Investors in IT stocks took the news of US visa restrictions in their stride. The Nifty IT index rose 1.5% on Tuesday, in line with the rise in the broader market. To start with, the restrictions, applicable till the end of the year, were not entirely unexpected. Considering rising unemployment in the US and the political rhetoric ahead of the presidential elections, analysts were expecting some curbs.
Since the US is the biggest market for Indian IT services firms, such measures typically impact sentiment for IT stocks. However, the latest restrictions were brushed aside because they will have limited impact on large Indian IT firms in the immediate future. Travel is anyway restricted due to the pandemic. Most IT vendors have transitioned to the work-from-home (WFH) delivery model, fulfilling on-site work demands from remote locations. Even project transitions have been handled from remote locations.
Besides, as Nitin Padmanabhan, analyst, Investec Capital Services (India) Pvt. Ltd, said: “It does not impact existing H-1B visa holders, so underlying capacity is likely intact." In addition, because of the tepid business environment, the need for increasing on-site resources is limited.
Emkay Global Financial Services Ltd expects dollar revenue to fall for most front-line IT companies in the current fiscal year, reflecting subdued demand in general, and cuts in discretionary spends by clients.
Infosys Ltd’s management alluded to this in their recent interaction with analysts. “(Infosys thinks) that the impact from a fulfilment perspective is likely to be lower, given FY21 is likely to see impact on demand, which reduces the need for new H-1B visas as new projects are delayed," Nomura research said in a note.
And, as it typically happens during downturns, customers recalibrate their expenditure and outsource work to cheaper offshore locations, said Kotak Institutional Equities and Emkay analysts. This reduces the demand for larger on-site workforce immediately, mitigating the impact of visa restrictions.
“Interestingly, Infosys’ offshore revenues/volumes have been outgrowing onshore revenues/volumes despite its much touted claims of localization and hiring over 10,000 local resources in the US since mid-CY17," Emkay analysts said in a note. “Given a weak macro environment and potential reset in client businesses due to covid-19, we see a case for greater offshoring in the sector over the medium term."
Finally, since curbs on visas have increased in recent years, Indian IT firms have stepped up local hiring in the US. According to Kotak Institutional Equities, more than half of Infosys’s, Wipro Ltd’s and HCL Technologies Ltd’s workforce deployed in the US are local hires. This reduces the dependence on visas, although it does impact margins. “This transition has come with its own set of challenges, such as limiting flexibility of moving resources offshore (when not on project) and hit on utilization, and thus, some adverse impact on margins," added Emkay analysts.