Dr. Reddy's Laboratories Limited American Depositary Shares 2027 Q2 Earnings Call

I'm Aishwarya Sitharam, Head of Investor Relations at Dr. Reddy’s. Joining us today are members of the leadership team, Mr. Erez Israeli, our Chief Executive Officer, and Mr. M.V. Narasimham, we call MVN, our Chief Financial Officer. Our quarterly financial results have been published earlier today and are available on our website for your reference. We will start today's call with MVN providing an overview of our financial performance for the quarter. Following that, Erez will share his insights on key business highlights as well as the company's strategic outlook. We will then open the floor for questions. All commentary and analysis during this call are based on our IFRS consolidated financial statements. Please note that certain non-GAAP financial measures may also be discussed. Reconciliations to the corresponding GAAP measures are included in our press release.

I would like to remind everyone that the safe harbor provisions outlined in today's press release apply to all forward-looking statements made during this call. Before we proceed, I would like to call out a few housekeeping points. All participants will be in the listen-only mode during the opening remarks. Should you need any technical assistance during the call, please use the chat function on your Zoom application. The chat will not be monitored for any questions to the management. This session is being recorded, and both the audio and the transcript will be made available on our website. Please note that this call is the proprietary material of Dr. Reddy’s and may not be rebroadcasted or quoted in any media or public forum without prior written consent from the company. With that, let me hand the call over to MVN to present the financial highlights for the quarter.

Over to you, MVN. Thank you, Aishwarya.

Greetings, everyone, and thank you for being with us today. It is my pleasure to take you through our financial performance for the second quarter of FY 2027. The business reported a 1.5% year-over-year decline in revenue, while EBITDA margin was at 20.6% for the quarter. Excluding lenalidomide in North America, the underlying base business maintained its growth momentum, delivering double-digit growth. All financial figures in this section are translated into USD using a convenience translation rate of INR 95.83, the exchange rate prevailing as of September 30, 2026. Consolidated revenues stood at INR 8,671 crores, which is $905 million, a decline of 1.5% on year-over-year and a growth of 7.4% on sequential basis. Strong underlying base business performance across key businesses, except Europe and API, driven by new product launches and favorable Forex movements, helped mitigate the impact of lower lenalidomide sales.

Consolidated gross profit margin was at 52.1%, an increase of 562 basis points sequentially, and a decrease of 254 basis points year-over-year. The year-over-year decline in margins during the quarter was largely on account of lower lenalidomide sales. As a reminder, margins in the preceding quarter were adversely impacted by a provision for inventory and other costs associated with the semaglutide API-related challenges. The reported gross margin for Q2 FY 2027 was 56.2% for Global Generics and 11.8% for PSAI. The SG&A spend was at INR 2,808 crores, an increase of 6% year-over-year and a decline of 3% sequentially, accounting for 32% of revenue. The year-over-year increase was primarily driven by higher personal costs following annual increments, adverse Forex movement, as well as elevated freight costs due to supply chain disruptions arising from the Middle East crisis.

The R&D spend was at INR 524 crores, down by 16% year-over-year and 9% sequentially, accounting for 6% of revenues and primarily reflecting lower developmental expenditure in the generics as compared to the previous year. The EBITDA, including other income, stood at INR 1,783 crores, which is $186 million, a decrease of 614 basis points year-over-year and an increase of 806 basis points sequentially, reflecting a margin of 20.6% of the revenues for the quarter. The profit before tax was at INR 1,228 crores, that is $128 million, representing a margin of 14.2%. Effective tax rate for the quarter was at 25.6% compared to 22.2% in the corresponding period last year. The ETR for the quarter was higher, primarily due to an adverse jurisdictional mix for the quarter in comparison to the same period in the previous year.

Profit after tax attributable to equity holders of the parent for the quarter stood at INR 925 crores, which is $97 million, a margin of 10.7% on revenues. Diluted EPS for the quarter is at INR 11.1. Operating working capital as of 30th September 2026 was INR 14,650 crores, which is $1.53 billion, an increase of INR 297 crores over 30th June 2026. CapEx cash outflow for the quarter stood at INR 186 crores, which is $19 million. Cash flow during the quarter was INR 171 crores, which is $18 million. As of 30th September, we have a net cash surplus of INR 2,502 crores, which is $261 million. Foreign currency cash flow hedges executed through derivative instruments during the period are $229 million, hedged using combination of forwards and risk reversal option scheduled to mature by March 2027. These contracts are hedged at a rate of 93.03 to 95.54 per U.S. dollar.

With this, I now request Erez to take us through the key business highlights.

Thank you, MVN. Good day, and thank you for your continued interest in our company. Apologize for my voice. I hope it will stay consistent. We remain consistent in our strategic priorities of delivering double-digit growth across geographies and sustainable profitability through strong execution in our core businesses, progress on key assets, continued productivity improvement, and disciplined investment in future growth drivers, both organic as well as inorganic. During the quarter, the underlying business that is excluding lenalidomide in North America continued to perform well, delivering a double-digit growth overall as well as across North America, emerging markets, and India. We achieve an EBITDA margin of 20.6%, supported by the strength of our base business and our continued effort to drive productivity. Subject to successful validation, we expect to relaunch semaglutide both directly as well as to our partners in November 2026, consistent with the timelines communicated earlier.

We also remain focused on advancing abatacept and other complex generics as they move through the regulatory review process in the coming quarters. Let me now walk you through some of the key highlights of the quarter. We partnered with Takeda to bring India first approved dengue vaccine, we call it QDENGA, to the private markets in India in the first half of 2027. We expand our collaboration with Gilead Sciences to enable access to investigational once yearly lenacapavir for HIV prevention in 120 countries. In collaboration with the GARDP Foundation, we secured approval for zoliflodacin, an antibiotic used in gonorrhea treatment in Thailand within six months of USFDA approval. We received USFDA approval for rituximab biosimilar, which will be commercialized in the U.S. through our partners, Fresenius Kabi. We launch nivolumab in India, marking our entry to biosimilar immune oncology in India.

Both rituximab and nivolumab are developed and manufactured in-house. Generic semaglutide is now approved in 10 countries across Latin America, Africa, the Middle East, as well, of course, as Canada and India. Our CDMO business under Aurigene Pharmaceutical Services generated revenues over $100 million in the last 12 months. We continue to receive global recognition for commitment for true sustainability. FinanceAsia Awards, a silver medal in the best large cap company in India category as Asia Best Companies 2026, reflecting strong endorsement by the Asian investor and analyst community. We improve our CRISIL ESG score to 73 out of 100 from 66, becoming the only pharmaceutical company in the leadership category. Let me take you through the key business highlights for the quarter. Please note that all financial figures mentioned are reported in the respective local currencies.

Our North America generic business reported revenue of $264 million for the quarter, accounting for 29% of our overall revenues and reflecting a decline of 29% year-on-year and a growth of 12% sequentially. The decline is attributed to lenalidomide sales versus last year. The underlying base business, excluding lenalidomide, continued to deliver strong double-digit growth, driven by new products launches. During the quarter, we launched six new products, including first to market launch of sugammadex injection. We remain on track to launch additional products, including complex injectable, during the year. Our branded franchise comprising India, emerging markets, and consumer health business in nicotine replacement therapy, or NRT, together accounted for 53% of our overall revenue and continue to provide a strong foundation for stable margin for the company.

Our emerging market business recorded revenue of INR 2,059 crore, accounting for 25% of our overall revenue and reflecting a robust growth of 24% year-over-year and 12% quarter-on-quarter. New product launches across market, including acquisition coupled with favorable currency movement, drove growth during the quarter. We introduced 27 new products across countries in Q2 FY 2027. Our India business revenues were INR 1,851 crore, accounting for 21% of overall revenues and consistently delivering a robust double-digit year-on-year growth of 17% and 8% sequentially. Growth was driven by recent launches, including acquired brands, along with price increases and higher volumes. According to IQVIA September 2026 data, our IPM rank improved to 8 for the quarter and 9 for the year.

We continue to outperform the Indian pharmaceutical market IPM, with moving quarterly total growth of 21% versus 14.7% for IPM and moving annual total MAT growth of 19.4% versus 13.2% for the market. Four of our brands feature in IPM top 50 new launches, and we launched four new brands during the quarter. Our European business, which include NRT, posted revenue of EUR 127 million for the quarter, accounting for 16% of our overall revenues. Revenues declined 6% year-over-year and 3% sequentially on account of price erosion in generic, partially offset by revenues from new product launches. Growth was further affected by the continuing impact of the operating model changes post-NRT integration as highlighted last quarter. During the quarter, we launched six new generic products across market. Our PSAI business reported revenue of $88 million, accounting for 10% of the overall revenues.