We are rather surprised that Indian IT stocks have been disconnected so far
from following Cognizant in not exhibiting nervousness in the wake of the
harsh stance taken on the matter of H1/L1 visas (in the proposed US
immigration bill). Cognizant stock has been feeling the brunt since this bill came
to light, falling by as much as 15% in the past 10 days. In so far as details pertain
to visas (H1/L1), the proposed measures, in their current form, seek to radically &
adversely alter the onsite:offshore delivery and cost ratios of Indian IT. If this bill
is substantially passed, we believe all Indian IT companies will likely be quite
badly hit (TCS, the best-managed company of the group, in our view, is perhaps
most impacted due to stiff wage realignment provisions of the bill). If minimum
payable wages defined by location/role are adjusted upwards, as the visa bill
requires, TCS would likely have to bridge the gap the most given its lower percapita
US wages than its peers. Three reasons for the rather muted reaction of
Indian IT stocks to this fairly adverse visa bill (as it stands), but information
asymmetry between the US & Indian/Asian investors may not last long:
First, from our conversations with investors, we think US investors are far
more worried about this than Indian/Asian investors as they (US investors)
are closer to the action and can see the bipartisan approach to drafting this bill
and support for immigration reforms cutting across party lines.
Second, we think Indian/Asian investors expect substantial watering down.
There have been such attempted interventions in the past that either have fallen
through or not had the desired impact (e.g., higher visa rejection rates in L1 have
not dented TCS’s ability to deliver despite its dependence on L1 visas). Also,
investors might feel that companies can do greater offshorization in existing
contracts/business to somewhat dilute the impact (TCS would likely manage the
transition better than most). But unfortunately, investors tend to miss the more
severe impact relating to revenue issues that come up due to restrictions on
outplacement (that bar visa-holders from working at client locations) if this bill
becomes law (they may think it’s still largely a cost/margin issue).
In a sector where performance continues to be very polarized, the focus of
the street is very likely on near-term visibility of earnings rather than looking
to FY15 and beyond (it is beyond the next 12-18 months when the repercussions
of this bill’s provisions would start taking effect and also given the time needed
for debating by the various constituents/bodies). In our view, information
asymmetry between the US and Indian/Asian investors will not last long and
Indian stocks (notably TCS) should logically start feeling pressure.
IBM/Accenture seem insulated from the impact of the bill given these firms’ high
local/green card workforce content in the US.
Summary: Implementing the provisions of the bill entail not just a cost
impact but revenue impact as well. JPM believes that the bill if passed in its
current form, it would be significantly negative for the offshore IT industry
(including Cognizant) and would likely compel a business model change for
Indian tech companies. The most impacted would likely be TCS (as it has
the highest % of non-locals/non-green card holders on its US rolls and also
perhaps has highest need for salary re-alignments among peers). Also,
bipartisan support in US Senate makes this bill different from previous
interventions. The Indian IT industry, with the support of the Government of
India, may be able to water down some of provisions. We would expect some
dilution, but the medium- to longer-term repercussions are still net negative.
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from following Cognizant in not exhibiting nervousness in the wake of the
harsh stance taken on the matter of H1/L1 visas (in the proposed US
immigration bill). Cognizant stock has been feeling the brunt since this bill came
to light, falling by as much as 15% in the past 10 days. In so far as details pertain
to visas (H1/L1), the proposed measures, in their current form, seek to radically &
adversely alter the onsite:offshore delivery and cost ratios of Indian IT. If this bill
is substantially passed, we believe all Indian IT companies will likely be quite
badly hit (TCS, the best-managed company of the group, in our view, is perhaps
most impacted due to stiff wage realignment provisions of the bill). If minimum
payable wages defined by location/role are adjusted upwards, as the visa bill
requires, TCS would likely have to bridge the gap the most given its lower percapita
US wages than its peers. Three reasons for the rather muted reaction of
Indian IT stocks to this fairly adverse visa bill (as it stands), but information
asymmetry between the US & Indian/Asian investors may not last long:
First, from our conversations with investors, we think US investors are far
more worried about this than Indian/Asian investors as they (US investors)
are closer to the action and can see the bipartisan approach to drafting this bill
and support for immigration reforms cutting across party lines.
Second, we think Indian/Asian investors expect substantial watering down.
There have been such attempted interventions in the past that either have fallen
through or not had the desired impact (e.g., higher visa rejection rates in L1 have
not dented TCS’s ability to deliver despite its dependence on L1 visas). Also,
investors might feel that companies can do greater offshorization in existing
contracts/business to somewhat dilute the impact (TCS would likely manage the
transition better than most). But unfortunately, investors tend to miss the more
severe impact relating to revenue issues that come up due to restrictions on
outplacement (that bar visa-holders from working at client locations) if this bill
becomes law (they may think it’s still largely a cost/margin issue).
In a sector where performance continues to be very polarized, the focus of
the street is very likely on near-term visibility of earnings rather than looking
to FY15 and beyond (it is beyond the next 12-18 months when the repercussions
of this bill’s provisions would start taking effect and also given the time needed
for debating by the various constituents/bodies). In our view, information
asymmetry between the US and Indian/Asian investors will not last long and
Indian stocks (notably TCS) should logically start feeling pressure.
IBM/Accenture seem insulated from the impact of the bill given these firms’ high
local/green card workforce content in the US.
Summary: Implementing the provisions of the bill entail not just a cost
impact but revenue impact as well. JPM believes that the bill if passed in its
current form, it would be significantly negative for the offshore IT industry
(including Cognizant) and would likely compel a business model change for
Indian tech companies. The most impacted would likely be TCS (as it has
the highest % of non-locals/non-green card holders on its US rolls and also
perhaps has highest need for salary re-alignments among peers). Also,
bipartisan support in US Senate makes this bill different from previous
interventions. The Indian IT industry, with the support of the Government of
India, may be able to water down some of provisions. We would expect some
dilution, but the medium- to longer-term repercussions are still net negative.
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