More than H-1B visa issue, Indian IT companies feel the heat of rising rupee against dollar, say analysts

Ever since the US H-1B visa issue came to the fore early this year following president Donald Trump’s ascension to power in the US, investors in Indian IT companies have been cautious. Reason: Any significant change in US policy has the potential to impact the prospects of the country’s robust software industry. As many top-notch Indian IT companies derive more than 60 percent of their revenue from their US clients, Trump’s protectionist move could hurt the sector. The Trump government wants more local hiring by companies instead of importing cheap labour from foreign countries. [caption id=“attachment_2005317” align=“alignleft” width=“380”]  Reuters[/caption] Also, recently the US had accused top Indian IT firms TCS and Infosys of unfairly cornering the lion’s share of H-1B visas by putting extra tickets in the lottery system. The Trump administration wants to replace these visas with a more merit-based immigration policy. “You may know their names well, but like the top recipients of the H-1B visa are companies like Tata, Infosys, Cognizant — they will apply for a very large number of visas, more than they get, by putting extra tickets in the lottery raffle, if you will, and then they’ll get the lion’s share of visas,” the senior official said, according to transcript of the briefing posted on White House website. “And those three companies are companies that have an average wage for H-1B visas between US $60,000 and US $65,000 (a year). In contrast, the median Silicon Valley software engineer’s wage is probably around US $150,000,” the official said. So, has the visa issue impacted the prospects of the IT companies on the local bourses? A look at their performance since the beginning of the year shows that top three IT stocks namely Infosys, TCS and Wipro traded flat to range-bound with a slightly negative bias. “The stock performance of these companies suggests that issues like H-1B visa are already priced in. Most of the IT companies have already been working on the change in US policy measures over the past one year or so…hence any change in US visa policy may not impact much for these companies going ahead,” said A K Prabhakar, Head of Research, IDBI Capital Markets. Infosys has already said that it plans to focus more on local hiring in the US and is also looking at setting up development and training centres in the country as part of its efforts to tide over visa-related issues. “We are closely monitoring the overall situation with respect to visa… in the last 24 months, we have focused on increasing our presence in the US with a lot more local hiring,” Infosys chief operating officer U.B. Pravin Rao told investors on a recent conference call earlier this month. Even TCS and Wipro, which are dependent on visas, are believed to be focusing on bringing on board more locals to comply with the norms. When it comes to market-cap, Infosys has seen investor wealth getting eroded by Rs 17,893.20 crore since the beginning of this year. More than the visa issue, the wealth erosion in Infosys stock was more to do with subdued earnings over the past few quarter, muted guidance, and corporate governance issues in the past few months. “Corporate governance is a serious issue with any corporate today. The growing discord between Infosys founders and the board coming in open was a cause of concern for investors, which was reflected in the stock as well,” said Prabhakar. Investor wealth in TCS eroded by Rs 9,428 crore durning the period under review due to subdued earnings. While visa issue may soon settle down once the US policy is in place, experts are more worried about the currency fluctuation that has the potential to further impact the earnings going ahead. The sudden spurt in the rupee against the greenback in the previous quarter caught the sector off-guard where most of the companies don’t hedge their currencies, barring few. Even the companies that hedge the currency position still end up posting losses due to currency fluctuation. On year-to-date basis, the Indian rupee has appreciated 5.3 percent. According to analysts, weak US dollar against major global currencies, including India, is likely to continue in the near term. The rupee is already hovering around 65 against the US dollar, and any significant appreciation from here on could hit the margins of IT companies in the quarters ahead, caution analysts. TCS’ profit in rupee terms fell 2.5 percent to Rs 6,608 crore and revenue grew 1 percent to Rs 29,642 crore, while for the January-March quarter, Infosys reported a 0.2 percent rise in consolidated net profit at Rs 3,603 crore while revenue grew 3.4 percent to Rs 17,120 crore. Thus, according to analysts, more than the US visa issue,  the appreciating rupee is a more serious concern for investors as IT companies’ margins may take a hit going ahead. This was evident from the March-quarter earnings of Infosys and TCS, which reported disappointing set of numbers.