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May 28, 2013, 01.42 PM IST | Source: CNBC-TV18

Nomura sees 150-400bps margin hit for IT cos from US bill

Ashwin Mehta, information technology (IT) analyst with Nomura India talks about the possible impact on companies in the the Indian IT sector due to the clauses in the US immigration bill.

India's information technology (IT) industry has raised its concerns over certain clauses in the US immigration bill's legislation which was approved in their senate recently. Some of the clauses, if enforced, will bar the model of sending engineers for short-term projects and issuing temporary work permits.

Ashwin Mehta, IT analyst at Nomura India, who authored a report on the possible impact of the bill, believes the clauses four of the senate immigration bill will require firms to employ 50 percent of their staff locally from 2016.

He added that the bill, in its current draft, may impact margins of companies like Cognizant and Tata Consultancy Services by 150-400 basis points (bps). However, the impact on Wipro and HCL Tech would be relatively less. The diluted version of the bill would though hit margins of Infosys by 200-300 bps and TCS by 300 bps.

Also read: US immigration bill could slow down Indian outsourcers in tech industry

Below is the edited transcript of his interview to CNBC-TV18

Q: Your report seems to suggest that the impact on IT companies could be quite severe if the US immigration bill to be passed in its current form. Can you take us through why you expect it to have such a big margin impact?

A: Essentially there are four clauses which are damaging within the current senate immigration bill which debar (1) the H1B outplacement at client (2) leads to visa fee increases for these companies (3) they will have to comply with 50 percent local proportion by 2016.

The current local proportions in our view are between 16-40 percent for the tier one IT companies and finally there is a plan to increase the mandated salary for the H1B resources in the US to make it at par or higher than the US comparable salary.

Therefore, our view is that even if it passes without the outplacement environment clause, which is the most severe of them, there could be impacts of between 150 to 400 bps on margins across companies with Cognizant and Tata Consultancy Services (TCS) followed by Infosys being the most hit. HCL Technologies and Wipro in our view will get less hit on these clauses.

Q: To break it up for individual stocks, what would the impact be for TCS and Infosys? As much as the industry wide impact or sharper on the margin front?

A: What we are building in our target prices is a 50 percent probability of diluted bill passing. Therefore, if the diluted bill passes, we see somewhere closer to 200-230 bps impact on Infosys. We see closer to 300 bps impact in terms of TCS on margins.

Q: By when do you think the picture will become clear on the immigration bill and from which quarter onwards do you expect to see some degree of margin compression?

A: The bill is currently in the senate. There would be discussion on that followed by a vote, which should happen sometime in June and then it moves to the House. If everything goes according to the plan of the sponsors of the bill then the bill could be law by October ’13. If it pushes beyond that then it could be possibly Q1 of next year.

In terms of some of these clauses, especially if it passes with outplacement debarment clause which is effective from first fiscal after which the bill passes and their fiscal year starts from October ‘13 onwards, one should start to see some impacts around that time.

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