IT stocks stare at fresh margin squeeze and de-rating on H-1B fee hike sparks

IT stocks stare at fresh margin squeeze and de-rating on H-1B fee hike sparks

Indian IT stocks are staring at margin pressure and the risk of further de-rating after the US government imposed a one-time $100,000 fee on new H-1B visa petitions filed after September 21, leaving investors to assess the cost burden on Indian IT firms. Fund managers could begin to increase their underweight position in tech stocks once again.

Why it matters:

The IT sector’s valuation premium rests on predictable growth and stable margins. A sudden cost shock of this scale threatens both, raising the risk of multiple compression for bellwethers like Infosys and TCS.

By the numbers:

Analysts caution that while existing staff and renewals are unaffected, the fee on new filings could still mean incremental costs for project staffing. Large IT firms may see a short-term squeeze on margins, though the impact is unlikely to be as severe as initially feared.

Some estimates suggest mid-teens earnings impact for firms most dependent on new H-1B inflows, though consensus points to a more moderate hit in the low single digits. Even the earnings downgrades — which many believed had bottomed after the last results season — may now deepen, said Arindam Mandal of Marcellus.

What they’re saying:

“Even though H-1B staff form a small fraction … the new $100,000 petition fee still eats into margins for firms sponsoring fresh talent,” said Siddharth Oberoi, noting companies may need to reassess project execution and brace for disruptions.

“Valuations typically follow margin compression. Firms heavily reliant on US-onshore revenue or sponsorship-dependent staffing are likely to face negative re-ratings,” said Rajesh Palviya.

“While manageable, structural derating is still a risk, and the cyclical upturn in dollar revenue growth may now be uncertain,” added Mandal.

“The H-1B update is far-reaching for new visa sponsorships, arguably more so than goods tariffs, even if existing workers remain unaffected," said Ashish Nigam, CIO of Axis Capital.

To the maximum, analysts pointed that even a 10–15% derating possible for large and mid-cap IT firms.

“Any challenge historically becomes an opportunity for India … Indian IT has weathered similar disruptions before,” added Shah.

Between the lines:

The shock announcement came with virtually no lead time, leaving little room for hedges. Companies may accelerate offshoring or shift to lower-cost geographies, but transitions are unlikely to be quick or seamless.

Beyond higher upfront visa sponsorship costs, firms may accelerate investments in automation and AI to cut dependence on new H-1Bs — but these transitions will weigh on earnings for 12–24 months.

Also read: India raises concerns over US H-1B visa fee hike, warns of family disruptions

Market impact:

Investor sentiment is already cautious: ADRs of Indian IT majors dipped on the announcement. “Valuations of IT companies are premised on predictable growth and margin stability … if earnings suddenly fall at risk, you could see multiple compression,” said a senior strategist.

Technology’s weight in equity fund portfolios of Top 20 fund houses, which slipped steadily from 9.6% in Jan’25 to 7.8% in Jul’25, inched up to 7.9% in Aug’25 (Motilal Oswal Fund Tracker). With greater level of uncertainty now, …exposure cuts may accelerate again, particularly in firms with higher dependence on fresh H-1B intakes. Stocks may underperform until clarity emerges on the actual cost absorption and growth trajectory.

Also read: Analysts see limited impact on Indian IT as White House eases concern on H-1B fee hike