IT stocks: US Bill may negate benefits of Rupee fall

Even as a depreciating rupee is seen supporting the earnings of IT companies in the June quarter,analysts expect the impending US immigration Bill to remain an overhang on the sector.

Written by Fe Bureau | Mumbai | Published:July 3, 2013 2:36 am

Even as a depreciating rupee is seen supporting the earnings of IT companies in the June quarter,analysts expect the impending US immigration Bill to remain an overhang on the sector. The Bill,which is expected to be finalised in the next 6-9 months,is likely to increase the costs for Indian IT majors and impact their profit margins.

However,experts seem to be divided on the extent of the impact,given that certain aspects of the Bill specifically related to the ‘outplacement clause’ need greater clarity. The increased costs on account of the Bill may even out any competitive advantage gained by the export-oriented industry due to a structural depreciation in the value of the rupee.

“Without a shadow of doubt,the Bill will impact margins and execution strategies of IT players. However,the impact will vary in degree for companies based on their business and execution mix,” said Edelweiss Securities in a recent note.

The brokerage house,which thinks that a stricter version of outplacement clause could completely change the business model of Indian IT industry,expects its lenient form to bring down net margins by 45 to 90 bps for the top-3 IT players — Infosys,TCS and Wipro — in FY15.

The immigration Bill,which was cleared by the US Senate last week and is now to be placed in the House of Representatives for a debate and subsequent amendments,is primarily aimed at granting US citizenship to close to 1.1 crore unauthorised immigrants. However,three clauses in the Bill could pose a problem for the Indian IT sector. These include increasing the local hires of visa dependent employers,doubling the application charges for skilled visas like H1B and L1 and implementing an outplacement clause,which will prevent IT companies from working at the client’s site if more than 15% of their employees are on visa.

According to JPMorgan,the key proposals of the Bill may bring down the FY15 earnings of India’s top-4 IT players by 12% to 18% with HCL Tech bearing the biggest hit on account of the outplacement clause. It reckons that besides impacting the margins of the IT companies,the outplacement terms may also lead to higher capex and local hiring by Indian IT firms in the US since the country contributes nearly 60% of IT services pie.

“Given the importance of the sector to the Indian economy,through both the direct and the multiplier downstream impact it exerts,the outplacement clause could take away as much as 0.3-0.4% of India’s FY15 GDP,” it added.

However,some argue that concerns related to the outplacement conditions may be overstated. Standard Chartered has pointed out that offshore firms can circumvent the restrictions by increasing the share of “intending immigrant” employees who are excluded from calculation of the 15% limit for H-1B/L1 visa employees.

“While this will have a financial impact with up to 100 basis points EBIT margin hit though non-recurring,it belies the extreme view of structural threat to the offshore business model of the industry,” it added.

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