Information Technology Sector Update : Intensifying pressure on margins by Prabhudas Liladhar Capital Ltd
Intensifying pressure on margins
Quick Pointers:
* H-1B visa fee increased by USD100,000 for new applications
* Additional costs are expected to impact operating margins by ~40bps on a median basis in FY27E across our coverage universe
The new executive order for imposing additional visa fee of USD100,000 on new approvals (applicable Mar’26) would pressurize margins by median ~40bps for FY27E across our PL coverage universe. More importantly, the individual visa petition/approval would be valid for 3+3 years before the individual falls into the lottery cycle again, and visa fee becomes due. Hence, the one-time visa fee would be capitalized over 6 years. However, the H-1B visa dependency has reduced meaningfully over the last decade, median visa approvals (new + renewals) as a percentage of headcount stood at 0.7% in 1HCY25 vs. 3.4% in CY16. Per our estimates, new H-1B visa approvals account for median ~0.2% to the overall employee base every year, that translates to median ~USD60mn expense for our coverage universe. We believe the impact is marginal across our coverage universe, except for LTIM, where the margin impact is notable at ~130bps for FY27E due to relatively higher visa dependency.
With the H-1B visa fee hike, we expect visa dependency to reduce further, and right shoring and offshoring to remain the key drivers to rationalize delivery charges. Post COVID, the offshoring trend has accelerated to its full potential, with notable improvement of 500-600bps over FY20-25. We expect the momentum to continue with near shoring (Canada, Mexico) likely to be an immediate available alternative before the lottery cycle falls due. We don’t see near-term impact until Mar’26; however, medium-term earnings (FY27E) might get impacted by median ~2.6% across our IT coverage universe, with LTIM being the most affected, by ~7.5% and ~5.0%, respectively. We continue to prefer INFY, TCS and PSYS, where the EPS impact is marginal.
Additional visa fee to impact margins from FY27E: The USD100,000 fee on new H-1B visa approvals translates into an incremental median margin impact of ~40bps and EPS erosion of ~200bps across our coverage universe in FY27E. Large-cap IT players (TCS, Infosys, HCLT, Wipro, TechM) will face modest headwinds, with EBIT margin declines of 30–60bps and EPS impact of 1–4%. LTIM (-130bps EBIT, -7.6% EPS) is disproportionately affected given higher visa reliance
Declining H-1B dependency: Over the past decade, IT companies have steadily reduced their dependency on H-1B visas, driven by stricter US immigration policies and a shift toward increased local hiring, supported by evolving delivery models. Our internal estimates indicate that median H-1B visa approvals as a share of total headcount have declined sharply, from 3.4% in CY16 to just 0.7% in 1HCY25. As a result, the overall financial impact of higher visa fee remains limited for most players, given their reduced reliance on new H-1B approvals.
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