H1-B visa issue makes IT stocks attractive; analysts prefer to wait & watch

Since January 31, the BSE IT Index has lost 2% till Monday's closing as against 5% up move in Sensex

Information technology (IT) stocks have taken a beating since January 31, 2017 when Donald Trump administration introduced a bill in the US House of Representatives requiring companies to double H1B visa holders’ minimum pay to $130,000 a year.

The bill, if implemented, will significantly hit Indian IT companies’ net profits, which reportedly hold 85% of the overall H-1B visas issued, analysts say. However, if experts are to be believed, IT companies may manage to protect their margins by going more into digitisation, local recruitment and less dependence on on-site services.

Since January 31, the BSE IT Index has lost 2% to 9,702 till Monday’s closing. This is when a bill called the High-Skilled Integrity and Fairness Act of 2017 was introduced in the US Congress.

By comparison, the benchmark S&P BSE Sensex has gained over 5% since then. Among the large-cap IT stocks, TCS, Infosys, Wipro and HCL Tech slipped between 1% and 4%. Meanwhile, Tech Mahindra managed to erase all its losses to add 1% by Monday’s closing.

While analysts remain bullish on the stocks from a long-term perspective, they prefer to remain on the side-lines in the short-term to gauge the impact of Trump’s policy decisions.

Mayuresh Joshi, fund manager at Angel Broking expects a marginal downgrade in terms of earnings’ perspective, but sees an upside potential on the stock as valuations are on the side of IT companies.

At the current levels, the S&P BSE IT index is trading at 15 times its trailing 12-month earnings per share (EPS), compared with Sensex's 20 times PR multiples.

Joshi of Angel Broking suggests having a longish view on IT stocks, and advises fresh investors to either wait for the better entry point or let the clarity emerge on the ongoing issues before taking a plunge into IT stocks.

“The valuations of large-cap IT companies look attractive, but the uncertainty over Brexit issue in UK and H1B visa issue in US will be the two headwinds in the short-term. The IT companies are looking at mitigating the risk through increasing the local recruitment, more offshoring, and moving offices to low cost states. To that extent, the real impact will be visible when the US bill actually turns into a law, which according to us could take time” Joshi says.

Deven Choksey of KR Choksey Securities, too, advises investors to not get unduly worried about the entire H1-B visa issue. 

“Even if the US decides against Indian IT professionals working there, they will have to produce equally skilful IT professionals in US, which they cannot do in one year. India has been providing IT services for over 20-30 years now. We are not easily replaceable,” he said.

“Secondly, over a period of time, Indian IT companies have succeeded with lower amount of on-site services. Today, it consists of around 30% of their overall business. With more companies looking to bring down the on-site services at lower levels, the ratio of the same may slip below 30%,” he added.