Early Q3 earnings show costs overtaking revenues, flipping the profit cycle
A jump in labour and input costs has flipped India Inc’s profit equation just as revenues begin to recover. Early prints signal that margins may no longer be doing the heavy lifting.
India Inc. may have finally found its revenue footing in the December quarter after a year of sluggish demand. However, the profit cycle appears to have flipped, driven by surging costs. Early Q3 FY26 results show the weakest profit growth in at least three years, despite the best top-line expansion in a quarter for corporate India in over a year.
A Mint analysis of 189 early results reported so far—including both financial as well as non-financial companies—shows aggregate revenue up roughly 9% year-on-year (y-o-y). However, net profits rose only 4% as total expenses jumped 14%—the sharpest increase in two years, and the first time in at least three years that expenses have grown faster than income.
Analysts differ on how long the cost pressure is likely to sustain.
Ashwini Shami, president and chief portfolio manager at OmniScience Capital, argued that the cost surge won’t persist as a margin drag in the future. “Managements have described it as a one-time payroll adjustment under the new labour laws, with IT and other labour-heavy sectors seeing the sharpest impact," he said.
Companies saw a spike in employee costs after the new labour codes kicked in from November, requiring basic pay to account for at least 50% of total compensation. This pushed up contributions towards provident fund (PF), gratuity and other statutory benefits, triggering a one-time jump in past liabilities in Q3, experts said. Companies’ monthly payouts have also risen as PF and related benefits are now calculated on a higher basic salary.
“PF adjustments are likely to add 1-2% to payroll costs, and mildly impact labour-intensive sectors. But it won’t materially alter margin trajectories at the broader level," Shami said.
Other analysts offer a different point of view. Vinod Nair, head of research at Geojit Financial Services, noted that labour code-related adjustments are likely to unfold through FY26 as companies implement the new norms by the March quarter, and could keep margins under pressure for the remainder of this fiscal, albeit moderately compared to Q3.
Ashwin Patil, head of fundamental research at LKP Securities, argued that even after the labour-law impact fades, raw material costs would pose a more persistent risk to margins. With silver, aluminium and copper prices rising, he said sectors such as electric vehicles and consumer durables could see muted profitability despite improving demand.
“If prices are raised to preserve margins, it could blunt the GST-related boost expected on top-line growth," Patil said. He expects the GST benefits to fully materialise by Q4, especially across consumer retail categories where demand is likely to improve next after a strong automobile season in Q3.
Analysts remain largely unimpressed with December-quarter earnings so far, pointing to the absence of broad-based expectation beats and a mildly underwhelming start by large players.
This suggests a mixed early earnings print for India Inc, with disrupted cost structures hitting companies unevenly even as early green shoots of top-line recovery emerge.
If financial firms—banks, financial services and insurance companies—are excluded, total revenue of firms rose nearly 5% year-on-year after five sluggish quarters, hinting at improving underlying demand. But their total expenses rose around 7% to a one-year high, sending net profit falling 3% to its lowest in three years. The pressure mainly stemmed from the labour-intensive IT sector’s big five companies.
Combined profits at TCS, Infosys, Wipro, HCL Tech and Tech Mahindra fell almost 5%, even though revenue growth hit a six-quarter high of nearly 8%. A 7% rise in employee costs—the highest in two years—drove profits to a three-year low, the analysis showed.
One notable outlier was Reliance Industries. The conglomerate saw a 2% drop in total income, on a standalone basis, driven by lower volumes. But its overall expenses declined as raw material costs fell for a sixth straight quarter amid softer crude oil prices. That helped Reliance deliver 8% profit growth year-on-year in Q3—bucking the broader trend of rising expenses.
At this juncture, experts see the December quarter as pivotal for two reasons. First, early reporters are signalling a reset in corporate cost base as earlier tailwinds fade. Second, net profit growth has begun to lag revenue growth, indicating a break from the margin-led profit cycle of the past year.
“From here on, India Inc will need to squarely rely on top-line growth instead of defending margins, to sustain earnings," said Shami of OmniScience Capital.
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