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US Bill on visa rule to add pressure to IT Cos margins

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Dion Global

11 Jan 2017

The margins of IT sector companies will come under further pressure, in the event the new US bill titled ‘Protect and Grow American Jobs Act’ gets passed, says India Ratings and Research (Ind-Ra).

The key proposal in the bill is to increase the salary of H1B visa holder to USD 100,000 (INR 6.6 million) from USD 60,000 per annum and the cessation of an exemption of having a master’s degree. The cash cushion and low debt levels that IT companies enjoy however will mean the squeeze on margins will be credit neutral, said the rating agency in the report.

According to Ind-Ra, the salary level that has been proposed is significantly higher than the average employee cost of Indian IT companies of under INR 1 million (ranges between INR 300000 to INR 5 million).

Further the removal of the exemption of possessing a master’s degree to qualify for a H1B visa if implemented will reduce the talent pool qualifying for such visas and in turn result in either increased employee cost for hiring employees with higher qualification or subcontract work, both of which would increase the cost of operations and pressurize margins, it said.

The US starts accepting the visa application under H1B typically from 1 April every year and issues around 65,000 visas to highly skilled professionals. A bulk of these visa’s are issued to technology companies belonging to various nationalities. Indian IT companies incur visa related costs in the first quarter of the financial year.

Ind-Ra notes, that the employee cost of IT companies has increased over the past eight quarters and has impacted margins negatively. The passage of the bill would impact IT companies operations and might lead to further increase in the onshore efforts and subcontracting expenses. Indian IT companies generate around 55 per cent-60 per cent of the revenue from the USA. The onsite proportion of revenue exceeds the offshore portion and the subcontracting expenses as a percentage of revenue has increased by around 50bp - 100bp over the last eight quarters for the top IT companies.