IT firm mar­gins will shrink on US lo­cal-hire pres­sure: Re­port

The Hindu Business Line - - IT & TELECOM - VARUN AG­GAR­WAL

Even as a strong dol­lar helps In­dian IT ser­vices com­pa­nies, their mar­gins will con­tinue to be un­der pres­sure as they are forced to hire lo­cally in the US due to in­creased visa re­stric­tions un­der the Trump ad­min­is­tra­tion.

De­spite the cur­rency ben­e­fit as well as use of op­er­at­ing levers, prof­itabil­ity has re­mained flat in FY2019 at 22.5 per­cent on ac­count of higher on­site hir­ing and sub-con­tract­ing cost ne­ces­si­tated by visa curbs, pric­ing pres­sure, in­creased reg­u­la­tory costs and wage inflation, ac­cord­ing to a new study from ICRA.

USCIS is­sued 10 per­cent less H-1B visas (fresh and re­newals) dur­ing FY2018 (Oc­to­berSeptem­ber) at 3,35,000 com­pared to pre­ced­ing year’s 3,73,400. The re­cent amend­ment (im­ple­mented from April 1, 2019) by USCIS (United States Ci­ti­zen­ship and Im­mi­gra­tion Ser­vices) re­vers­ing the process for H1-B se­lec­tion favour­ing ad­vanced de­gree hold­ers will have an ad­verse fi­nan­cial im­pact on the com­pa­nies.

This will cul­mi­nate in­ap­prox­i­mately 10 per­cent reduction in H1-B visa ap­provals for reg­u­lar ap­pli­cants (with­out ad­vanced de­gree - master’s or higher from US uni­ver­si­ties) which form ma­jor part of the H1-B visa re­quire­ments. This will lead to higher on­site hir­ing. The over­all mar­gins are es­ti­mated to de­cline from 22.5 per­cent in FY2019 to 21.5 per­cent in FY2020 for ICRA sam­ple com­pa­nies.

The share of fixed price con­tract im­proved to 55.2 per­cent in FY2019 (53.4 per­cent in FY2018) while em­ployee util­i­sa­tion lev­els re­mained flat for the sam­ple com­pa­nies — two critical fac­tors as­so­ci­ated with gen­er­at­ing op­er­a­tional ef­fi­cien­cies.

De­spite pres­sure on growth and mar­gins, the credit pro­file of the com­pa­nies is ex­pected to re­main sta­ble un­der­pinned by their abil­ity to sus­tain free cash flows. The credit pro­file is also sup­ported by net cash po­si­tion with sig­nif­i­cant liq­uid­ity in the form of surplus in­vest­ments gen­er­ated out of past cash flows de­spite healthy div­i­dend payout and share buy­backs.

“Over the next decade, ICRA also ex­pects con­sol­i­da­tion in the in­dus­try es­pe­cially among small and mid-size play­ers as mar­gin pres­sure will in­ten­sify lead­ing to lower re­turns for share­hold­ers. Geo-po­lit­i­cal is­sues re­strict­ing move­ment of skilled labour or in­crease in min­i­mum salary re­quire­ment will have neg­a­tive im­pact on the sec­tor out­look,” Gau­rav Jain, Vice Pres­i­dent - Cor­po­rate Rat­ings, ICRA, said.

Com­pa­nies have re­ported higher deal wins dur­ing the pre­ced­ing year while net em­ployee ad­di­tion has in­creased dur­ing the FY2019 across ma­jor­ity of sam­ple com­pa­nies, in­di­cat­ing a sta­ble de­mand en­vi­ron­ment for the sec­tor. The net em­ployee ad­di­tions show pos­i­tive trend with ap­prox­i­mately 1,13,787 ad­di­tions dur­ing FY2019 com­pared to 11,600 dur­ing FY2018 and 93,500 in FY2017.

Among the sec­tors, bank­ing and fi­nan­cial ser­vices con­tin­ues to see some weakness led by cur­rent macro-eco­nomic con­di­tions in­clud­ing low in­ter­est rates; con­tin­ued fo­cus on cost op­ti­mi­sa­tion, manag­ing their dis­cre­tionary spends as well as in­sourc­ing by a few clients for want of greater con­trol. In­sur­ance ver­ti­cal is sup­port­ing the over­all growth for BFSI which con­trib­utes 30 per cent of the ICRA sam­ple rev­enues.

Re­tail ver­ti­cal grew healthy dur­ing FY2019 com­pared to flat­tish trend in FY2018 sup­ported by im­proved con­sumer sen­ti­ments and higher dis­cre­tionary brick mor­tar re­tail de­mand.

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