Rs 3,100 crore provisions! Labour Codes drag TCS, HCL Tech Q3 results; key details

The December quarter results of Tata Consultancy Services Ltd and HCL Technologies Ltd were affected by the implementation of India’s new Labour Codes, which became effective from November 21, 2025. The two IT firms made combined provisions of Rs 3,084 crore, earnings statements showed.

The Labour Code provisions led to a charge of Rs 2,128 crore towards gratuity and unearned leave for TCS. MOFSL said a normalised impact of about 10 to 15 basis points is likely from the next quarter.

In the case of HCL Technologies, Nomura India noted that provision for higher gratuity and leave encashment under new Labour Codes led to one-off hit of Rs 956 crore. HCL Tech also expects the recurring impact to be limited to 10-15 basis points, unless there are further changes in the rules, Nuvama noted.

The hit was visible on bottom lines. TCS' consolidated net profit fell 14 per cent year-on-year (YoY) to Rs 10,720 crore compared with Rs 12,444 crore in the year-ago period. HCL Technologies also posted a 11.15 per cent YoY drop in its consolidated net profit at Rs 4,082 crore compared with Rs 4,594 crore in the corresponding quarter of last year.

To recall, the government had approved the implementation of four labour codes that were passed by the Parliament in 2020 and were awaiting implementation. A total of 29 labor laws were consolidated into four codes with the aim of easing compliances and modernising outdated provisions while safeguarding workers’ rights.

Changes were made in the redefinition of wages, which are used for calculation of employee benefits such as gratuity, leave encashment etc. Companies were needed to recalculate these benefits based on new definitions and make additional provisions, if any, accordingly.

Kotak Institutional Equities in its earnings preview note had said that most companies would catch-up on this in H2FY26 and possibly have a one-time cost related to increased provisions.

Anlaysts are largely positive on TCS but mixed on HCL Tech post Q3 results.

On TCS Nirmal Bang said the IT major can deliver sustainable earnings growth, best margins, strong ROICs, and healthy cash flows in the Tier-1 space, adding that TCS has a high margin of safety during times of high volatility.

"Valuations too have become lucrative at below the 10-year mean (24x). We reiterate our ‘BUY’ rating on TCS for a target of Rs 3,905 against Rs 3,861 earlier," it said.

MOFSL said TCS' margins have remained stable as wage headwinds and one-offs subside, with further upside dependent on execution rather than pricing. It retained 'Buy' on the stock.

In the case opf HCL Tech, it continues to deliver the highest growth in IT Services largecap space. However, Nuvama feels the current valuations leave limited upside potential, as earnings upgrades also appear unlikely.

"We revise our FY26-28 EPS by 1-4 per cent and target to Rs 1,810 (from Rs 1,790 previously), set at
unchanged 23x 1HFY28F EPS. We think HCLT’s strategy to remain asset light while focussing on services in GenAI world is a step in the right direction," said Nomura.