Dr. Reddy’s Laboratories Ltd. (NSE: DRREDDY), the Indian drugmaker, on Wednesday reported a modest rise in third-quarter revenue but a notable decline in net profit as pressure from pricing and product-specific challenges weighed on earnings for the quarter ended Dec. 31, 2025.
Revenue Growth Moderates; Profit Falls
Consolidated revenue increased 4.4% year-on-year to ₹8,726.8 crore ($971 million) in the third quarter of fiscal 2026, driven by broad-based growth across certain overseas markets and domestic businesses. The top line narrowly beat expectations, reflecting resilience in branded and emerging market segments.
However, net profit attributable to equity holders declined about 14% from a year earlier to ₹1,209.8 crore, compared with ₹1,413.3 crore in the corresponding quarter of the previous fiscal year. Earnings were also lower sequentially, highlighting mounting headwinds in key markets.
Margins Under Strain
On the operating front, EBITDA fell nearly 11% to ₹2,049.3 crore, with the EBITDA margin contracting to 23.5% from 27.5% in the year-ago period. The company said profitability was affected by pricing pressures in its North American generics business and a one-time provision related to new labour code compliance in India, which added to costs during the quarter. Excluding that provision, adjusted margins would have been moderately higher.
Gross margin for the quarter eased to 53.6% from 58.7% a year ago, as cost pressures and erosion in certain high-margin products persisted. Selling, general and administrative (SG&A) expenses rose, reflecting investment in commercial operations and strategic initiatives. Research and development (R&D) expenditure amounted to about 7% of revenues, underpinning ongoing investment in new product development.
Market Performance and Product Mix
Dr. Reddy’s said growth in the quarter was supported by robust performance in Europe, India and emerging markets, which recorded double-digit increases, partially offsetting weakness in the company’s largest revenue contributor, North America Generics. Revenue from the North American generics segment declined year-on-year, largely due to lower sales of lenalidomide and other key products, while other regional markets delivered stronger results.
In the global generics business overall, revenues were up about 7% on a year-on-year basis. The Pharmaceutical Services and Active Ingredients (PSAI) segment saw a slight decline in sales, reflecting continued volatility in API markets.
Cash Flow and Balance Sheet Dynamics
Despite margin pressures, the company’s cash flow position remained solid, with a reported net cash surplus of approximately ₹3,069 crore ($342 million) at the end of the quarter. Operating working capital increased as inventories and receivables rose modestly, and capital expenditure continued in line with strategic capacity expansions. Free cash flow generation was positive, albeit moderated by investment activity and working capital changes.
Management Commentary and Strategic Priorities
Management highlighted ongoing efforts to expand the company’s base business, accelerate its development pipeline and pursue operational efficiencies. “We continue to focus on disciplined execution of our strategic priorities of base business growth, pipeline advancement, operational efficiencies, and select inorganic opportunities to create long-term value for our stakeholders,” Co-Chairman and Managing Director, G. V. Prasad said in a statement.
Dr. Reddy’s noted continued progress on product launches and regulatory filings across markets, including biosimilars and complex generics, although competitive dynamics in mature markets like the U.S. continued to challenge pricing and volumes. R&D spend remained focused on high-growth areas such as complex generics, biosimilars, peptides and novel biologics.
Investor Reaction and Outlook
Shares of Dr. Reddy’s dipped in early trading following the results, reflecting investor caution over margin compression and slower profit growth despite the top-line beat. Analysts have pointed to the company’s substantial exposure to the North American market, where generic pricing pressures and product mix shifts have weighed on recent earnings trends.
Looking ahead, the company reiterated its commitment to balancing near-term profitability with long-term investments in innovation and geographic diversification, as it navigates a challenging global pharmaceutical landscape.
Reasons to Pass on DRREDDY
- Declining Net Profit: Net profit fell 14% YoY to ₹1,209.8 crore, signalling profitability erosion amid headwinds.
- Margin Compression: EBITDA margin contracted to 23.5% from 27.5%; gross margin eased to 53.6% from 58.7%, driven by pricing pressures and costs.
- North America Generics Weakness: Key revenue segment saw YoY decline due to lower lenalidomide and other product sales, offsetting gains elsewhere.
- One-Time Costs: Provisions for new labour code compliance in India added to expenses, hurting adjusted margins.
- Rising Expenses: SG&A increased from commercial investments; R&D at 7% of revenues reflects ongoing high spend without immediate returns.
- Investor Caution: Shares dipped post-earnings, highlighting concerns over U.S. exposure, pricing dynamics, and slower profit growth despite revenue beat.
- PSAI Segment Decline: Slight sales drop due to API market volatility, adding to overall revenue moderation.