The financial results of Indian companies in the third quarter are experiencing strain, particularly with IT firms such as TCS and Infosys being the most affected.

A significant reason for this is the rise in employee-related costs after the implementation of the new labor codes at the end of November.

These regulatory adjustments have increased required wage-related contributions, resulting in a significant increase in total payroll expenses during the December quarter.

The IT industry is especially susceptible to these shifts because of its significant dependence on a local workforce and its extensive number of employees.

Due to a significant share of its operating expenses being linked to salaries and benefits, even a slight rise in wage-related commitments can disproportionately impact margins. Consequently, IT firms are experiencing lower profitability in the December quarter relative to other industries. The effect is observed to gradually stabilize in later periods.

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The impact of the new regulations is already evident in the third-quarter earnings disclosed to date.

IT leader Tata Consultancy Services (TCS), which revealed its financial results on Monday, reported an expense of Rs 2,128 crore due to the statutory impact of new labour codes, accounting for approximately 12 percent of profit before tax and extraordinary costs. This resulted in a 14 percent decline in TCS's consolidated net profit for the third quarter.

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"TCS evaluated and revealed the additional effects of these modifications based on legal advice received and the most reliable information accessible, in line with the recommendations given by the Institute of Chartered Accountants of India," TCS stated.

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Elara Capital stated in a report that TCS management observed that the ongoing restructuring of the workforce might persist into Q4, while the effects related to the labor code are likely to be minimal. TCS has seen a reduction of approximately 31,000 employees over the past two quarters.