H-1B Visa Fee Hike To Impact Indian IT Firms? Macquarie's Ravi Menon Bullish On THESE Stocks Despite Risk

Indian information technology services (IT) companies will likely see an impact on margins and operating expenses in the medium term after US President Donald Trump issued a proclamation to hike the visa fee of H-1B, according to domestic brokerages. D-Street analysts have said that Indian IT companies will also increase offshoring and local hirings.

Assuming one-third of H-1B employees are replaced with local hires, the impact on EBIT margin is likely to be 20–50 basis points and 2–4% on earnings per share for IT firms, according to brokerage Dam Capital. However, some Street analysts have taken a counter bet on Indian IT stocks despite the medium-term risk over the H-1B visa fee hike.

In an exclusive interaction with NDTV Profit this week, Ravi Menon, IT Services Analyst at Macquarie Capital said that he does not see an impact on the margins of Indian software services majors due to the H-1B visa fee hike. Menon has also chosen his top IT blue-chip stock picks despite the slowdown in earnings growth.

According to Ravi Menon, IT companies will not see a margin impact as the H-1B rule applies to all firms. "One can be an Amazon or a supermarket chain or a TCS, you still have to pay the same amount. This is very unlike 2016-17 when there was talk about introducing a different wage level for companies which are deemed visa reliant, where if the US workforce comprises over 50% visa holders, then they'll be subject to the minimum wage limit."

Menon further explained, "This rate won't create a very material impact as we're looking at roughly over $8-bill rate increase per hour that's required to compensate for the hike which isn't a large amount, especially considering we have an onsite-offshore mix in most cases." He referred to the mix of domestic and global workforce for most of the Indian IT firms.

The Macquarie analyst does not see 'anything negative' about the H-1B visa fee hike on Indian IT companies and also highlighted a silver lining. "I don't think there's anything negative. It can be even be a little bit of a positive because there's a shortage, as every year, we see it going into a lottery. There's a long tail of filers and a lot of them just sponsor visas for people with a bare minimum qualifications. So, that will stop and one will see more eligible candidates getting the H-1B visas," he said.

According to the Macquarie analyst, the brokerage remains bullish on Indian IT stocks, despite the earnings slowdown in the last few quarters and the possible medium-term risk due to global headwinds. "TCS is our top pick among largecaps, followed by HCL Tech, LTIMindtree, and Wipro."

In the midcap segment, Menon's top IT stock pick is Persistent Systems and L&T Technology Services. Cyient Ltd. and Tata Consultancy Services are likely to see the least impact among peers, according to global brokerages. Citi Research believes that HCL Tech and Infosys Ltd. are better placed, as they have already adopted localisation as the most important strategy.