More companies are going to take a knock from the labour code rollout

On Monday, two of India's largest information technology services companies—Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd—acknowledged the impact of the new regime. While TCS jotted down costs of ₹2,128 crore, HCL Tech set the figure at ₹956 crore.

More companies may face additional costs as they rework gratuity and leave encashment costs due to the broader definition of wages, said Alok Agrawal, partner, Deloitte India. "Possibly, these payroll costs may also increase on account of overtime due to the broader definition of “workers", he said.

The new labour codes implemented in November are expected to trigger higher social security contributions by both employers and employees. Employees may see a slight reduction in take-home pay if the overall cost-to-company remains unchanged, as statutory deductions go up.

“This is likely to have the largest impact on the services sector, where the payroll costs are a large proportion of the overall cost base. Particularly, those companies where the basic salary was much lower than 50% are likely to see the largest impact," Agrawal of Deloitte India said.

According to Agrawal, gratuity is generally the largest component of the extra expense, since it applies to past service periods for all existing employees. "The Institute of Chartered Accountants of India had issued guidance recently to clarify the recommended treatment, based on which the companies have proceeded with the provisions. This is likely to have the largest impact on the services sector, where the payroll costs are a large proportion of the overall cost base," Agrawal added.

Other consulting firms also noted the short-term impact.

“India’s new labour codes, with expanded wage definitions bringing allowances over 50% of remuneration into gratuity and other linked bases, impose immediate short-term financial pressures on IT services and Manufacturing with large headcount," said Anustup Chattopadhyay, associate partner, Aon Talent Solutions. Financial services companies such as non-bank lenders will face the heat, he added.

TCS pointed out that gratuity payments amount to about ₹1,800 crore and leave liability is the balance ₹300 crore. It does not expect any exceptional impact on the operating margins from the codes for now.

"On the labour code, we don't expect (any future impact on profitability) unless the rules give more clarity. And there's something else which needs to be (considered) because currently, the rules came into effect and the guidance came towards the end of December, we have made an assessment and done it, and we'll call it out if there is a change in the understanding of our rules," TCS chief financial officer Samir Seksaria said at the company's post-earnings analyst call on Monday.

HCLTech too faced a hit, though somewhat lower.

"The labour code has an impact of $109 million. It's a one-time cost due to certain obligations that are mandated. As per the labour code, we see very minimal ongoing costs. It will be in the range of 10 to 20 basis points," said chief executive C. Vijayakumar, while declaring the December quarter earnings.

Others who have noted a smaller impact include cable services provider Hathway Cable and Datacom Ltd and retail chain Avenue Supermarts Ltd.

Hathway reported a ₹2.89 crore hit on account of the labour codes. The company reported revenue of ₹932.6 crore and profit of ₹11.5 crore in the December quarter.

Avenue Supermarts, which runs DMart retail stores, said the incremental liability from labour codes for its own employees "is not material" to its standalone financial results, adding it is evaluating other possible impacts including for contract workforce. "However, management is of the view that impact, if any, is unlikely to be material," the company said.