India's ₹250 billion information technology sector is preparing for substantial earnings pressure as new labour codes take effect in November 2025. Jefferies has warned that the regulatory changes could deliver a significant blow to December quarter profits, with potential reductions of 10-20% across the industry.

One-Time Profit Impact from Regulatory Changes

The consolidation of 29 existing labour laws into four comprehensive codes will fundamentally alter how IT companies calculate employee compensation and benefits. This transition will force companies to recognise substantially higher gratuity and leave-encashment liabilities during the December quarter.

Jefferies estimates that contributions linked to gratuity, provident fund and leave encashment could increase by 27-70%, creating a significant one-time hit to profitability. The brokerage noted that even at the lower end of estimates, this impact could erode 10-20% of quarterly profits sector-wide.

Structural Changes in Employee Cost Structure

Beyond the immediate adjustment, the new labour codes introduce permanent changes to cost structures. Under the revised wage code, "wages" must constitute at least 50% of an employee's cost-to-company, compared to the current 30-40% range. This represents a fundamental shift in how compensation packages are structured across the industry.

Additional structural changes include:

• Annual encashment requirement for leave exceeding 30 days
• Extension of gratuity benefits to fixed-term employees after one year instead of five years
• Potential reduction in take-home salaries by 4-6% if companies maintain 12% provident fund contributions

Citing an Aon survey, Jefferies noted that approximately two-thirds of IT companies expect employee costs to rise by up to 5% under the new framework. Even with partial mitigation through adjusted wage structures at senior levels, a 2% increase in India employee costs could reduce FY27 earnings by 2-4%.

Varied Impact Across Industry Players

The earnings sensitivity differs significantly across companies based on their margin profiles and operational structures. Jefferies expects certain companies to weather the changes better than others.

The labour code impact compounds existing challenges including slower revenue growth, business mix changes driven by artificial intelligence adoption, and potential increases in onsite wages linked to possible US H1B visa norm changes.

Investment Recommendations Amid Headwinds

Despite the challenging outlook, Jefferies maintains selective buy recommendations across different market segments. The brokerage continues to favour specific stocks where valuations and earnings resilience appear more supportive.

Jefferies noted a preference for mid-cap IT stocks over large caps, even as mid-cap valuations remain at a premium. The brokerage's revenue growth forecasts for FY27 and FY28 remain below consensus across its coverage universe, with earnings estimates materially lower than consensus for TCS and Tech Mahindra.

Market Response and Outlook

The cautionary outlook from Jefferies contributed to market pressure on IT stocks, with the Nifty IT index declining 0.40%. HCL Technologies dropped 2.00%, while Tata Consultancy Services edged down 0.10%, reflecting investor sensitivity to emerging earnings risks amid already fragile near-term growth prospects.

Jefferies concluded that there is "limited scope for PE rerating" for the sector given the multiple headwinds, suggesting that the industry faces a period of margin-constrained recovery as companies adapt to the new regulatory environment.

India's data centre expansion has captured significant attention with hyperscalers committing billions and major conglomerates positioning themselves as digital infrastructure platforms. However, the real investment opportunity lies not with data centre operators but in the underlying infrastructure systems that support these facilities.

Major platform players including Reliance Industries' Jio, Adani Enterprises, and Bharti Airtel are driving sustained multi-campus demand that extends capital flows into power systems, cooling infrastructure, construction, and electrical equipment at industrial scale. Beyond large conglomerates, operators such as Sify, Nxtra, Yotta, NxtGen, and NTT are clustering capacity around power-secure corridors rather than pursuing lowest-cost land options.

Capital Distribution Across Infrastructure Layers

Data centres function as layered industrial systems where most capital flows to supporting infrastructure before the first server becomes operational. The investment hierarchy reveals distinct beneficiary categories across the technology stack.

Power Infrastructure Dominates Investment Flow

Power systems represent the most dominant and inflexible component of data centre capital expenditure. As AI workloads intensify and downtime tolerance decreases, redundancy requirements multiply and upgrade cycles compress. This reality benefits listed utilities and electrical equipment suppliers operating upstream of utilization cycles.

India's largest platforms are building with power certainty as the primary consideration. Jio's data centre strategy integrates captive power and grid adjacency, while Adani's approach combines energy generation, transmission, and data centre development. Airtel prioritizes sites where power availability and redundancy can scale ahead of compute demand.

Key Power Infrastructure Beneficiaries:

• Utilities: NTPC, Tata Power, JSW Energy benefit from long-duration, always-on demand
• Backup Power: Cummins India, Kirloskar Oil Engines provide reliability-focused solutions
• Electrical Equipment: ABB India, Hitachi Energy India, Siemens India, CG Power supply essential substation equipment

Cooling Systems Emerge as Performance Bottleneck

Thermal management has evolved from a facilities concern to core infrastructure as AI-heavy environments create cooling demands that no longer scale predictably with compute capacity. This shift positions industrial HVAC and thermal management firms at the center of data centre investment flows.

Construction and EPC: Execution-Limited Opportunity

Construction and engineering, procurement, and construction (EPC) services absorb meaningful capital shares but operate as execution-limited rather than volume-driven businesses. Data centre construction demands zero tolerance for failure, creating barriers to entry while rewarding established capabilities.

Firms such as Larsen & Toubro have developed dedicated data centre execution capabilities both as contractors and facility owners. Specialist EPC players like Sterling & Wilson Renewable Energy experience accelerating order inflows as credibility establishment leads to repeat business opportunities.

Supporting Infrastructure and Land Development

Security and building management systems, while representing smaller stack portions, provide non-negotiable functionality. Physical security, access control, surveillance, fire detection, and monitoring systems scale with footprint and regulatory requirements rather than utilization patterns. Listed exposure includes firms such as SIS and automation specialists like Honeywell Automation India.

Land and external infrastructure increasingly act as gating constraints despite not always representing the largest cost component. Data centres require power-ready, permitted sites with connectivity and water access. Developers including Anant Raj, DLF, Macrotech Developers, and REITs like Mindspace Business Parks REIT are repositioning as digital landlords with infrastructure-linked cash flows.

Investment Cycle Characteristics and Constraints

The data centre investment pattern represents a sustained infrastructure cycle rather than a one-time technology refresh. Redundancy expansion, density upgrades, regulatory changes, and AI workload evolution drive repeated reinvestment requirements.

Execution constraints including power availability, permitting timelines, water access, and skilled delivery capacity are tightening across several markets. When data centre demand outpaces grid capacity, approvals, and experienced EPC talent, capital concentrates toward fewer locations and proven suppliers.

Investment Implications:

• Infrastructure rewards scale, patience, and execution discipline
• Most durable exposure sits with companies receiving payment regardless of utilization rates
• Opportunity distribution favors scale, credibility, and constraint-delivery capability

India's data centre boom fundamentally represents an infrastructure cycle where the most significant investment opportunities exist beneath the server racks in the supporting systems that enable digital operations.