Dr. Reddy's Laboratories Ltd

Good day, everyone, and welcome to the quarter one FI26 earnings call of Dr. Reddy's Laboratories Limited. I'm Aishwarya Sitaram, and I'm part of the Dr. Reddy's Congratulations team. I would like to indicate that all participants will be in the listen-only mode during the opening remarks, and there will be an opportunity for you to ask questions thereafter. Should you need any technical assistance during the call, please use the chat function in your Zoom application. Please note that the chats will not be monitored for any questions to the management. I now hand the conference over to Richa Parival. Thank you. Thank you, Aishwarya. Good morning, good evening, and a warm welcome to all. Thank you for joining us for Dr. Reddy's Q1 FY26 earnings conference call. We truly appreciate your time and participation. Joining us today are members of the leadership team, Mr. Iraz Israeli, our CEO, Mr. N.V. Narsimham, our CFO, and the IR team. Earlier today, we released our quarterly financial results. These are now available on our website for your reference. We'll begin the session with N.V. presenting an overview of the financial performance for the quarter. Following that, Evaze will provide his perspective on the business highlights and the strategic outlook. We will then move to the Q&A segment as mentioned by Aishwarya. Before we proceed, please note that today's call is the proprietary material of Dr. Reddy's laboratories and cannot be rebroadcasted or attributed in any media or press outlet without prior written consent from the company. This session is being recorded and both the replay and the transcript will be made available on our website shortly. All commentary and analysis during this call are based on our IFRS consolidated financial statements. In addition, the discussion may refer to certain non-GAAP financial measures. A reconsideration to the GAAP measures is provided in our press release. We would also like to remind you that the safe harbor provisions as detailed in today's press release apply to all forward-looking statements made during this conference call. With that, let me now hand it over to Ambien to present the financial highlights for the quarter.

So thank you, Richard. A very warm welcome to all. Thank you for taking the time to join us today. I am pleased to walk you through our financial results for the first quarter of FY26. The quarter begins on positive note, marked by the steady double-digit revenue growth. We delivered an every-term margin of 26.7%, modestly ahead of our aspiration of 25%. The inclusion of our consumer healthcare business contributed positively to top-line momentum. All financial figures in this section are translated into US dollars using a convenience translation. 85.74, the exchange rate prevailing as of June 30th, 2025. Consolidated revenues for the quarter stood at 8,545 crores, which is 997 million US dollars, a growth of 11% on year-over-year basis and remaining flat on sequential basis. This performance was driven by steady performance across most markets with the exception of our US GenX business. Consolidated gross profit margin for the quarter was 56.9%, a decrease of 350 basis points year-on-year, and an improvement of 134 basis points sequential. The year-over-year decrease in margins was largely attributable to price erosion in generic segments, particularly in lignamine and lower operating leverage, partly balanced by a better product mix. Gross margin for global generics and PSA wore at 60.9% and 13.2% respectively. Lower business margins in PSA reflects seasonal weakness and under-recovery of overheads. The SMA spend for the quarter was Rs. 2,565 crores, which is in U.S. dollars to 99 million, an increase of 13% euro a year and 7% on a sequential basis. The euro a year increase was primarily driven by strategic growth-oriented investments in consumer healthcare business of NRT and the Nestle JV for new pharmaceuticals portfolio. Both businesses represent strategic growth drivers necessitating focused investment to unlock and sustain their long-term potential. Other S&A expenses remain well managed and broadly flat on year-on-year basis, reflecting discipline in cost control across core operations. Consequently, S&A expense accounted for 30% of the sales during the quarter, was higher by 44 basis points on year-over-year and 173 basis points on quarter on quarter. The R&D spend for the quarter was rupees 624 crores which is US dollar 73 million remaining broadly flat on Euro real basis and declined by 14% sequentially. We continue to make targeted investments in our complex generics API and biosimilars pipeline to support long term growth. The R&D spend was at 7.3 percent of the sales for the quarter and lower by 76 basis points on euro year and 123 basis points on quarter over quarter. For the full fiscal we expect the R&D investments to be in the range of 7 to 7.5 percent of the sales. EBITDA for the quarter inclusive of other incomes to that rupees 2278 crores which is U.S. dollar 266 million, an increase of 5% on year-over-year and decline of 8% on QOQ basis. The QOQ decline was primarily driven by higher revenue and lower other income on relatively flat revenue base. The EBITDA margins stood at 26.7% as it was lower by 149 basis points on year-over-year and 243 basis points on QOQ basis. The net finance income for the quarter is around Rs. 157 crores as compared to Rs. 84 crores for the same quarter last year. As a result, the profit before tax for the quarter stood at Rs. 1,905 crores. That is US dollars to 22 million. PPT as a percentage of revenue was at 22.3%. Effective tax rate for the quarter was at 25.9% compared to 26.04% in the corresponding period last year. We expect the normalized ETR to remain around 25% for the full fiscal year. Profit after tax attributable to equity holders of the period for the quarter stood at rupees 1,419 crores, which is $166 million. A growth of 2% on Euro year and decline of 11% on maturity basis. This is at 16.6% of revenues. Diluted EPS for the quarter is Rs. 17.04. Operating working capital as of 30th June 2025 was Rs. 13,320 crores which is $1.55 billion. An increase of Rs. 7.22 crores, which is $84 million over 31st March 2025. CapEx cash outflow for the quarter stood at Rs. 683 crores, which is $80 million. Free cash flow generated during the quarter was Rs. 433 crores, which is $51 million. As of June 30th, 2025, we have a net cash surplus of Rs. 2,009.2 crores, which is Rs. 341 million. Foreign currency cash flow hedges executed through derivative instruments during the period are as follows. US dollar 648 million has been hedged using structured derivative contracts scheduled to mature over the next financial year. These contracts provide a minimum production rate of rupees 86.13 per dollar while also allowing participation in the event of dollar appreciation. Ruble 3.7 billion hedged at a fixed rate of one per Russian ruble, with maturity falling within the next four months. With this, now I request Eric to take us through the key business highlights.

Thank you, MBM. A very good morning and good evening to everyone joining us today. We appreciate your time and interest. Our performance in Q1 highlights consistent performance and steady progress of our strategic agenda. We deliver a double-digit growth in our base business, advanced critical pipeline programs including C-Manglutide and Abatacept. We remain focused on optimizing structural costs and driving operational efficiencies. We are also consistent with our strategic priority as we scale our presence in consumer health, innovative therapies, and . Overall, our results were a broad base except some softness in the U.S. market. Let me now walk you through some of the key highlights from the first quarter. Revenue grew by 11%, reflecting a sustained business momentum and consistent execution. We delivered EBITDA margin of 27%. The ROCE for the quarter was 22%. We closed the quarter with the net cash surplus of $341 million, reinforced a strong balance sheet position. Our biosimilar business gained momentum this quarter through a strategic collaboration with Algotech. for the co-development, manufacture, and commercialization of Pembrolizumab . The phase integration of the acquired nicotine replacement therapy, the NRT business, is progressing as planned. Following the successful integration in the UK and Nordics, we are now preparing onboard additional markets, including Canada, Australia, and other selected countries across Western Europe in the next phase. During the quarter, the US FDA inspected the Middleburg API facility in New York and issued a form for increase with observations. Following our response, the site has been classified as VAI. The agency also conducted a GMP inspection at CTO-5, our ATI facility in Mir-el-Lagouda and Legana, and issued a form for increased ritual observation. We have submitted timely response in line with our regulatory requirements. Last week, USFDA conducted a GMP entry approval inspection at our FTO-11 formulation facility in Shrikakulam Andhra Pradesh, resulting in 443 with seven observations. We will respond with it the required timelines. In recognition of our sustained commitment to sustainability, our carbon disclosure project CDP rating for 2024 was elevated to an A in the climate category, making us the only pharmaceutical company with this current placing us among the top 2% of any companies globally. We also retain a leadership status in the water and supplier engagement categories, reflecting our consistent performance across key environmental dimensions. 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 American business generated revenue of $400 million for the quarter, a 17% year-on-year decline, and 4% decrease sequentially. The softness in the market was primarily due to price erosion in selected products, primarily linadulemite, as well as timing of procurement of this product by certain customers. During the quarter, we launched five new products and expected a pickup in the lost momentum in the remainder of the fiscal year, which is expected to support recovery and drive growth in this segment. Our European generic business delivered revenue of 131 million for the quarter, making it a 124% year-on-year growth and 6% sequential decline. Year-on-year performance was primarily fueled by the contribution from the acquired nicotine replacement therapy portfolio, and the new product launches, which provided an offset to some pricing erosion. During the quarter, we introduced 13 new generic products across European markets, further strengthening our portfolio and reinforcing our growth trajectory. Our emerging market business reported revenue of 1,404 CR rupees in Q1, displaying a 10% year-on-year growth and a flat sequentially. Growth was primarily driven by higher volumes and further support by new product launches. During the quarter, we introduced 26 new products across multiple countries, reinforcing our commitment to expanding access and deepening market prices. With this segment, our Russia business delivered a 17 year-on-year growth and 2% sequential increase in constant currency terms, underscoring its continued momentum despite macroeconomic challenges. Our India business reported a revenue of 1,471 core rupees in Q1, delivering a double-digit year-on-year growth of 11% and 13% in sequential increase. This performance was primarily driven by contributions from new products and pricing. According to Acuvia, we continue to hold our position as the 10th largest player in India pharmaceutical market and have outpaced market growth with moving annual total growth of 9.2% compared to IPM of 8% growth and MQT growth of 11.2% versus IPM growth of 8.6%. During the quarter, we launched five new brands, including two innovative assets, Bayfotus, which is a RCV vaccine, and the product called Sensimium in Q1, further strengthening our domestic portfolio and reinforcing our growth momentum. Our PSAI business reported revenue of $95 million in Q1, April 26th, registering for year-on-year growth while experiencing a 14% sequential decline. The business momentum is expected to pick up in the coming quarters, positioning us to return to a double-digit growth trajectory for the fiscal year. During the quarter, we filed 12 drag master files. We remain committed to strengthening our pipeline as a key driver for future growth, while actively pursuing a strategic collaboration to accelerate innovation and expand our capabilities. Our R&D efforts remain concentrated on complex generic high-impact like GLP-1 group and biosimilars, which are central to our long-term value creation strategy. During the quarter, we completed 11 global generic filings. As we move through the fiscal year, our focus remains on strengthening our base business, advancing key pipeline assets like Simaglutide and Abatacept, building commercial strength in regulated markets and improving efficiency and cost structure. We are actively exploring strategic partnership and acquisitions to diversify and strengthen our portfolio. These efforts reflect our commitment to agility and disciplined execution in a very dynamic market environment aimed at delivering sustainable value for our stakeholders. With that, I will welcome your thoughts and questions as we move into the QA session.