firms, which account for 60% of the industry revenue,” said Anuj Sethi, Senior Director, CRISIL Ratings.
“On the other hand, the share of local hires in their US onshore employee mix has steadily increased from 30-35% in fiscal 2017 to about 55-60% in fiscal 2020,” he noted.
“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,” he said.
The US, CRISIL noted has proposed a transition of the existing H1-B visa issuance to a merit-based program rather than the lottery system currently capping new visas at 85,000.
The criteria for capping under the merit system may be decided on quantum salary or a potential increase in minimum salary floor.
Assuming employee requirements through new visa approvals (6,137 units in fiscal 2019) are completely met via local hiring and considering a 25% premium for local hiring over the H1-B route, the additional cost burden on IT firms may not exceed Rs 12,000 million ($160 million), CRISIL said.
Thus the incremental cost impact on the over $97 billion IT service industry remains marginal at about 25-30 bps, though a few mid-sized IT firms with higher reliance on H1-B visas and lower onsite presence could face some challenges, it said.
“Additionally, with 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,” said Sameer Charania, Director, CRISIL Ratings.
“Further, IT firms are expected to re-negotiate the onsite requirements with clients until the industry witnesses a recovery in discretionary IT spending,” he noted.
Having said that, any larger adverse change in US visa regulations especially on the existing visa H1-B visa renewals or continued suspension of new H1-B visa issuances over the long run will remain a monitorable, given the industry derives about 60% of revenues from North America, the ratings agency said..
CRISIL Ratings said it does not expect any material impact on the credit quality of most IT firms as their financial risk profile is healthy, supported by low debt levels and large liquid surplus.
The sample set of 15 IT firms has an average gearing of around 0.12 time and cash balances adequate to cover 4-5 months of employee costs, it said.
H-1B ban, green card delays, and now 10% visa fee hike! (July 3, 2020)
USCIS: Nearly 600,000 H-1B visa holders working in the US (June 29, 2020)
US think tank: H-1B, work visas create jobs for Americans (June 25, 2020)