A Hong Kong-based research firm is warning investors that Indian IT service providers can no longer do business under the conventional wisdom that they can operate unscathed by those pesky visa issues that keep cropping up. Infosys, which is dealing with the ramifications of the visa fraud lawsuit brought by Infosys employee and whistleblower Jay Palmer, is one of two Indian IT vendors whose stock performance is expected to be particularly hard hit.
The research firm, CLSA Asia-Pacific, issued its Indian IT services sector downgrade on Monday. Here's an excerpt:
We are downgrading our sector recommendation for Indian IT from Neutral to Underweight as we watch the margin of safety in Indian IT stocks recede. We see three extant islands of optimism being tested in Indian techs in coming months. 1) 20%+ growth is achievable in FY13/14 for Tier-1 vendors. 2) Visa issues are unlikely to alter business prospects. 3) Valuations of Tier-1 techs are not at risk. We expect the upcoming months to be a downward inflexion point for trends in all three parameters driving stock prices down, though June quarter results are unlikely to show any material proof points. Indian IT holds little promise of sustainable absolute returns hereon. We are downgrading TCS and Infosys to Underperform and have no positive ratings in the sector now.
The Wall Street Journal's India Real Time website, citing the CLSA report, noted that clampdowns on visa oversight in the United States and other countries are changing the Indian IT landscape:
The visa issue is potentially becoming a game changer for the Indian IT industry, which takes many workers overseas for projects. But visa policy in client markets like the United States, the United Kingdom, Switzerland and Canada has, for the past 12-18 months, been veering towards greater oversight and more stringent rules, the [CLSA] report noted.
Rejection rates for works visas for some of the biggest Indian tech companies have soared to nearly 40%, up from a mere 5% 18 months ago, the report noted. At least one top tier IT company has not received a single work visa in either the short-term or long-term visa categories for its personnel in the last four and a half months, CLSA said. IT companies in India generate about 60% of their combined $50 billion annual revenue from U.S. clients.
Meanwhile, Livemint.com, a media partner of The Wall Street Journal in New Delhi, is reporting that a U.S. embassy official there has let it be known that the United States is scaling back the "Business Executive Program," which expedites visas for companies that send large numbers of workers to the United States. According to the report, the United States has reduced the number of Indian companies in the program from more than 500 to around 300.
In a separate development, Robert O. Blake, assistant secretary for South and Central Asian affairs, was asked during a Q&A session in India on Monday what the impact on U.S.-India trade relations would be if the visa fraud allegations against Infosys prove to be true. Blake's response was that it would just be a "momentary blip" on the trade relations radar screen, and that Infosys would continue to be a key partner for U.S. firms:
I don't think it will have a major impact on our trade relations. Our trade relations have a momentum all their own that is not driven by how many B or H or other visas are given. The fact of the matter is there's a huge volume of new visas that are being issued every year by our consulates and by our embassy in New Delhi. India is the largest recipient of H visas; one of the largest recipients of L visas which are the intra-company transferee visas; and will continue to be so because it's a very dynamic economy and growing economy. Again, the whole range of B visas also are increasing fast.
That will be I think a sort of momentary blip. Infosys itself is obviously a very well-known company and will continue to be a very important partner for a wide range of American companies.
I'm not so sure. I have to wonder if Blake is familiar with the extent of the allegations against Infosys, and of the U.S. government's criminal investigation of the company. Infosys' U.S. clients are almost certainly already getting antsy about the notion of illegal employees working on their premises. If Infosys is found to be guilty of widespread criminal activity in this country, it's difficult to imagine that the company would be seen as anything other than toxic.