Impact Assessment of India's New Labor Laws on Tata Technologies and Multinational Enterprises in India

Based on the collected data, I will prepare a detailed analysis report for you.

Tata Technologies’ Q3 FY26 (third quarter of fiscal 2026) financial results, released in January 2026, show that due to one-time expenses related to India’s new labor laws, the company’s consolidated net profit plummeted 96% from INR 1.69 billion in the same period last year to INR 66.4 million, marking the largest quarterly profit decline since its 2023 listing [1]. This is not an isolated case; major Indian IT companies including Tata Consultancy Services (TCS), Infosys Limited (Infosys), HCLTech, and Tata Elxsi have all been significantly impacted by the implementation of the new labor laws, with a cumulative profit impact exceeding INR 437.3 billion [2][3].

Management generally expects this impact to be a one-time expense, with the subsequent annualized profit margin impact remaining within a controllable range of 10-20 basis points, and performance will see a significant rebound starting from the fourth quarter. Warren Harris, CEO of Tata Technologies, expects sequential revenue growth of over 10% in the fourth quarter [1].

On November 21, 2025, the Indian government officially implemented four new labor codes, integrating the original 29 labor laws into a unified regulatory framework. This is the largest labor law reform in India since its independence [4]. The four core codes include:

The new labor laws impose major adjustment requirements on enterprises’ compensation structures, with the most impactful being the

“At least 50% of the employee’s Cost to Company (CTC) must be basic salary” [4]

This regulation directly leads to the following cost increases:

1. Expanded Provident Fund (PF) calculation base
   : As the proportion of basic salary increases, the amount of PF contributions will rise accordingly
2. Increased Gratuity expenses
   : The calculation standard for gratuity for employees with 5 years of service has changed
3. Increased leave liabilities
   : Long-term paid leave liabilities need to be recalculated

Taking TCS as an example, of the INR 212.8 billion in labor law-related expenses, approximately INR 181.6 billion was used for gratuity adjustments, and INR 31.2 billion for leave liability adjustments [5].

Key financial indicators of Tata Technologies for Q3 FY26 (October-December 2025) are as follows [1]:

The INR 1.4 billion one-time special expense accrued by Tata Technologies in this quarter mainly stems from [1]:

1. Increased gratuity liabilities
   : Under the new law, the calculation base for gratuity has been raised from the original lower level to meet the 50% basic salary requirement
2. Reassessment of leave liabilities
   : The calculation method for long-service leave liability has changed, requiring supplementary provisioning for historical arrears
3. Compliance adjustment costs
   : Expenses for restructuring compensation structures to meet new regulatory requirements

As a subsidiary of the Tata Group focused on Engineering Research and Development (ER&D), Tata Technologies’ core clients include Jaguar Land Rover and Tata Motors. Although this profit slump is an extreme case, it reflects the widespread impact of the new labor laws on labor-intensive service industries.

According to financial results disclosed by various companies, the profit impact on major Indian IT enterprises due to the new labor laws in Q4 2025 is as follows [2][3][5]:

As India’s largest IT service enterprise, TCS’s Q3 financial results show [5][6]:

• Net profit fell 13.91% YoY to INR 1.0657 trillion
• Excluding the one-time impact of INR 212.8 billion, net profit actually grew 8.5% to INR 1.3438 trillion
• Quarterly revenue was INR 670.87 billion, with 2% sequential growth and 4.9% YoY growth
• Operating profit margin remained at a healthy level of 25.2%
• Samir Seksaria, CFO, stated: “The annualized impact is expected to be in the range of 10-15 basis points, and we do not anticipate any further costs”

Infosys’s Q3 performance shows [2][3]:

• Net profit fell from INR 68.06 billion in the same period last year to INR 66.54 billion (-2.2%)
• Affected by INR 128.9 billion in labor law-related expenses, operating profit margin dropped to 18.4%
• Jayesh Sanghrajka, CFO, expects “the subsequent annual impact to be approximately 15 basis points”

HCLTech’s quarterly impact was USD 109 million (approx. INR 9.5 billion), but Ram Sundararajan, the company’s Chief Human Resources Officer, stated that “all necessary adjustments have been incorporated into this quarter’s compensation changes” and does not anticipate further significant incremental costs in the future [2].

As another engineering design service enterprise under the Tata Group, Tata Elxsi was also significantly impacted:

• Net profit fell 45.3% YoY
• Accrued INR 956.9 million in one-time labor law-related expenses
• Its stock price fell 3.2% on the day to an intraday low of INR 5609.15 [7]

Tata Technologies’ management is optimistic about Q4 performance, mainly based on the following factors [1]:

1. Steady growth of the service segment
   : The service segment, which accounts for 77% of total revenue, grew 4.7% YoY, demonstrating core business resilience
2. Stable customer base
   : Core clients include globally renowned enterprises such as Jaguar Land Rover and Tata Motors
3. Profit margin recovery expectations
   : Uttam Gujarathi, CFO, clearly stated: “The profit margin pressure in Q3 is a thing of the past, and we expect the adjusted profit margin in Q4 to recover and exceed the Q2 level”
4. Revenue growth guidance
   : Sequential revenue growth of over 10% is expected in Q4

1. One-time expenses fully provisioned
   : Major enterprises have completed labor law compliance adjustments, with subsequent impacts controllable
2. AI transformation-driven growth
   : TCS’s annualized AI service revenue reached USD 1.8 billion in the quarter, with 17.3% sequential growth [6]
3. Sufficient order backlog
   : TCS’s total contract value (TCV) in the quarter reached USD 9.3 billion, with North America contributing USD 4.9 billion
4. Labor cost optimization
   : The new labor laws promote automation transformation, which can improve per capita productivity in the long term

1. Global IT spending environment
   : Geopolitical uncertainties may affect corporate IT budgets
2. Exchange rate fluctuations
   : Fluctuations in the INR to USD exchange rate impact export-oriented IT enterprises
3. Talent competition
   : Shortages of AI-skilled talent may drive up labor costs

Large-scale enterprises have demonstrated stronger shock resistance due to the following advantages [8]:

1. Sufficient financial buffer
   : Enterprises such as TCS and Infosys have abundant cash reserves to absorb one-time shocks
2. Diversified revenue streams
   : Business covers multiple industries and regions, diversifying risks
3. Mature HR systems
   : Have specialized compensation management and compliance teams
4. Automation investments
   : Have made substantial investments in AI and automation, which can partially buffer labor cost pressures

Taking TCS as an example, even after the one-time shock of INR 212.8 billion, the company’s operating profit margin remained at a healthy level of 25.2%, and operating cash flow reached 130.4% of net profit [6].

Mid-scale IT enterprises face greater challenges:

1. More obvious profit margin pressure
   : Enterprises with lower billing rates and reliance on segmented contracts lack cost pass-through capabilities
2. Difficult to allocate compliance costs
   : Fixed compliance costs account for a higher proportion of the smaller revenue base
3. Disadvantage in talent competition
   : Difficult to compete with large enterprises for top AI talent

For multinational IT service enterprises with delivery centers in India, the impact of the new labor laws needs to be assessed from a strategic perspective:

1. Cost structure adjustment
   : Need to re-evaluate India’s cost advantage as an offshore delivery center
2. Compliance unification
   : Multi-country operating enterprises need to coordinate India’s compliance requirements with policies in other regions
3. Long-term competitiveness
   : Although short-term costs have risen, India’s talent pool and English proficiency remain core advantages

The impact of the new labor law reforms on India’s IT industry can be summarized as “short-term pain, long-term gains” [8]:

• Profit margins face annualized pressure of 10-20 basis points
• One-time costs from compensation structure adjustments
• Short-term increase in compliance management complexity

1. Productivity improvement
   : More flexible employment rules allow enterprises to adjust staff sizes based on project needs
2. Improved employee retention
   : Standardized salaries and social security coverage enhance employee trust, reducing turnover costs
3. ESG compliance advantages
   : Higher labor standards enhance India’s credibility as an outsourcing destination
4. Global competitiveness
   : Forms differentiated advantages compared to competitors in Eastern Europe, Southeast Asia, etc.

The new labor laws will drive the following structural changes in India’s IT industry:

1. Accelerated automation
   : Rising labor costs will accelerate the application of AI and automation technologies
2. Business model transformation
   : Shift from labor-intensive to technology and knowledge-intensive
3. Talent structure upgrade
   : Increased demand for talent with high-end skills such as AI and cloud computing
4. Compliance capacity building
   : Enterprises will increase investment in compliance management

For investors focusing on India’s IT sector, the following key points are recommended:

1. Distinguish between one-time and recurring impacts
   : This labor law impact is a one-time expense and should not be viewed as a deterioration of fundamentals
2. Focus on long-term growth drivers
   : Long-term indicators such as AI transformation, order backlog, and customer diversification are more important
3. Selective investment
   : Large-scale IT enterprises have more advantages in industry consolidation and can be preferred investment targets
4. Valuation considerations
   : Short-term profit margin pressure may create valuation attractiveness, which needs to be judged in combination with fundamentals

1. Impact assessment
   : The impact of India’s new labor laws on IT enterprises is a one-time event, with the expected subsequent annualized profit margin impact only 10-20 basis points, which is within a controllable range
2. High probability of performance rebound
   : Tata Technologies and major IT enterprises have a solid foundation for Q4 performance rebound, with positive management guidance
3. Long-term positive industry outlook
   : The new labor laws will promote the standardized development of India’s IT industry and enhance global competitiveness
4. Differentiated pattern
   : Large-scale enterprises will recover faster due to scale advantages and financial buffers, while mid-scale enterprises face greater challenges

1. Macroeconomic risks
   : Slower global economic growth may affect corporate IT budgets
2. Policy uncertainties
   : Implementation details of the new labor laws may be further adjusted
3. Exchange rate fluctuations
   : Fluctuations in the INR exchange rate may affect USD-denominated performance
4. Increased competition
   : Competition from regions such as Eastern Europe and Southeast Asia may intensify

For investors continuously tracking the industry, the following indicators are recommended:

• Comparison of actual Q4 financial results with management guidance
• AI service revenue growth
• Changes in order backlog (TCV) and customer retention rate
• Operating profit margin recovery

[1] Sina Finance - “Tata Technologies’ Quarterly Profit Plunges 96% Due to One-Time Labor Law-Related Expenses” (https://finance.sina.com.cn/stock/usstock/c/2026-01-16/doc-inhhpfkr5388114.shtml)
[2] Moneycontrol - “New labour codes cost TCS, Infosys, HCLTech over Rs 4,000 crore in Q3” (https://www.moneycontrol.com/news/business/information-technology/new-labour-codes-cost-tcs-infosys-hcltech-over-rs-4-000-crore-in-q3-13773833.html)
[3] Livemint - “Why India’s IT majors TCS, Infosys, HCLTech, Tata Elxsi took a Q3 earnings hit” (https://www.livemint.com/companies/company-results/tcs-infosys-hcltech-tata-elxsi-4-500-crore-profit-hit-q3-new-labour-codes-q3-results-11768460497760.html)
[4] FactoHR - “New Labour law in India (2025-2026) For Employer & Employee” (https://factohr.com/labour-law-in-india)
[5] Business Standard - “New labour codes, restructuring and provisioning impact TCS’ Q3 profit” (https://www.business-standard.com/companies/news/new-labour-codes-restructuring-and-provisioning-impact-tcs-q3-profit-126011200909_1.html)
[6] TCS Official Website - “AI-led Growth and Strong Order Book highlight TCS’ Q3” (https://www.tcs.com/who-we-are/newsroom/press-release/tcs-financial-results-q3-fy-2026)
[7] Economic Times - “Tata Elxsi Q3 PAT slumps 45% YoY” (https://m.economictimes.com/markets/stocks/news/tata-elxsi-q3-pat-slumps-45-yoy-brokerages-flag-22-downside-risk-heres-what-they-say/articleshow/126519765.cms)
[8] Swastika Investmart - “India’s Labour Code Reform: Short-Term Pain, Long-Term Gain for IT Sector” (https://www.swastika.co.in/blog/indias-labour-code-reform-short-term-pain-long-term-gain-for-it-sector)