Jefferies says new labour codes may add to margin pressures for IT companies, sees lower wage hikes at senior level

Jefferies says new labour codes may add to margin pressures for IT companies.

• India's new labour codes raise recurring costs for IT firms, impacting margins
• HCLTech and TCS reported profit declines due to one-time labour code provisions
• IT firms may offset costs by lowering wage hikes, especially for senior staff

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Global brokerage firm Jefferies on Monday said India’s new labour codes are likely to add to margin pressures for information technology (IT) firms and could lead to lower wage hikes, particularly at the senior level.

The labour codes, which came into effect in November, mandate that employee wages must be at least 50 percent of cost to company (CTC), with benefits such as provident fund and gratuity to be calculated on wages. This is expected to raise recurring employee costs for IT companies and also result in a large one-time financial impact.

"New labour codes will add to the margin pressures from slower revenue growth, AI-led business mix change and potentially higher onsite wage hikes in FY27 and FY28 due to changes in H-1B visa norms," Jefferies said in a note.

It added that a 2 percent increase in Indian employee costs could reduce FY27 earnings estimates by 2-4 percent for IT companies. Firms are likely to offset part of the impact through lower wage hikes, especially at senior levels.

IT services firm HCLTech reported an 11.2 percent decline in consolidated net profit to Rs 4,076 crore for the October-December quarter of FY26, mainly due to a one-time provision of Rs 719 crore linked to the implementation of the new labour codes.

The Noida-based company had posted a net profit of Rs 4,591 crore in the same quarter last year.

Excluding the one-time impact, HCLTech said net profit would have stood at Rs 4,795 crore. Regulatory filings showed that the impact on earnings before interest and taxes (EBIT) was Rs 956 crore.

HCLTech said the one-time impact under the labour code amounted to about Rs 900 crore, and that this would not affect its hiring plans.

Chief People Officer Ram Sundararajan said the company has factored in all required provisions in the current quarter’s pay changes and does not expect any further significant incremental costs related to the new rules.

Country’s largest IT services exporter Tata Consultancy Services (TCS) also reported a 13.91 percent decline in profit for the December quarter at Rs 10,657 crore, largely due to the one-time impact of the labour codes.

The company said the implementation of the new labour codes during the quarter led to a statutory impact of Rs 2,128 crore. Excluding this, profit would have grown 8.5 percent to Rs 13,438 crore.

(With inputs from Reuters)

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