H-1B fees, AI worries: Double trouble for Indian IT
The steep increase in the US's H-1B visa fees and the growing impact of AI are adding pressure on India’s IT services sector. While tier-1 companies may weather the storm, tier-2 firms face tighter margins and slower revenue growth amid cautious client spending.
The Nifty IT index fell 3% on Monday after a new cog in the wheel emerged for India’s information technology services sector, which is in desperate need of catalysts to revive revenue growth. The US’s one-time fee of $100,000 on new H-1B visa applications, up from $1,000, will make it more expensive for Indian IT services companies to do business in their largest market.
Lately, Indian IT companies have cut dependency on H-1B visas, opting instead to transfer US-related business to Canada or Mexico. The impact of the H-1B visa changes on the earnings per share (EPS) of tier-1 Indian IT companies is expected to be limited, while tier-2 companies such as Persistent Systems Ltd and Mphasis Ltd may feel relatively more heat (although they havesaid it wouldn’t affect their operations).
Assuming new H-1B visa applications by Indian IT services providers continue at the same pace as in 2024-25, their Ebit margin may be hit by 11-99 basis points, according to Nomura Global Markets Research’s estimate. Their EPS may compress by 0.5-6%, assuming the companies do not make any changes to their operating model, Nomura said in a report dated 21 September.
Alternatively, if Indian IT companies decide to hire more people in the US, it could result in higher expenses towards salaries. Companies may choose to pass on some of this cost burden to clients. But this could make them more cautious, adding to further delays in decision-making.
Another option for IT companies is to reallocate software development and technical support work to other countries to save costs. But that could have drawbacks.
“We believe companies might prudently not accelerate offshoring aggressively, but this might be done more gradually as the purpose of this proclamation is to lower outsourcing and create American jobs," Ambit Capital said in a report dated 22 September. Substantial offshoring might invite a reaction in terms of service tariffs or offshoring taxes, it added.
Slow recovery
The H-1B visa changes come when India’s IT services industry is already grappling with muted discretionary spending on IT due global macroeconomic challenges. There is another moving part to the story—the rising adoption of artificial intelligence.
According to HSBC Global Investment Research, a concern among investors is whether agentic AI would lead to further decline in the IT services pie as traditional software becomes obsolete. Agentic AI refers to autonomous systems that can independently set goals, make decisions and execute complex tasks with minimal human intervention.
HSBC estimates AI to result in a gross revenue deflation of 8-10% on Indian IT services companies. “This will likely be realized over three-four years as deals come up for renewal; hence an annual impact (2025/26/27) of as high as 3-4%," it said in a 17 September report.
In the April-June financial first quarter, sequential constant currency revenue fell for some tier-1 IT companies despite robust deal wins. With rising protectionism in the US, uncertainty is extending into July-September and the seasonally weak third quarter (October-December).
This dashes hopes of swift revenue repair in 2025-26. Ambit Capital has cautioned of slower revenue for India’s IT sector, warning of margin pressure for tier-1 companies and lower increases for tier-2 firms.
In 2025 so far, the Nifty IT index is down 18% and trades at a one-year forward price-to-earnings of 23x, a premium to 10-year average, show Bloomberg data.
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