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IT: Near term pessimism amid H-1B fee hike; albeit most negatives seem priced in

ICICIdirect Research 26 Sep 2025 DISCLAIMER

The U.S. government has announced a sharp H-1B fee hike — a one-time $100,000 levy on fresh applications starting FY26, Importantly, this does not cover renewals or extensions, but only new filings, which means the near-term hit kicks in from FY27.
Notably, top-tier IT firms have already reduced H-1B reliance significantly with 70–80% of their U.S. workforce now visa-independent. In the medium term, expect a sharper pivot to local hiring, nearshore/offshore delivery, and alternate visas like L-1.
For Indian IT, near-term margin pressure could be 40–200 bps (40-65 bps for top 4 players), with earnings hit of 2-14% (2-6% for top 4 players). Birlasoft, Persistent and LTIM appear most exposed, while BPOs with zero reliance on H-1B like Firstsource remain insulated along with ER&D players.
Importantly, INR depreciation is being overlooked — Euro is up ~11% and GBP ~6.4% over the last year. This partially cushions margin pressure for companies like TCS, Infosys, Mastek and ER&D players with >30% exposure to these currencies.
Globally, Accenture’s FY25 print was a mixed bag as revenues beat on AI momentum as GenAI demand is a bright spot and provides a positive read through for Indian IT players. However, margins were pressured by a $865 mn optimization program (including $615 million in Q4 and an additional ~$250 million expected in Q1FY26). Guidance for FY26 points to 2–5% local currency growth (3–6% excluding a 1–1.5% drag from the U.S. federal business), with margin expansion of 60–80 bps over FY25 to 15.3–15.5%.
To sum up, the H-1B levy is a short-term overhang and adds near-term margin pressure, but with falling reliance on H-1Bs and a pivot to local hiring and offshore delivery, Indian IT’s operating model is already shifting to reduce visa risks. Moreover, currency depreciation will also partially cushion margin pain. Nifty IT is already down ~20% YTD and valuations for most players are near the lower end of historical ranges, reflecting that most of the pain is priced in. Note that most of the top tier IT companies are trading at ~4 year low. Thus, amid beaten-down valuations, the medium-term impact looks more manageable than feared.

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