'It's better to stay away from large IT stocks until there is clarity on tariffs.'
Indian IT stocks saw their sharpest decline in nearly six months after the US government announced a steep new fee on H1B visa applications.
The Nifty IT index closed at 25,550, down 2.95 per cent -- its steepest fall since April 3. Nine of its 10 constituents ended lower, wiping out a combined Rs 85,496 crore (Rs 854,960 billion) in market capitalisation.
The biggest losers in the index included Mphasis, which declined 4.7 per cent, LTIMindtree (4.5 per cent), and Coforge (4.5 per cent). Infosys, which slipped 2.6 per cent, and TCS (3 per cent) were the biggest drags on the Sensex.
Together with other IT stocks, they contributed to more than half of the index's decline.
The US administration's proposal imposes a one-time fee of $100,000 on new H1B applications filed after September 21. Existing H1B holders and renewals are exempt.
Indians accounted for 71 per cent of approved H1B beneficiaries last year. India's IT industry, which draws over half of its revenue from the US, has long relied on the programme to expand overseas.
However, approvals for fresh H1B visas for Indian IT firms have already been falling amid rising localisation and near-shoring trends.
<p'This could hit the Ebit (earnings before interest and taxes) margin for some companies in our coverage universe by 11-99 basis points and earnings per share (EPS) by 0.5-6 per cent, assuming they do not make any changes to their operating model,' Nomura said in a note.
The brokerage added that the impact of the new visa fee would likely be negligible over the next year.
'Over the medium to long term, we believe the operating models of Indian IT services companies will continue to lower their dependence on H1B visas. It is, however, unclear about the impact on onsite talent cost due to higher demand,' the note said.
Motilal Oswal, in its note, said if new H1Bs vanish, both onsite revenues and costs will decline.
'This shift could improve operating margins, as offshore work tends to be structurally more profitable. The net effect on EPS could be neutral in the medium term, although top line growth could be slower,' the note said.
G Chokkalingam, founder of Equinomics, said while the impact of the visa fee would be marginal, the timing hurts an industry already facing multiple headwinds.
"IT companies managed when travel was restricted during the COVID-19 pandemic. However, there will be some cost associated with the requirement of critical onsite work. But this is happening when the industry is struggling with single-digit dollar revenue growth," he said.
"There is fear of tariffs on IT services. It's better to stay away from large IT stocks until there is clarity on tariffs.
Feature Presentation: Aslam Hunani/Rediff
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