How H-1B visa norms will impact margins of IT services cos

IT services India companiesICRA says tightening of H-1B visa norms will limit movement of low cost skilled labour — impacting margins of IT service providers in India.

Main Indian IT service providers include TCS, Infosys, Wipro, HCL Technologies, Tech Mahindra, among others.

The tightening of H-1B visas by the United States Citizenship and Immigration Services (USCIS) is likely to have a negative bearing on Indian IT Services companies with significant dependence on H-1B visas, said Gaurav Jain, vice president, Corporate Sector ratings, ICRA. Changes in H-1B norms will disqualify certain positions currently eligible for H-1B visas, the movement of low-cost skilled labour from India and will have direct impact on margins of IT service companies.

The awarding of H-1B visas, based on highest skill or compensation, will leave less headroom for Indian companies to get such visas. Increased onsite hiring or raising the compensation for H-1B visa applicants will significantly impact companies’ margin.

The US Government through Department of Homeland Security (DHS) is undertaking a study to review the definition of specialty occupation i.e. positions which are eligible for H-1B visas along with guidelines to ensure employers pay appropriate wages to H-1B visa holders. The guidelines are expected to be issued by October 2018.

Such changes could be in the form of filtering various computer-related occupations, which require a bachelor’s degree (a pre-requisite for being classified as specialty occupation) or mandating a combination of education and the kind of work required to qualify as a specialty occupation.

The current H-1B system is lottery based, giving equal selection rights to all applications. The DHS is contemplating awarding visas to the most skilled or to highest-paid beneficiary. This will work against the Indian IT services sector (H-1B dependent) as the average wage is approximately lower by 25 percent compared to companies that are not dependent on H-1B visas as per ICRA estimates. An entity is defined as H-1B dependent if more than 15 percent of its US full time employees are on an H-1B visa.

The number of requests for evidence (RFEs) for H-1B approval rose by more than 40 percent during January-November 2017 compared to CY2016 and by 65 percent compared to CY2015.

The US Government is planning to permanently end work authorisation (H-4 visa) granted to spouses of H-1B visa holders. Revoking such visas will have an indirect negative impact on workers currently employed on H-1B visas or seeking such visas whose spouses are working professionals.

The cap on new H-1B visa issuances is 65,000, with an additional 20,000 for highly-skilled labour possessing a master’s or a higher degree from a US university.

The Indian companies’ share of total H-1B visas (fresh as well as renewals) issued in FY2017 (October-September period) was close to 75.0 percent (65.3 percent in FY2013) coupled with majority of such H-1B visas issued for computer-related field.

The propensity for new H-1B visas has declined overall, over time for the IT services sector owing to lower growth opportunities as well as shift of services offered to digital technologies, which rely on automation leading to lower requirement of skilled-labour workforce.

During FY2015-2017, the decline was ~ 37 percent in the share of approved petitions by ICRA’s sample of eight leading Indian IT services companies. The lower H-1B visa demand is also reflected in the decline in net hiring by leading IT Services companies as well as applications made for H-1B visas.

For FY2017 visa approvals (H-1B lottery held in April 2017), the USCIS received 1.99 lakh applications compared to 2.33 lakh applications in FY2015, a reduction of 15 percent.  This declined further to 1.90 lakh applications in April 2018, reflecting lower requirement of H1-B visas.

The revenue growth for Indian IT services sector for ICRA’s sample of 13 companies fell to 9.7 percent in FY2017 (April to March period) and 4.2 percent in FY2018 from 17.1 percent CAGR growth over FY2013-2017 period.