The industry's operating margins will narrow by 0.30- 0.80 per cent largely on an increase in local hires.
Mumbai: Profitability of IT companies is set to be impacted by adverse policies like the one on H1-B visas in the key US market, with margins estimated to narrow by up to 0.80 per cent in 2019-20, a report said on Monday.
Revenues are set to rise by 7-8 per cent in dollar terms for the over USD 180 billion industry in this fiscal on the back of faster growth in digital services, ratings agency Crisil's research wing said in a note.
The industry's operating margins will narrow by 0.30- 0.80 per cent largely on an increase in local hires which the industry has been forced into due to the policy framework in its markets, the note said.
It explained that the Indian IT sector has traditionally relied on labour arbitrage -- getting the same work done cheaper than the developed markets -- but the gap is narrowing, crimping the margins.
Nearly 65 per cent of the operating expenses for an IT player are towards employees, it said, adding that the same grew by a faster clip of 17 per cent for tier-I players in FY2018-19 as against 6 per cent earlier.
"Such an increase in employee costs can be attributed to tightening of visa norms for Indian players, resulting in higher onsite costs for them," the note said.
It said ever since the US government tightened its H- 1B visa policy in 2017, challenges have mounted for the sector as Indian-origin employees were the largest consumers of H-1B visas at 63 per cent of initial employment.
It can be noted that the US reduced both the number of visas available and also set a minimum floor of salary to be offered, making it difficult for the Indian IT industry.
Typically, an Indian-origin employee with an H1-B visa would cost 20 per cent lower than hiring the same talent locally, it said.
Additionally, lower unemployment of under 2 per cent in the US technology sector as against an overall unemployment of under 4 per cent means talent availability is limited and it will lead to higher costs, it said, adding profits will continue to be under pressure in the future as well.
It said margins have been declining for the last five fiscals due to factors like stabilising utilisation levels and billing rates, and the rise in employee costs is only aggravating the problem.
The note suggested players can try to optimise onsite costs by resorting to the pyramid model, wherein college graduates are hired at USD 50,000-60,000 in a higher proportion and the rest filled with a few domain experts at a higher cost.
Focus on moving up the value chain in digital services could also play a role to offset rising employee cost, it said.