India is the world’s largest sourcing destination for the information technology (IT) industry, accounting for approximately 67% of the USD 124-130 billion market. The industry employs about 10 million individuals. India’s cost competitiveness in providing IT services, which is about 3-4 times cheaper than the US, continues to be the mainstay of its Unique Selling Proposition (USP) in the global sourcing market. The Indian IT and ITeS industry is divided into four major segments – IT services, Business Process Management (BPM), software products and engineering services, and hardware.
The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI) inflows worth USD 21.02 billion between April 2000 and March 2016, according to data released by the Department of Industrial Policy and Promotion (DIPP).
The Information Technology industry is already witnessing a trend of slowdown in revenue growth and pressure on the EBITDA and net profit margins due to lower spending on IT infrastructure by companies in the developed World, due to a prolonged slowdown in economic growth. Some of the top IT Companies have revised their revenue guidance on the lower side for the FY 2016-17 and 2017-18. The National Association for Software and Services Companies (Nasscom) has downgraded the growth forecast for the IT industry for the FY 2016-17.
To add salt to the wound the newly elected President of the United States of America, Donald Trump, has introduced a bill to double the fees associated with the H1B Visa (from USD 60,000 to USD 1,30,000) which allows US companies to employ foreign workers in speciality occupations that require theoretical or technical expertise. The current H-1B minimum wage of $60,000 was fixed in 1989 and has since remained unchanged.
Technology companies, including those from India, depend on H1B for hiring tens of thousands of employees each year. The move is aimed at protecting job opportunities for Americans, by the Trump Administration. The bill is yet to be passed and implemented in the US but stocks of Infosys, TCS, Wipro, HCL Technologies and other IT Companies have corrected sharply as it is expected to hamper their revenue growth and dent profit margins in the near future. The Zoe Lofgren Bill, introduced in the US House of Representatives, is a long way from becoming law but it does pose a threat to Indian IT companies which receive the largest share of the 65,000 H1B work visas issued by the US every year, according to NASSCOM.
Indian Software Companies enjoy competitive advantage over its global peers due to lower cost of human resource. H1B Visas are given by the US Government to foreign workers to fill up the gap if there is no other American worker with the required set of experience and qualification to do the required job. In such a scenario IT companies in India are expected to increase local hiring in the US as that would tend to keep costs low and still remain competitive instead of hiring Indian Nationals and sending them onsite.
The revenue growth would slow down if companies are not able to remain cost competitive in such a kind of scenario which would result in a sharp reduction in the EBITDA and net profit margins and would directly hurt their cashflows. Any reduction in the operating cash flows would have an adverse impact on the earnings per share for companies. Any negative impact on the earnings per share would automatically make it less attractive to hold stocks of IT companies.
TCS, Infosys, Wipro and HCL Technologies have corrected 5%, 7%, 3% and 1% respectively year to date and corrected 6%, 19%, 17% and 2% respectively in the last one year. The valuations have also seen some erosion with the price to earnings ratio in the range of 13 to 17 (last year range was 16 to 22) for the big four. It would be a structural change for the IT industry if the proposed bill is passed and made a law in the time to come. The industry would have to newly strategize and plan their processes well in advance to keep themselves competitive in the global IT landscape.