The Information and Technology sector stocks are in focus after the recent H-1B fee hike shocker. Though Nomura expects a negligible impact over the next one year, they believe Indian IT companies will continue to lower their dependence on H-1B visas. Given the current dynamics, their top picks in the IT sector include Infosys and Cognizant among large caps, and Coforge in midcaps. They have a Buy rating on Firstsource, too. They see any sharp correction as an opportunity to buy into these stocks.
Nomura: ‘Buy’ recommendation on 4 large-cap IT stocks
Let’s now take a look at the large-cap IT stocks that Nomura has a Buy on –
–Infosys: Nomura has a target price of Rs 1,880, implying 22% upside
–HCL Tech: The target price is Rs 1,810, implying 23% upside from current levels
–Wipro: The target for this stock is set at Rs 310, implying over 21% upside
–Tech Mahindra: This is expected to run up 16% from current levels with a target of Rs 1,810
Nomura: ‘Buy’ recommendation on 2 midcap IT stocks
The midcap IT space also has some value buys as per Nomura. Here is a look at the two stocks they have a Buy recommendation on-
–Coforge: The target price is Rs 2,100, implying 17% upside
-Firstsource: The target price for this stock is set at Rs 410 per share. This indicates at least 9% upside
Nomura on Indian IT sector: Worst-case impact
According to Nomura, the worst-case impact of the higher H-1B fee hike could be 10-100 bps on margins for the stocks in their coverage universe.
The new H-1B visa approvals by Indian IT companies have fallen significantly over the past few years, following ongoing localisation and near-shoring of the workforce. They added that “companies have indicated that their US workforce is 20-40% visa-dependent.”
Nomura highlighted that the “new visa applications were 17% of the total applications for the companies.” For a theoretical exercise of assessing the impact of the changes in the H-1B visa programme, Nomura assumes new visa applications would continue at the same pace as in FY25, with a one-time impact at the time of filing.
This, they believe, “could hit EBIT margin for some companies in our coverage universe by 11-99 bps and EPS by 0.5-6%, assuming they do not make any changes to their operating model.”
Nomura on IT sector: 4 big changes underway
One of the key reasons that Nomura expects limited impact is because they believe the number of H-1B visas is going to come down materially in the next cycle (FY27) due to the following reasons –
-While companies have approvals for H-1B visas, they often do not send all the approved employees in the first year. Given that the visa fee hike is for new applications, the employees holding valid H-1B visas on the date could be sent over their visa holding period.
-Clients and IT service providers are likely to increase offshoring and the use of automation to overcome visa cost challenges.
-Increasing localisation and near-shore hiring in locations like Mexico and Canada.
-H-1B visa use is likely to be restricted to extremely critical roles where localisation of talent is not an option.
Additionally, Nomura also expects that the number of global captive centres (GCCs) in India is likely to further accelerate as a result of the development.