India's new labour codes have begun delivering significant financial impacts across the IT sector, with major companies reporting substantial one-time charges in their third-quarter results. The regulatory changes, which redefine wage structures and expand the base for employee benefits calculations, are forcing companies to recognise higher past service liabilities.

Major IT Players Report Significant Charges

The labour code implementation has created substantial financial adjustments across leading IT firms:

TCS and HCLTech Q3 Performance

TCS faced the largest impact with a one-time labour code provision of ₹2,128 crores, including ₹1,800 crores toward gratuity and ₹300 crores toward leave liabilities. Combined with legal and restructuring costs, the total profit impact reached ₹3,391 crores. Net profit came in at ₹10,657 crores, down 11.7% against street expectations of 6.6% growth.

HCLTech reported a labour code-related charge of ₹956 crores, resulting in net profit declining 3.77% compared to street expectations of 10.8% growth. The company posted a profit of ₹4,076 crores, missing estimates of ₹4,702.40 crores by approximately 13%.

Regulatory Framework Changes

The new labour codes mandate that wages constitute at least 50% of the cost to company (CTC), necessitating comprehensive restructuring of employee benefits. This includes recalculating provident fund and gratuity based on the revised wage structure, creating significant past service liabilities for employee-intensive IT services companies.

Both TCS and HCLTech emphasised these charges were non-recurring, with management guidance indicating recurring margin impact should be limited to 10-20 basis points, assuming no further regulatory changes.

Business Operations Remain Resilient

Despite the regulatory impact, underlying business performance showed strength:

HCLTech upgraded its service revenue guidance to 4.75-5.25% from earlier 4-5%, and revised FY26 revenue growth guidance to 4-4.5% in constant-currency terms.

Market Impact and Future Outlook

Brokerages warn of structural cost implications, with Jefferies estimating that a 2% increase in Indian employee costs could reduce FY27 earnings by 2-4%. Companies with larger India-based workforces face higher exposure to these regulatory changes.

With TCS and HCLTech setting the precedent, investor focus now shifts to upcoming results from Infosys, Wipro, and Tech Mahindra, where similar one-time charges cannot be ruled out as companies align employee liabilities with the new labour framework. The regulatory impact represents a one-time adjustment rather than demand-led weakness, with companies maintaining confidence in their operational performance and cash flow generation capabilities.

Tata Elxsi has shared its outlook on sector recovery, expressing confidence that key business segments will show improvement in the coming quarters. The company's management has indicated expectations for a turnaround in three critical sectors that contribute significantly to its revenue streams.

Sector Recovery Timeline

The company anticipates that the media, communications, and healthcare sectors will begin their recovery phase by Q4 FY26. This timeline suggests that Tata Elxsi expects market conditions and business dynamics in these sectors to stabilize and improve during the final quarter of the current financial year.

Growth Outlook

Beyond the immediate recovery expectations, Tata Elxsi has expressed optimism for sustained growth in the next financial year. This positive outlook indicates the company's confidence in the underlying strength of these sectors and their potential to drive business performance in the medium term.

The company's projections reflect its assessment of market trends and business opportunities across the media, communications, and healthcare verticals, which represent important components of its diversified business portfolio.