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 faced a challenging third quarter with net profit declining 45.3% year-on-year to ₹1.09 billion, primarily impacted by exceptional charges related to India's evolving labour law landscape. The significant profit drop was attributed to a one-time exceptional charge of ₹956.9 million arising from employee benefit provision increases mandated under revised wage structures in the new labour codes.

Financial Performance Overview

Despite the profit decline, the company demonstrated resilience in operational metrics. Revenue performance exceeded expectations with 3.2% quarter-on-quarter growth in constant currency terms, driven primarily by strong momentum in the Transportation vertical. The earnings disappointment led to immediate market reaction, with shares falling 3.2% to an intraday low of ₹5,609.15.

Operational Highlights and Challenges

The company showed mixed performance across business segments. The Transportation vertical emerged as a key growth driver, supported by anchor account ramp-ups and recovery in strategic top clients. However, this positive momentum was offset by persistent weakness in Media & Communications and Healthcare segments, which reported another quarter of decline.

Utilisation rates improved to 75%, ahead of earlier estimates, contributing to better-than-expected margin performance. The margin beat estimates by 140 basis points quarter-on-quarter, demonstrating effective cost control measures despite wage increases.

Brokerage Recommendations and Price Targets

Brokerages remain divided on the stock's outlook, with target prices ranging significantly based on different valuation approaches and growth expectations.

Detailed Brokerage Analysis

Morgan Stanley maintained its cautious stance despite acknowledging better-than-expected growth trends and positive margin surprises. The brokerage highlighted management's optimism in the automotive sector and potential recovery in healthcare and media segments from Q4 FY26, supported by large media deal wins. However, concerns about rich valuations and unfavourable risk-reward profile without material signs of sustainable growth persist.

PL Capital adopted a more balanced view, raising its target price while maintaining a Hold rating. The firm credited strong Transportation vertical performance but flagged ongoing weakness in Media & Communications and Healthcare segments. It expects margin expansion of 70bps/40bps/20bps over FY26–FY28 and projects 9.8–11.6% revenue growth in FY27–FY28.

Elara Capital and Choice Broking both maintained Sell ratings, citing valuation concerns despite acknowledging operational improvements. Both brokerages noted that much of the fundamental improvement appears already priced in, requiring consistent double-digit growth in Transportation and Healthcare verticals for sustainable re-rating.

Market Outlook and Key Factors

The company faces a mixed outlook with several key factors influencing future performance. Positive indicators include improved utilisation rates, strong Transportation vertical momentum, and effective margin management. However, challenges persist in Media & Communications and Healthcare segments, along with concerns about sustaining growth momentum and current valuation levels.

Management's optimism about automotive sector recovery and potential healthcare and media segment improvements from Q4 FY26 provides some hope for future quarters. The company's ability to maintain margin expansion while navigating demand headwinds in key segments will be crucial for investor confidence going forward.