New Labour Codes Add Margin Pressure on IT Companies, May Lead to Lower Senior-Level Wage Hikes: Jefferies

Global brokerage firm Jefferies has issued a cautionary note regarding India's new labour codes, warning they will intensify margin pressures on information technology companies and potentially lead to reduced wage increases, especially at senior levels. The labour codes, which became effective in November, are expected to create both immediate one-time costs and ongoing financial challenges for the IT sector.

Key Provisions and Financial Impact

The new labour codes introduce significant changes to employee compensation structures. Under these regulations, employee wages must constitute at least 50% of the total cost to company (CTC), with benefits such as provident fund and gratuity calculated based on wages rather than previous methodologies. This restructuring is expected to raise recurring employee costs across IT companies while also creating substantial one-time financial impacts.

Jefferies projects that a 2% increase in Indian employee costs could reduce FY27 earnings estimates by 2-4% for IT companies. The brokerage firm noted that these new regulations will compound existing margin pressures from slower revenue growth, AI-led business mix changes, and potentially higher onsite wage hikes in FY27 and FY28 due to anticipated changes in H-1B visa norms.

Major IT Companies Report Significant Profit Declines

The immediate impact of these labour codes has already materialized in recent quarterly results from leading IT services companies:

*Calculated based on reported decline percentage

HCLTech, the Noida-based IT services firm, reported its consolidated net profit for the October-December quarter fell to ₹4,076 crore, down from ₹4,591 crore in the same quarter last year. The company attributed this decline mainly to a one-time provision of ₹719 crore linked to implementing the new labour codes. Excluding this one-time impact, HCLTech indicated its net profit would have reached ₹4,795 crore. Regulatory filings revealed the impact on earnings before interest and taxes (EBIT) was ₹956 crore.

Company Responses and Future Outlook

HCLTech has assured stakeholders that the labour code implementation will not affect its hiring plans. Chief People Officer Ram Sundararajan stated the company has incorporated all required provisions in the current quarter's pay changes and does not anticipate further significant incremental costs related to the new regulations.

Tata Consultancy Services (TCS), India's largest IT services exporter, also experienced substantial impact from the labour codes. The company reported a profit decline to ₹10,657 crore for the December quarter, with the statutory impact from labour code implementation reaching ₹2,128 crore. Excluding this one-time effect, TCS indicated profit would have grown 8.5% to ₹13,438 crore.

Industry Adaptation Strategies

To mitigate the financial impact of these new regulations, Jefferies suggests IT firms are likely to offset part of the increased costs through strategic adjustments to compensation structures. The brokerage specifically highlighted that companies may implement lower wage hikes, particularly targeting senior-level positions where the impact would be most significant in terms of cost savings.

The implementation of these labour codes represents a fundamental shift in how IT companies structure employee compensation and calculate benefits, creating both immediate financial challenges and long-term operational adjustments for the sector.