Proposals on H1-B visa pose a threat for IT firms' margins, say experts

After outperforming all broad and sectoral indices in the first nine months of 2018, the information technology (IT) pack has run into rough weather. In October, the BSE IT index lost 7 per cent — its worst monthly performance in the last 18 months.

Lofty valuations, coupled with the poor performance by smaller-sized IT firms, has dampened investor sentiment. The management commentary from these firms has also indicated some concerns building up for the sector.

“The correction seen in some of the IT names is due to a combination of factors. Some of the performance indicators of TCS and Infosys were slightly below the estimates. Among Tier-II, Hexaware, Mindtree and Persistent had a patchy performance on the revenue front and missed expectations,” said Gautam Duggad, head of research (institutional equities) of Motilal Oswal Financial Services. 

“There have also been some sporadic mentions of a tight situation on the supply side, which could lead to lateral hiring and add to the IT companies’ costs. The H-1B visa proposals of Donald Trump administration doesn’t bode well for the industry either,” Duggad added.

The smaller-sized IT players have faced the brunt of recent selling seen in the IT space. In the last one month, stocks of Persistent Systems, Hexaware Technologies and Mindtree have all corrected by around 25 per cent. The major IT names have not escaped the selling pressure either. Infosys and TCS are down nine and 11 per cent, respectively. 

Experts say the proposals on H1-B visa pose a threat for the IT companies’ margins. These proposals could reduce the number of visas available for those without the US advanced degrees. Indian IT companies pre-dominantly employ people with bachelor’s degrees. Some companies are already facing margin pressure as tighter visa rules require them to hire US citizens and sub-contract work if they cannot hire quickly enough.

The BSE IT index has given year-to-date returns of 27 per cent, leaving the market benchmark Sensex far behind which has just posted a meagre two per cent gains in the same period. The average one-year category return of the technology-focused schemes is more than 30 per cent – the best returns given by any fund category in the same period. 

Following the sharp run-up in IT stocks, some brokerage houses feel that it is time to review their stance on the sector. 

“We just went underweight on IT. We feel that the rally is over for IT. You need to have IT shares when the economy is not doing well. It is a good counter-cyclical play from that perspective. Also, the currency tailwind has played out. It is not going to add to the IT sector’s ability to beat domestic growth. Valuations also look expensive,” said Ridham Desai, managing director, Morgan Stanley India.