IT margins to shrink up to 0.8% for FY20 on increased hiring of American talent: Crisil

Credit rating agency Crisil said that Indian information technology (IT) margins will shrink up to 80 basis points (or 0.8%) for the current financial year of 2019-20 as employee costs surge due to rising US visa expenses. It added that the Indian IT firms need to find new methods to rein in the rising employee costs, which account for 60-65% of operating costs.

Mumbai-based Crisil said in its IT sector report that while traditionally the sector has relied on labour arbitrage for maintaining margins, the gap has been narrowing owing to various market forces -- mainly increased US restrictions on H-1B visas forcing firms to hire American talent, which is 20% more expensive, it said.

According to Crisil, IT companies can focus on moving up the value chain by offering more digital services to offset rising employee costs. 

Majority-owned by global financial research and rating firm Standard & Poor’s, Crisil in its report noted that operating costs and cost per employee for Tier-I firms rose faster at 17% and 9%, respectively, year-on-year for 2018-19, compared with 6% and 3% a year earlier.

Over the last couple of years, Indian IT firms have been hiring locally in the US. As of now, the offsite-onsite employee ratio of Indian IT players stands at 80:20.

"An increase in employee costs can be attributed to the tightening of visa norms for Indian players, resulting in higher onsite costs for them. In 2017, Indian-origin employees were the largest consumers of H-1B visas at 63% of initial employment, so the sudden change meant fulfilling onsite client requirements became tough," the Crisil report said.

Crisil also suggested that players can optimise onsite costs by resorting to the pyramid model, where college graduates are hired at $50,000-60,000 a year in a higher proportion.