Jefferies said the consolidation of 29 labour laws into four new codes, effective November 2025, will materially alter how employee compensation and benefits are calculated, forcing IT companies to recognise sharply higher gratuity and leave-encashment liabilities in the December quarter. The brokerage estimates that contributions linked to gratuity, provident fund and leave encashment could rise by 27%–70%, resulting in a one-time hit to profits.
“The increase will be recognised as a one-time impact in Dec-25 results,” Jefferies said, adding that the impact at the lower end could still erode 10%–20% of quarterly profits across the sector.
Structural rise in employee costs
Beyond the one-off adjustment, Jefferies warned of a structural increase in employee costs. Under the new wage code, “wages” will become the base for calculating statutory benefits and must account for at least 50% of an employee’s cost-to-company, compared with roughly 30%–40% under the current regime. Companies will also have to allow annual encashment of leave exceeding 30 days and extend gratuity benefits to fixed-term employees after one year, instead of five.
As a result, the brokerage estimates that in-hand salaries could fall by 4%–6% if firms continue to contribute 12% of wages to provident fund. While companies may opt for a lower statutory PF contribution of Rs21,600 a year, Jefferies cautioned that this may not fully offset the pressure, particularly at junior levels.
Citing an Aon survey, Jefferies noted that about two-thirds of IT firms expect employee costs to rise by up to 5% under the new norms. Even assuming partial mitigation through lower wage hikes at senior levels, a 2% increase in India employee costs could reduce FY27 earnings by 2%-4%, it said.
Uneven impact across companies
The earnings sensitivity varies significantly across the sector. Jefferies expects TCS, Infosys and IKS to be the least affected due to their stronger margin profiles, while Coforge, LTIMindtree and Tech Mahindra are likely to face greater pressure.
The labour-code impact adds to what Jefferies described as “rising margin woes” from slower revenue growth, changes in business mix driven by artificial intelligence, and the risk of higher onsite wages in FY27 and FY28 linked to potential changes in US H1B visa norms. Against this backdrop, the brokerage said there was “limited scope for PE rerating” for the sector.
Selective buy calls remain
Despite the headwinds, Jefferies maintained a selective stance, favouring certain stocks where valuations and earnings resilience appear more supportive. Among large caps, it reiterated ‘Buy’ ratings on Infosys and HCL Technologies, while keeping Hold on TCS and LTIMindtree and Underperform on Wipro and Tech Mahindra.
In the mid-cap space, Jefferies retained Buy calls on Coforge and Mphasis, and in BPO and knowledge services it favoured Sagility and IKS. The brokerage said it continues to prefer mid-cap IT stocks over large caps, even as valuations for the segment remain at a premium.
Jefferies’ revenue growth forecasts for FY27 and FY28 are below consensus across its coverage, and its earnings estimates are materially lower than consensus for TCS and Tech Mahindra, reflecting what it sees as an uneven and margin-constrained recovery for the sector.
The caution from Jefferies comes as IT stocks weighed on broader market sentiment on Tuesday, with the Nifty IT index falling 0.4%. HCL Technologies slipped 2%, while Tata Consultancy Services edged down 0.1%, reflecting investor sensitivity to emerging earnings risks even as near-term growth remains fragile.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)