Early Q3 earnings show costs overtaking revenues, flipping the profit cycle

Subscribe to enjoy similar stories. 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,"