India’s $250 billion IT sector is bracing for significant earnings disruption following the implementation of the country’s new labour codes. Jefferies has warned that sector-wide profitability could take a notable hit in the December 2025 quarter, even as overall growth remains uneven.
The brokerage highlighted that the consolidation of 29 existing labour laws into four new codes, effective November 2025, will force IT companies to revise how they account for employee compensation and statutory benefits. This recalibration is expected to trigger a substantial increase in gratuity, provident fund, and leave-encashment provisions. Jefferies estimates that this one-time adjustment alone could reduce quarterly profits across the industry by 10–20%, as related contributions may surge by 27–70%.
Beyond the initial accounting impact, Jefferies expects a lasting increase in employee expenses. Under the new wage code, “wages” will form at least half of an employee’s cost-to-company, up from the current 30–40%. Additional mandates include annual encashment of leave beyond 30 days and extending gratuity eligibility to fixed-term employees after one year of service.
The brokerage noted that take-home pay could fall by 4–6% if companies maintain a 12% provident fund contribution. While firms could adopt the statutory minimum annual PF contribution of ₹21,600, this would only partially ease the burden, particularly for junior staff. An Aon survey cited by Jefferies indicated that nearly two-thirds of IT firms expect employee costs to rise by up to 5% under the revised framework.
The impact of the labour codes will not be uniform. Companies with stronger margins, such as TCS, Infosys, and IKS, are better positioned to absorb the shock, while Coforge, LTIMindtree, and Tech Mahindra may face greater pressure.
These labour-related challenges compound existing margin pressures from slower revenue growth, AI-driven shifts in business mix, and potential increases in onsite wages in FY27–FY28 if US H1B visa norms change. Jefferies suggests there is “limited scope for PE rerating” across the sector under these conditions.
Despite headwinds, Jefferies remains selectively positive. It maintainsBuyratings on Infosys and HCL Technologies,Holdon TCS and LTIMindtree, andUnderperformon Wipro and Tech Mahindra. Among mid-caps, Coforge and Mphasis are preferred, while Sagility and IKS are favoured in BPO and knowledge services.
The brokerage also expressed a preference for mid-cap IT stocks over large caps, citing elevated valuations. With revenue growth forecasts for FY27–FY28 below consensus and earnings estimates trailing expectations for some majors, Jefferies anticipates an uneven recovery that will keep investor sentiment cautious in the near term.
