A recent policy change favouring advanced degree holders for visas in US will lead to a hit on IT companies' profitability as the number of H1-B visas approved gets reduced, a report said. In December 2018, the United States Citizenship and Immigration Services (USCIS) proposed reversing the process for H1-B selection favouring advance degree holders.

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This is likely to lead to 10 per cent reduction in H1-B visa approvals for regular applicants, where the applicant is without an advance degree masters or higher from US universities, ratings agency Icra said.

Increased onshore hiring associated with higher wage bill along with factors such as pricing pressure on commoditised services, wage inflation and lower revenue growth will negatively impact the margins going forward, it said.

Even though the companies have other factors to restrict the impact, overall operating margins are still expected to decline from 22.1 per cent in FY18 to 20.8 per cent in FY21, it said.

Under the proposed amendments, USCIS would first select the 65,000 visas from the cumulative pool of regular as well as advance degree holder applicants and 20,000 highly skilled H1-B visas would then be allotted among the remaining pool of unselected advance degree holder applicants, domestic rating agency Icra's vice president Gaurav Jain said.

"This will work against the Indian IT services sector (H-1B dependent employers) as their share of masters degree or equivalent for H-1B visas approved was approximately 27 per cent compared to 55 per cent for non-H-1B dependent employers," he said.

An entity is defined as H-1B dependent if more than 15 per cent of its employees are on an H-1B visa. The agency, however, said that credit profiles of players will remain stable as companies will be able to sustain free cash flows despite pressure on revenue growth and margins.

At present, when sufficient number of petitions needed to reach the regular cap or advanced degree exemption are received, USCIS selects qualifying position towards the H1-B advance degree exemption first through lottery and the unselected advance degree applications are merged with the pool of regular applicants for selection process towards cap of 65,000, it said.

Indian companies have started to ramp up onshore hiring with the visa issuance norms being tightened by restricting the entry of entry-level programmers earlier coupled with increasing compliance requirements adding to cost pressures, it said.

In its sample of companies, Icra said the share of offshore revenues reduced from 43.2 per cent in FY16 to 40.3 per cent in FY18, and has subsequently increased to 42.2 per cent in H1FY19.