Dr Reddy’s Q2 FY26: Revenue Up 9.8% but Margin Under Pressure

Dr Reddy’s Q2 FY26: Revenue Up 9.8% but Margin Under Pressure

Dr Reddy’s delivered healthy top-line growth in Q2 FY26, consolidated revenue of ₹88,051 Mn (+9.8% YoY, +3% QoQ), but profitability shows strain: gross margin fell to 54.7% and PBT margin slipped, reflecting product mix shifts, one-offs and pricing pressure in key markets.

*Key numbers*
* Revenue (consolidated): ₹88,051 Mn (Q2 FY26), +9.8% YoY and +3% QoQ
* EBITDA: ₹23,511 Mn, 26.7% of revenues
* Profit before tax (PBT): ₹18,350 Mn, PBT margin 20.8% (down ~310 bps YoY)
* Profit after tax (PAT) attributable to equity holders: ₹14,372 Mn, +14% YoY and +1% QoQ
* Gross margin: 54.7% (Q2 FY25: 59.6%), down ~492 bps YoY and 223 bps QoQ.
* SG&A: ₹26,436 Mn, 30% of revenues, +15% YoY (company notes one-offs and NRT investments)
* R&D: ₹6,202 Mn, 7% of revenues (down YoY)
* Impairment (non-current assets, net): ₹662 Mn (noted as related to discontinued pipeline/ product issues)
* Global Generics: ₹78,498 Mn (+10% YoY): broken down as North America ₹32,408 Mn (–13% YoY), Europe ₹13,762 Mn (+138% YoY, driven by NRT acquisition/ excluding NRT growth is 17% YoY), India ₹15,780 Mn (+13% YoY), Emerging Markets ₹16,548 Mn (+14% YoY)

*What accelerated the revenue*
Growth came from a broad mix: branded markets (India, Emerging Markets) and the recently acquired Nicotine Replacement Therapy (NRT) business (a strong contributor to Europe growth) offsetting weakness in certain U.S. generics like Lenalidomide. In short, new product launches and M&A (NRT) and volume growth in emerging markets powered top-line expansion.

*Rationale behind margin compression*
1. Product mix/ pricing headwinds in North America: Lower Lenalidomide sales and price erosion in U.S. generics reduced gross margin contribution.
2. One-offs and provisions: The company recorded inventory provisions and an impairment related to discontinued pipeline products (₹662 Mn) and mentioned a potential VAT liability (~₹700 Mn) that lifted SG&A. These items dented margins this quarter.
3. PSAI operating leverage: PSAI (Pharmaceutical Services & Active Ingredients: APIs & services) margins are lower than Global Generics and a larger share or weaker performance in PSAI pulls consolidated gross margin down.
Net result: gross margin fell to 54.7%, and while EBITDA remains at 26.7%, PBT and effective margins are lower than last year. The firm emphasises these are partly transient and linked to mix and one-offs.

*Mixed outlook for the U.S. and Europe*
* United States: the U.S. generics franchise is still material (North America ~₹32,408 Mn this quarter) but faces pricing erosion and product-specific declines (Lenalidomide). Management flagged that NA pressures continue to be the primary margin headwind.
* Europe: Headline growth in Europe looks strong (₹13,762 Mn, +138% YoY) but a large part is acquisition-driven (NRT). Forex and product launches helped QoQ gains. Europe is a growth story for Dr Reddy’s, but sustainability depends on integration of the NRT asset and continued new product wins.

*Conclusion*
Dr Reddy’s posted solid revenue growth but faced a clear margin dip due to U.S. pricing pressure, product mix, and one-offs. The core business remains strong and diversified, but near-term profitability will depend on stabilising the U.S. portfolio and successfully scaling the Europe NRT business. Medium-term margin recovery is possible if execution stays on track.

The image added is for representation purposes only