India's top six IT services companies faced a substantial financial impact in Q3 FY26, absorbing a combined ₹5,400 crore one-time charge due to the implementation of new labour codes. The regulatory changes, which consolidate 29 existing labour laws, forced a structural shift in how companies calculate employee benefits, significantly affecting quarterly earnings across the sector.

Company-Specific Impact Analysis

TCS Bears Heaviest Burden

Tata Consultancy Services (TCS), the country's largest IT services exporter, reported the most significant impact with a statutory charge of ₹2,128 crore. This provisioning led to a 13.90% decline in net profit to ₹10,657 crore. The impact breakdown included ₹1,800 crore for gratuity and ₹300 crore for leave encashment. TCS CFO Samir Seksaria indicated the codes will continue affecting margins by 0.10-0.15% going forward.

Mixed Performance Across Major Players

Infosys reported a one-time exceptional charge of ₹1,289 crore, resulting in a 2.20% decline in net profit to ₹6,654 crore. CEO Salil Parekh noted the codes would create an ongoing annual impact of approximately 15 basis points on margins. HCLTech faced a ₹956 crore provision, dragging net profit down 11.20% to ₹4,076 crore, though the company indicated profit would have grown without this regulatory impact.

Tech Mahindra stood out as the only major player reporting profit growth, with a 14.00% increase to ₹1,122 crore despite setting aside $30 million (approximately ₹272 crore) for the new wage codes. CFO Rohit Anand cautioned the code would reduce margins by 0.20% quarterly.

Strong Operational Performance Despite Regulatory Headwinds

Revenue Growth Momentum

Despite profit pressures, companies demonstrated robust operational health with strong revenue growth across the board. The revenue performance highlighted the underlying sector resilience and demand strength.

AI-Driven Growth and Deal Pipeline Strength

The companies reported significant momentum in artificial intelligence services and strong deal pipelines. Infosys raised its FY26 revenue growth guidance to 3-3.5% in constant currency from the previous 2-3%, while securing large deal Total Contract Value (TCV) of $4.8 billion with 57% being net new deals.

TCS CEO K Krithivasan highlighted that AI and associated data revenues led topline growth, with COO Aarthi Subramanian reporting 17% quarter-on-quarter growth in AI revenues to an annualized level of $1.8 billion. HCLTech demonstrated exceptional performance with a 19.90% sequential surge in Advanced AI revenue reaching $146 million and $3 billion in net new bookings, up 43.50% year-on-year.

Strategic Positioning and Future Outlook

Company leadership expressed confidence in long-term prospects despite short-term regulatory impacts. Wipro's management described their pipeline as "very strong," driven by vendor consolidation and AI-led modernization. CEO Srini Pallia emphasized positioning for an AI-first world as artificial intelligence becomes a board-level mandate for global organizations.

Tech Mahindra secured new deals worth $1.096 billion during the quarter, with CEO Mohit Joshi asserting robust deal pipeline strength across geographies and verticals. The quarter showed divergent hiring trends, with TCS reducing headcount by over 11,151 employees while Infosys and Wipro added 5,043 and 6,529 employees respectively. HCLTech adopted a strategic shift toward hiring "elite engineers" at 3-4 times standard entry-level salaries to fuel AI ambitions.

The implementation of new labour codes represents a significant regulatory adjustment for India's IT sector, but the strong operational performance and forward-looking investments in AI capabilities demonstrate the industry's resilience and adaptation to evolving market demands.

Source: https://www.etnownews.com/companies/new-labour-codes-top-it-firms-including-tcs-wipro-infosys-and-tech-mahindra-take-rs-5400-crore-blow-in-q3-earnings-everything-explained-article-153474682

Market expert Sandip Agarwal from Sowilo Investment Managers has called for a fundamental reset in growth expectations for the IT sector, despite recent positive developments that have lifted investor sentiment. His comments come after a major large-cap IT company surprised the market by upgrading its FY26 revenue guidance to 3-3.5%, even as broader debates continue around artificial intelligence-led efficiency gains and long-term growth prospects.

Guidance Upgrade Reflects Low Expectations Rather Than Strong Demand

Speaking to ET Now, Agarwal emphasized that the recent guidance upgrade was primarily driven by the latest quarter outperforming modest expectations, rather than indicating a sharp turnaround in underlying demand conditions. He noted that even the upgraded guidance implies negative to zero percent growth, which represents a relatively low threshold.

"So yes, the Q3 performance has been slightly better than what was anticipated, and because of that, obviously, the guidance sees an upgrade. Even the upgraded guidance implies a negative to zero percent kind of growth, which is a very, very low ask. So, the numbers are definitely better," Agarwal explained.

While acknowledging the company's strong execution on margins and robust order book strength, aided by a significant NHS deal, Agarwal stressed that these improvements don't change the sector's fundamental structural challenges.

Sector Maturity Limits High Growth Potential

Agarwal's central thesis revolves around his belief that the IT services industry has entered a mature phase, which significantly constrains the potential for high growth over the medium term. He expressed skepticism about the sector's ability to deliver substantial growth rates, particularly for large-cap companies.

"The only thing where we have a difference of opinion on the sector is that we continue to believe, based on data, that this is now a very, very mature sector. Expecting any substantial growth, even double-digit growth, for large caps is very, very tough. I do not think that is going to happen even in the next three to four years," he stated.

Revised Growth Projections and Valuation Concerns

The market expert outlined his revised growth expectations across different segments of the IT sector, suggesting a more conservative approach to forecasting:

Agarwal emphasized that current growth expectations need to be reset to mid-single-digit to low-single-digit levels. He expressed particular concern about valuation metrics, noting that PEG ratios appear "very, very high" across most segments, with small caps being the exception.

While acknowledging that strong management quality, steady cash flows, and dividend appeal justify some premium, Agarwal believes current valuations remain stretched relative to the sector's growth prospects.

Cautious Outlook on Market Movements

Regarding Infosys, whose ADR jumped nearly 10% overnight, Agarwal maintained a guarded stance and cautioned against reading too much into ADR movements. He highlighted the complexity of predicting opening trades based on overseas ADR performance.

"It is very tough to give a call because we do not know how people are positioned. The correlation with ADRs has not played out in the past in a big way. ADRs have their own environment in which they operate—liquidity and a lot of other factors are there," he explained.

IT as Alternative to Expensive Defensives

Despite his cautious outlook, Agarwal suggested that the IT sector could serve as a "quasi-cash" alternative and potentially replace more expensive defensive sectors. He specifically mentioned FMCG as a sector where similar growth rates command multiples that are two to three times higher than IT stocks.

"This is a sector which is kind of quasi-cash slowly, and maybe a good replacement for much more expensive sectors like FMCG, where the growths are similar but multiples are two to three times more expensive than this sector," Agarwal noted.

Preference for ER&D Over Traditional IT Services

Agarwal expressed a relative preference for engineering and R&D (ER&D) focused companies over traditional IT services players, citing stronger long-term growth potential. He specifically mentioned LTTS, KPIT, and Tata Elxsi as companies likely to outgrow conventional IT services firms.

However, he acknowledged that valuation remains a significant challenge, as investors have already assigned much higher premiums to these companies, making them difficult to justify on valuation grounds.

Investment Rationale Remains Limited

Summing up his investment stance, Agarwal struck a distinctly cautious tone about the sector's current investment appeal. "I believe the sector is very, very expensive. Unless someone wants to replace something which is even more expensive with this, there is no real investment rationale in the sector currently," he concluded.