US decision to suspend H1-B, other visas to cost just Rs 1,200 crore to $97 billion IT industry

The US government's decision to suspend issuance of new H1-B and L1 visas till December 2020 will have only a marginal impact of 25-30 basis points (bps) on the operating profitability of the $97 billion Indian information technology (IT) sector in this fiscal, a CRISIL Ratings analysis of 15 large IT firms, which account for almost 70% of the IT service sector revenue, shows. However, this will be over and above a 200-250 bps decline expected because of the COVID-19 pandemic and will beat down operating profitability from an average 23 per cent seen last fiscal. The ratings agency report suggests that even if employee requirements through new visa approvals are completely met via local hiring and considering a 25 per cent premium for local hiring over the H1-B route, the additional cost burden on IT firms may not exceed Rs 1,200 crore. "though a few mid-sized IT firms with higher reliance on H1-B visas and lower onsite presence could face some challenges," the agency added.Despite the COVID-19 crisis and the US move, credit profiles of IT firms will continue to be strong supported by healthy balance sheets and liquidity, it added. The report said that since the US move pertains to just new H1-B and L1 visas issued till December 2020, applications for renewal of visas, which on average are 3-4x new H1-B requests, remain unaffected.Also, in the past three years, Indian IT firms have gradually reduced dependence on the H1-B route because of increasing denial rates - from about 6 per cent in fiscal 2016 to 39 per cent in the first half of fiscal 2020."New H1-B visa issuances contribute less than 5% of the US onshore workforce of the top 5 listed Indian IT firms, which account for 60% of the industry revenue. On the other hand, the share of local hires in their US onshore employee mix has steadily increased from 30-35% in fiscal 2017 to about 55-60% in fiscal 2020. And with firms aiming to increase the share of local talent, especially with digital skills, the transition impact is expected to be marginal for them," Anuj Sethi, Senior Director, CRISIL Ratings, said.Notably, the US has proposed a transition of the existing H1-B visa issuance to a merit-based programme, criteria for capping new visas at 85,000 to be decided on quantum of salary rather than the lottery system currently, or a potential increase in minimum salary floor.Additionally, with higher share of employees working from home and with continued restrictions on mobility due to the pandemic, the onshore requirements of IT firms are likely to be lower, said Sameer Charania, Director, CRISIL Ratings, adding that IT firms were expected to re-negotiate the onsite requirements with clients until the industry witnessed a recovery.CRISIL Ratings does not expect any material impact on the credit quality of most IT firms as their financial risk profile is healthy, supported by low debt levels and large liquid surplus. The sample set of 15 IT firms has an average gearing of 0.12 time and cash balances adequate to cover 4-5 months of employee costs.US President Donald Trump last month decided to restrict the entry of H-1B and other temporary visa holders amid rising unemployment in the United States. The suspension will come into effect on June 24 and will expire on December 31, 2020.

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