Trump’s H-1B fee hike a net positive? JM Financial shares 1st and 2nd order effects 

JM Financial believes the latest hike in H-1B visa fees, announced under President Trump’s proclamation, is ultimately a net positive for the Indian IT sector. With one of the biggest regulatory overhangs now behind, the brokerage said the financial impact on margins is likely to be negligible, while sentiment has already shifted from panic to relief.

"In a more likely scenario of higher offshoring, the impact could be completely negated. Financially, therefore, this is neutral, in our view.  Importantly, with one of the biggest regulatory overhangs now behind, this event is net positive, in our view," it said.

JM Financial said sentiment around the impact of the US President’s H-1B proclamation on IT services swung from panic to a sigh of relief, all in a weekend. The ambiguity around the applicability of the $100,000 fee – frequency (annual/one-time) and type of petition (new/renew/ amendment) – caused the confusion. 

The White House Press Secretary’s clarification that the increased fee is applicable one-time on new petitions only makes the impact manageable. New petitions have reduced substantially for IT Services players. Incremental petitions could now drop to a trickle, for specific skill-sets where clients are willing to pay, JM Financial said.

"This will make it margin neutral. Margins could, however, have a second-order impact, through wage inflation in sub-con/local talent pool. Potential offsets are higher offshoring and price renegotiations. That said, IT Services players, to comply with the spirit of the proclamation, should further increase the share of local talent," JM said.

Given the 3-year renewal cycle of the H-1B visa, approvals of past 3 years’ H-1B applications can give a sense of the existing stock of H1B visa holders for a company. 

"We compiled past 3-year data (USICS 2022-24) for a) new petitions; b) continuation petitions (renewals); and c) change in employee approval – where a company hires an existing H-1B visa holder within the US. Note, we have not accounted for attrition among the H-1B employee base, which could further reduce the count. Based on this methodology, we estimate that H-1B employees make up 1.2 per cent to 4.1 per cent of total employees for the top-10 IT companies. 

"ExpoCompanies with higher exposure to the US – LTIM/PSYS/MPHL – have understandably higher dependence on H1B visas. Surprisingly, Wipro, despite relatively higher US exposure (62 per cent), has lesser dependence on H-1B (1.9 per cent). This likely reflects local hiring + acquisitions (Rizing/CAPCO," JM said.

First and second order impact JM said first-order impact of higher H-1B fee on only new petitions is likely to be minimal. IT players will likely apply for new petitions only for specific skill-sets where the client is willing to pay for the visa fee, thus making it margin neutral. Further, no impact on existing H-1B visa holders mean project delivery will not be affected, a positive. 

"Second-order impact – due to wage inflation in local talent pool or subcontractors – can’t be ruled out though. We have estimated margin impact under two scenarios. In scenario one, we assume that the companies will supplant all new H-1B requirements with local resources. Plus, we have assumed that they will gradually (over 6 years as H-1B visas expire/convert into Green Card) move towards 100% non-visa dependence," JM said. 

The brokerage assumed $25,000/annum wage differential between H-1B and local hires (due to upward wage pressure), resulting in 15-50bps margin impact. In scenario 2 (more likely), it assumed that IT players will replace 50 per cent of H-1B base with local hires and offshore the balance H-1Bs. The broking firm estimated that higher offshoring can negate the impact of higher wages of local hires, thus making it financially neutral.