Dr. Reddy's Laboratories Ltd

Good day, everyone, and welcome to the quarter four and full year FY26 earnings call of Dr. Reddy's Laboratories Limited. I'm Aishwarya Sitaram, 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. D. Narasimham, 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 Emian providing an overview of our financial performance for the quarter as well as the year. 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 gap 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 on 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 in your Zoom application. The chat, however, will not be monitored for any questions to the management. The session is being recorded, and both the audio and transcript will be made available on our website. Please note that this call is the proprietary material of Dr. Reddy's Laboratories Limited 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 MDN, to present the financial highlights for the quarter. Over to you, Ambien.

Thank you, Aishwarya. Greetings to everyone on the call. It is my pleasure to walk you through our financial performance for the fourth quarter and full year, supply 26. Supply 26 reflected a resilient operating performance, delivering highest ever annual revenues. product-specific headwinds and certain one-time impacts. The underlying base business continued to deliver double-digit growth for the quarter as well as for the full year FY26. At the outset, I would like to highlight a few items impacting the quarter. Number one, a self-stock adjustment or SSA related to lignamide of rupees 453 crores taken as a reduction in revenue. Number two, an additional provision of 114 crores related to potential VAT liability in one of our subsidies included in S&A expenses. Impairment of 135 crores including A R&D charge of 6 crores on account of discontinuation of R&D programs related to CAR-T therapy as part of the portfolio prioritization. Impairment of 93 crores on account of discontinuation of a trial by our partner Immutab of an in-license asset following an interim futility analysis. The full year performance was further impacted by provisions related to potential tax liability of 70 crores as well as the impact of new labour law code in India of Rs. 170 crores. After factoring these items, the adjusted profit before tax was 994 crores for the quarter versus the reported number of 199 crores and for the full year, 6463 crores versus the reported PBT of 5482 crores. Now, I would like to discuss the underlying performance in detail. Margins in this section are expressed as a percentage of the revenues before the impact of SSA unless otherwise stated. For the reported figures, please refer to the respective ending releases. All financial figures in this section or translated into US dollars using a convenience translation rate of Rs. 93.83, the exchange rate prevailing as of March 31, 2026. Excluding SSA, the adjusted revenue stood at Rs. 7,969 crores, which is 849 million US dollars for the quarter. a decline of 6% year-over-year, and 9% on Q2, and at 34,000 purchase growth, which is 3.63 US billion dollars for the full year, representing a growth of 4.6%. The decline was primarily on account of lower linoleumide sales, while the base business excluding linoleumide delivered double-digit growth on year-over-year basis. We expect the base business to sustain its growth momentum in the year ahead. The gross margin on the adjusted revenue base after estimating the ONOS for the quarter was at 48%, lowered by 760 basis points on year-over-year and 615 basis points on sequentially and at 53.5% for the year, lowered by 498 basis points on year-over-year. The decline in margins was largely on account of lower land-wide sales and price erosion in our unbranded generics businesses. The gross margin for global generics was at 51.7% for the quarter and 57.4% for the year as a percentage of its adjusted revenues, while that for PSA stood at 19.9% for the quarter and 17.2% for the PSA for the fiscal on its reported revenues. Given our focus on the cost efficiencies and productivity improvement, we expect the margins to improve and be above 50% in FY27. Excluding one of provisions mentioned earlier, R&A spends over 2,662 crores per quarter, an increase of 11% on Euro years and 1% sequentially. and 33% of the adjusted revenue base, and Rs. 7,435 crores for the year, an increase of 11% on year-over-year and 31% of the adjusted revenues. The increase was primarily on account of ongoing targeted investment to support long-term growth of our branded franchise, namely the acquired NRT Conjugal Healthcare business and branded business. We expect the spend to be around the same level as FI 26 for the year ahead. The adjusted R&D spend for the quarter was 541 crores, a decrease of 26% year-over-year, and 12% on sequential, and a margin of 6% of adjusted revenue. For the year, the spend excluding one-time labor code-related provision was 2,385 crores for FI 26, a decrease of 13% and 12% adjusted revenues. The decrease reflects reduced biosimilars developmental expenditure as a significant portion of investments related to abatacept has been completed. We expect the expense to be in the range of 7% to 8% in the fiscal head. Other operating income for the quarter was 344 crores as against 241 crores in the corresponding quarter last year. and Rs. 763 crores in FY26, as against Rs. 436 crores in FY25. The increase during the quarter was largely on account of divestment of non-core brands in India business for net of Rs. 189 crores. The underlying EBITDA, including other income, stood at Rs. 1,554 crores for the quarter, which is $166 million, a decline of 37% on Euro-US basis and 28% sequentially, and reflecting a margin of 19.5% of the adjusted revenues. For FY26, the EBITDA adjusted one-off was at 8,419 crores, which is $897 million, that is like 24.7% of the adjusted revenue basis. Employment charge for the quarter was 259 crores as compared to 77 crores during the same quarter last year. The higher charge this quarter was largely on account of discontinuation of RTI assets and partner product FD like a more alpha as mentioned earlier. Employment charge for the year 358 crores as compared to 169 crores last year. The net finance income for the quarter was 62 crores. worth Rs. 235 crores during the same quarter last year and Rs. 413 crores for FY26 versus Rs. 472 crores for FY25. The decrease was primarily an account of lower foreign exchange gain in comparison to the corresponding period last year. As a result, the underlying profit before tax was at Rs. 994 crores, that is U.S. dollar 106 million representing a margin of 12.5% and for FY26 at 6463 crores that is U.S.D. 689 million a margin of 19%. Effective tax rate for the quarter was negative of 10.8% compared to 20.8% in the corresponding period last year. While for FY26 ETR was at 22.5% versus 25.4% in FY25, the ETR for Q4 FY26 was lower primarily due to recognition of a deferred tax asset on carry forward losses in one of our subsidiaries and favorable juridical mix for the quarter in comparison to the same period in the previous year. We expect the ETR to be 24 to 25% versus FY27. Profit after tax attributable to the equity holder of the parent for the quarter stood at Rs. 220 crores, which is $23 million, a margin of 2.9% on the reported revenues, and for the year, Rs. 4,285 crores, which is $4.57 million, a margin of 13% before adjusting for one of items mentioned earlier. Based on the company's performance, the board recommended payment of dividend Rs. 8 for equity share of face value Rs. 1. This is equivalent to 800% of the face value for the 800 March 31, 2026 subject to approval of the shareholder of the company. Diluted EPS for the quarter Rs. 2.64 and Rs. 51.42 for FY26. Operating working capital as of 31st March 2026 was Rs. 14,434 crores, which is 1.54 billion US dollars, an increase of 2,920 crores, which is 31 million over 31st December 2025. CapEx cash outflow for the quarter stood at 438 crores, which is 47 million, and 2,302 crores, which is 245 million for FI. Free cash flow generated during the quarter before acquisition related payout was 600 crores, which is 64 million, and 2,004 crores, which is 214 million for FI. As of March 31, 2026, we have a net cash surplus of 3,271 crores, which is 349 million US dollars. Foreign currency cash flow hedges executed through derivative instruments during the period are as follows. USD, $4.62 million hedge using combination of forwards and risk reversal options scheduled to mature by March. These contracts are hedged at rate of 91.37 to 93.46 per US dollar. Ruble, 1.6 billion hedge at a fixed rate of 1.12 per Russian ruble. with maturity falling within the next three months. With this, now I request a raise to take us through the key business highlights.

Thank you, MVN, and good day, everyone. We appreciate your participation on this call today and value your continued interest in our company. During the year, we remain focused on advancing our two-point strategy of strengthening the base business, while investing in our future growth drivers, the cost peptides by similar consumer health and innovation. Our FY26 performance reflected consistent discipline execution of our strategic priority, namely scaling the base business, advancing our pipeline programs, C-Magnus and the Lambataset, and targeted business development efforts to support our growth ambitions while continuing to enhance efficiency across operations. I'm pleased to report that the first quarter, in this first quarter without one of our key products, Lirandulemide, the company delivered an EBITDA margin of around 20% after adjusting for certain items indicated by MVM earlier. Launches of products offering meaningful opportunity, BD and continued cost optimization efforts will take us closer to our aspiration of 25%. For FY26, the adjusted EBITDA margin was in the neighborhood of 20%, consistent with our stated aspirations. Further, the underlying base business delivered double-digit growth in Q4, as well as for the full years of FY26. All geography, besides North America, recorded double-digit growth, while performance in North America was impacted due to linear dolomite sales and one-time shape stock adjustment related to this product. Let me now walk you through some of the key highlights of the quarter. In line of our strategic priorities, we made progress on our key pipeline assets, Simaglutide and Abatacept during the quarter. We are pleased to announce that Dr. Redis became the first company to secure regulatory approval of Simaglutide injection for type 2 diabetes in Canada, reinforcing our in-house expertise in peptide science and complex product development. Likewise, As the first company to receive approval in India for the same product in November last year, we successfully launched our brand Grubeda on day one of market formation upon patent expiry in India. Our oral version of Simaglutide is being approved by the CDSCO in India. We continue to engage with Anvisa in Brazil to address its concern related to our generic Zymaglutide filing and remain committed to making this important therapy available to patients across federal markets subject to approvals. Further, in February 2026, the US FDA accepted for review our VLA for the intravenous IV presentation of Arabatacept by a similar candidate, following its filing in December 2025. Aligned with our strategic focus to bring innovation to patients in India, we forage in hormones replacement therapy segment with the acquisition of Provinova and Sackler Provinova in India. Our partner for the COIAT-302 received fast-track review status. In addition, the operational integration of our required consumer healthcare business in nicotine replacement therapy is now largely complete. On the regulatory front, in March 2026, the U.S. provided the VAI classification power formulation facility, FUSCZ, in Shrikakulam, Andhra Pradesh, following a GMP and pre-approval inspection, PAI, in December 2025. We continue to build on our leadership in sustainability. Dr. Redis was awarded The gold medal for EcoVad is for FY26, achieving its highest ever score of 80, placing us among the top 5% companies assessed globally. During the quarter, we were named by the business world among India's top 5 sustainable companies, ranking first in the Indian healthcare and pharmaceutical industry for 24 and 25. We've been recognized in the leadership category of 2025 Indian Corporate Governance Court card for the third consecutive year. Let me now take you through the key business highlights for the quarter and the full year. Please note that all financial figures mentioned are reported in the respective local currencies. Our North America generic business report revenue of $199 million for the quarter and $1.3 billion for FY26. Excluding one type, shelf stock adjustment, revenue were $251 million for the quarter, a decline of 40% and 26% sequentially at $1.36 billion. A decline... of 21% year-over-year. The decline was primarily on the Continental Zulimite. During the quarter, we added seven new products to our portfolio, taking the annual of total 25 products. We aim to continue to launch Momentum in the fiscal ahead. Our emerging markets reported revenue of 1,806 course rupees in Q4 FY26, reflecting a robust growth of 29% year-over-year and a decline of 5% sequentially, and 6,761 gross rupees in FY26, a growth of 23% year-over-year. The growth was led by new product launches across markets and higher volumes, particularly in the rest of the world, further aided by favorable currency movements. During the quarter, we introduced 49 new products across countries, stacking the FY26 total to 129. Within this segment, our Russia business reported a growth of 8% year-over-year and a decline of 23% sequentially in concept currency terms. Our India business posted revenue of 1,566 crores rupees in Q4-26, delivering a robust double-digit year-over-year growth of 20% and a decline of 2% sequentially. While the quarterly revenues were at 6,219 crores, a year-over-year growth of 16%. This performance was largely driven by revenues from our innovation franchise, new brand launches, price increase, and volume growth. Accurated data as of March 31st, 2026 shows that we continue to outperform the Indian pharmaceutical market IPM with a moving quarterly total growth of 15.2% compared to IPM growth of 11.6% and moving annual total MAT growth of 12.1% compared to IPM growth of 9.9%. Our IPM rank 2.9% for the quarter and 10% for the year. We launched 10 new brands during the quarter and 28 over FY26, reflecting our continued focus on strengthening our domestic market presence. Our European business, which includes our acquired consumer health business in nicotine replacement therapy, posted revenue of $136 million for the quarter, a decline of 3% on year-on-year basis, as well as sequentially, and $542 million for FY26, reflecting an acquisition-led growth of 37% year-on-year. The decline this quarter was primarily on account of price erosion in generics. During the quarter, we launched seven new generic products across the market, taking the full year total to 38, further expanding our European product portfolio. Our PSAI business reported revenue of $101 million in Q4 FY26, resulting in a decline of 10% year-over-year and a growth of 10% sequentially. The decline was primarily on account of lower API volume uptake during the quarter. During the quarter, we filed 48 drag master files globally, taking the total number of filing to 128 for the year. Looking ahead, we remain focused on delivering on our strategic agenda of strengthening our core business while building future growth drivers. Underpinning this strategy is future-ready organization structure aligned to our business model with dedicated leadership across global generics, biologic, consumer health, and innovation. enabling sharper focus, relevant capabilities, and more effective execution across each growth pillar. Within this framework, we'll continue to advance our differentiated pipeline program, such as Immagdotide and Abatacept, drive operational efficiency, and pursue value-accretive inorganic opportunities that support sustainable long-term stakeholder value. With that, I invite your questions as we move into the Q&A sessions.