Bulging staff cost, shrinking margin to hit Indian IT companies, earns Crisil
28 May 2019
Indian information technology (IT) services companies need to write a new code to debug rising staff costs.
According to a Crisil Research report, operating margins of IT firms will shrink yet again, as H-1B visa rules continue to curb arbitrage.
Crisil expects revenues to grow by 7-8 per cent in dollar terms for the sector in fiscal 2020, helped by double-digit growth in digital services.
Operating margins are forecast to decline 30-80 bps for the sector in fiscal 2020 as local hires increase for onsite job, who cost 25-30% more than their H1-B counterparts.
Traditionally, the sector has relied on labour arbitrage for maintaining margins, but that gap has been narrowing owing to various market forces — mainly changing US policy stance towards H-1B visas.
Employee expenses which account for nearly 60-65 per cent of total operating costs and cost per employee for Tier 1 players rose faster at ~17 per cent and ~9 per cent on-year in fiscal 2019, respectively, compared with ~6 per cent and ~3 per cent a year before. For mid-tier players, the increase in employee expenses was ~13 per cent on-year for nine months ended December of fiscal 2019 as many are yet to declare fourth quarter results.
Such an increase in employee costs can be attributed to tightening of visa norms for Indian players, resulting in higher onsite costs for them.
Ever since the US government tightened its H-1B visa policy in 2017, challenges have mounted for the sector. That year, Indian-origin employees were the largest consumers of H-1B visas at 63 per cent of initial employment, so the sudden change meant fulfilling onsite client requirements became tough.