Visa Cap Issues Offer Excuse for Indian Outsourcing Stocks To Pull Back

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Includes: CTSH, INFY
by: William Trent, CFA

Given how difficult it has been for us to find an available web designer lately (let alone one we can afford) we weren’t especially surprised to see this nugget:

H-1B cap for fiscal 2008 reached in two days

Only one day after starting the receipt of applications, U.S. Citizenship and Immigration Services [USCIS] announced Tuesday that it had already received enough H-1B petitions to meet the congressionally mandated cap for fiscal year 2008. Contrastingly, it took nearly two months for the cap to be reached for fiscal year 2007.

According to the U.S. Department of State, H-1B classification applies to persons in a specialty occupation which requires the theoretical and practical application of a body of highly specialized knowledge requiring completion of a specific course of higher education. This classification requires a labor attestation issued by the Secretary of Labor (65,000). This classification also applies to Government-to-Government research and development, or co-production projects administered by the Department of Defense (100). The H-1B visa is widely used among the IT outsourcing firms such as Cognizant (NASDAQ:CTSH), Infosys (NASDAQ:INFY) and others, who need feet on the ground on site to determine needs and communicate them to the coders back in India.

Whether the on-site team is itself Indian is of relatively little importance. The cost efficiencies still dictate that a good deal of work will be done offshore. Meanwhile, on-site staff are paid local rates, so they can be locals just as easily as not. And with the visa cap being met virtually the moment the doors opened, it is a safe bet that more of them will be locals this year. Which helps explain our difficulties finding someone to help us with our site.

The news may have a short-term impact on the outsourcing firms. The last time there were visa cap issues, investors reacted harshly for a couple of months on the belief that the shortage of immigrant workers would affect the rapid growth in offshore outsourcing. It did not, of course, but it is unclear whether investors were completely disabused of the idea. This time is also somewhat different because the firms are also having difficulty finding (or at least keeping) workers in India as well.

The stocks have had a strong recent run and may be looking for any excuse to pull back. This visa cap offers one such excuse.

CTSH-INFY 1-yr comparison chart:

CTSH-INFY 1-yr comparison chart