Last week, investors cheered Cognizant's robust sales growth and bullish June forecast but the celebration was mixed with caution as 80 per cent of its revenues are derived from the US, leaving the New Jersey-based company extremely vulnerable to the proposed overhaul of the immigration system in the world's largest economy.
While large IT services companies are scrambling to minimize the impact of proposed changes to rules for issuing temporary and short-term work visas, analysts expect Cognizant and Tata Consultancy Services, to be the most affected based on factors such as their US revenue contribution and proportion of visa holders in their US workforce.
"This bill does not affect only Cognizant. It affects many of the largest companies in the US who use our services because of the shortage of science, technology, engineering, math graduates in the US," said R Chandrasekaran, group chief executive at Cognizant.
"The bottom line is if the bill would ultimately change the way America does business. We don't believe that will happen," said Chandrasekaran. Last week, brokerage Nomura had alerted clients on the client-wise impact in the sector if the proposed changes become law in their current form.
"US revenue contribution, local proportion of US staff and company H-1B salary levels would determine the impact across companies - the impact is likely to be higher at Cognizant as 80 per cent of revenues come from the US, and TCS because of lowest local (employee) proportions," analysts Ashwin Mehta and Pinku Pappan wrote in their client note on May 8. "We estimate TCS and Cognizant are likely to be in the 15-30 per cent band on local proportion (of US staff) while other tier-1 companies are likely to be in the 35-40 per cent range."
New Jersey-based Cognizant and Mumbai-based TCS did not respond to emails seeking details of their US employee-mix and salaries. Cognizant said some of the data points analysts used were incorrect, but declined not to elaborate.
"The industry will have to re-align its business model," said Ameet Nivsarkar, vice-president at Nasscom that represents India's $108-billion (Rs 5.9 lakh crore) IT industry. According to Nivsarkar, Indian IT providers will need to evaluate options such as acquisitions and larger presence in smaller US cities. Currently, Indian IT companies get 60-70 per cent of the work in the US and Europe done in India. Nivsarkar said this may have to be raised to 80 per cent.
The most damaging of the proposed measures are the ones relating to issue of new H-1B visas. There are also provisions that seek to prevent IT companies from placing engineers on visa at client locations, if visa holders as a proportion of total US workforce are above a certain minimum threshold. Among other things, the immigration bill says if an employer has more than 50 per cent of employees on H-1B or L-1 visas, it must pay a $10,000 fee per additional worker.
"While a majority of current proposals, if accepted, will affect margins, the restriction on the incremental outplacement of an H-1B visa-holding employee at the client's office is feared to place the offshore business model itself at risk," said Pankaj Kapoor, analyst with Standard Chartered Equity Research.
While announcing earnings last month, Wipro Chairman Azim Premji had said he was confident that some of these conditions would be made more practical, else it would affect US companies as much as Indian firms.
"Indian firms will either hire locally or make one large or several small acquisitions to get the employee strength needed," said Siddharth Pai, Asia-Pacific head at sourcing advisory ISG. "With the increasingly global reach of Indian tech firms, they would have had in any case considered this sort of move around local hires and acquisitions." Raja Lahiri, partner-transaction advisory services at consultancy Grant Thornton, said while US acquisitions would make sense in light of the proposed US immigration reforms, the trigger would be the potential to tap into newer technology areas of growth such as cloud computing, big data and analytics, healthcare and US public sector.
