Blasé Capital LOADS OF CODES
As the first set of the corporate financials for the third quarter (October-December 2025) in this fiscal year come in, there is a growing conviction that the new four labour codes will benefit employees. On the flip side, there will be a huge one-time negative impact on firms across sectors, and ongoing repercussions, which may influence future earnings, and benefits of the employees. In effect, while the codes will provide immediate gains to the existing employees, future ones, and those who shift, may face pressures from the employers to lower the remunerations to adjust the higher legal requirements on benefits due to the new codes. As an immediate effect, analysts feel that the net profits of Indian firms in the third quarter may be impacted by 10-50 per cent in most cases, and even more than the higher percentage in some instances. There will be an ongoing effect as firms adjust to the new wage realities.
Jeffries, an analyst firm, concludes that the higher corporate contributions to gratuity, provident fund, and leave encashment, as mandated under the codes, will hike remuneration costs for the IT and software firms by 30-70 per cent. One-time adjustments by the firms may erode net profits by 10-20 per cent during the third quarter. The quarterly results by TCS and HCL Tech prove this, as their net profits took a hit by a couple of thousand of crores. In another case, Tata Elxsi, a research and engineering firm, the net profits were down by 45 per cent, which implies that the implications across sectors may be worse than the ones in the IT one. A recent survey indicates that IT firms feel that employee costs will rise by up to five per cent under the new norms, which may be tackled by lower annual increments, especially at the higher-management levels, and better negotiations for future employees, the impact on earnings will continue in 2026-27, and shave off net profits by 2-4 per cent.
According to a media report, “Under the new wage code, ‘wages’ will become the base for calculating statutory benefits, and must account for at least 50 per cent of an employee’s cost-to-company, compared with 30-40 per cent under the current (previous) regime. Companies will have to allow annual encashment of leave exceeding 30 days, and extend gratuity benefits to fixed-term employees after one year, instead of five.” Some brokerages believe that in-hand salaries may, therefore, fall by 4-6 per cent in the IT firms, if the latter contribute 12 per cent of the wages to the provident fund. Obviously, firms will try new and innovative ways to combat these cost increases. But Jeffries feels that at least in the case of IT firms, the wage pressures will be felt irrespectively, especially at the junior levels. Unless, of course, the firms use the natural attrition rates to lower salaries.
In the recent past, employees-related costs, which are most crucial for the IT and software firms, are becoming a matter of concern. There are higher costs associated with techies going to the US because of visa fees, and more scrutiny and monitoring. According to Jeffries, this is coupled with the “rising margin woes” due slower revenue growth, as clients become smarter, and demand lower charges, and changes in business mix, which forces the IT firms to readjust, and realign their business models as per the new realities. Although the bigger firms capture new deals, which provide robust future pipelines, others are unable to do so. In addition, there are massive capital costs involved as firms transition from traditional models to those which heavily rely on Artificial Intelligence (AI). Indeed, AI can pose both cost-related problems, and boost margins, which implies that the former is like double-edged tech swords.
For example, as employee costs go up, firms can reduce them through higher adoption of AI tools, which will reduce the overall manpower. Firms like TCS and HCL Tech, as is evident from the third quarter figures, reduced workforce by substantial numbers, which is an ongoing exercise for the past few years, and will extend into the future. With fewer employees, and higher productivity, IT firms can manage employee-related costs, even as the new labour codes impose higher expenses. The flip side, of course, is that AI adoption implies more influx of senior, experienced, and skilled manpower, or highly-skilled workforce at the junior levels. This will hike the average salaries, and the new labour codes will increase them further. One will need to see how the dynamics between the lower number of employees, aided by AI, and the higher average salaries, dictated by AI, will play out, and how they will determine profitability and margins.
As per Jeffries, different firms will initiate varying courses of action and, hence, the influence on their margins, price-earnings, and profits will be different. This is why the brokerage believes that while some of the leading Indian IT firms will be less affected because of the codes, the stock movements will vary. Hence, while it keeps a ‘buy’ on Infosys, and HCL, it maintains a ‘hold’ on TCS, and ‘underperform’ on Wipro, and Tech Mahindra. What one may witness is “uneven and margin-constrained recovery.”
