Jefferies, the global brokerage firm, has identified Tata Consultancy and Infosys among the largecap IT sector stocks as their top picks. The brokerage firm sees both of them “well placed” to deal with the $100K Visa curveball for the Indian IT sector. They pointed out that both these companies have at least 4-5 years to resolve the issue. Among the midcaps, Jefferies is betting on Coforge.
The US government has introduced a $100,000 fee for all new H-1B visa applications from September 21. The US government has also clarified that said fee is per application rather than per year, applies only to new applications, and does not apply to H-1B visa renewals. This gives IT firms 4-5 years to resolve the issue. “We estimate a higher share of H-1B employees for Infosys and Hexaware Technologies,” said Jefferies.
Jefferies top picks in IT: Price target for TCS, Infosys & Coforge
The brokerage has a Hold rating on TCS with a target price of Rs 3,230, which implies an upside of 2% from current levels. Jefferies sees Infosys’ share price reaching Rs 1,750 in the next 12 months, implying an upside of 13%, while it has a price target of Rs 1,680 on HCL Technologies, an upside of 14%, with a ‘Buy’ rating on both. In the midcap, the company selected Coforge and has a Buy rating on the stock, with a target price of Rs 2,030, an upside of 13%.
Jefferies on tech stocks: Impact on EBIT crucial
Jefferies stated that the EBIT generated per employee over the visa period in the past years by the Indian IT firms will be offset, so they’ll reduce H-1B visa usage. IT firms usually bill onsite employees at $150-200k annually and earn 10% margins, implying $15-20k EBIT per onsite employee. A $100K fee will effectively offset 5-6 years of EBIT from an employee on H1B. With the duration of H-1B visas capped at six years (assuming 100% renewals), IT firms are likely to shift away from H-1B visas.
Jefferies on IT stocks: Margins to be impacted
H-1B employees generate 3 to 4 times more revenue per employee, and they make up 2-3% of the employee base. The revenue share of these employees is higher, at 7-12%. At this juncture, IT firms can either hire local talent or use subcontractors. Also, they can hire talent from near-shore like Mexico and Canada or offshore from India. The path chosen will be based on negotiations with clients. Local hiring and subcontractors may not impact revenues, but will hit margins as the talent shortage in the US will raise resource costs. Near-shoring and off-shoring will impact revenues and will have a lower impact on margins.
“The talent supply crunch will drive up onsite wages, which could drag profits by 4-13%. Growth may slow amid operating model shifts, macro pressures, and AI risk,” said Jefferies.