Dr. Reddy's Q4 FY26 Results: A Long-Term Investor's Honest Take

I have held Dr. Reddy's Laboratories (NSE: DRREDDY) in my portfolio for several years. When a company I own reports a quarter where profits fall nearly 86% year-on-year, I do not panic, but I do pay close attention. The Q4 FY26 results, announced on May 12, 2026, were ugly on the surface but layered with context underneath. Here is my honest read as a long-term shareholder.

Quick Numbers at a Glance

Metric	Q4 FY26	Q4 FY25	Change
Revenue	Rs. 7,516 Cr	Rs. 8,506 Cr	▼ Down 11.6% YoY
Gross Margin	44.8%	55.6%	▼ Significant contraction
EBITDA	Rs. 981 Cr	Rs. 2,475 Cr	▼ Down 60% YoY
PAT (attributable)	Rs. 220 Cr	Rs. 1,594 Cr	▼ Down 86% YoY
Diluted EPS	Rs. 2.64	Rs. 19.13	▼ Down 86% YoY
Full Year FY26 Revenue	Rs. 33,593 Cr	Rs. 32,554 Cr	▲ Up 3.2% YoY
Full Year FY26 PAT	Rs. 4,285 Cr	Rs. 5,654 Cr	▼ Down 24% YoY

The numbers look alarming. But context is everything in investing.

Why the Quarter Looked So Bad

Most of it was identifiable one-off charges. Here is what happened.

Before drawing any conclusions, I always strip out the noise. Q4 FY26 was hit by a cluster of exceptional charges that, in my view, distort the underlying picture:

The big one: Lenalidomide. Dr. Reddy's took a Rs. 453 Cr hit (roughly USD 50 million) as a one-time Shelf Stock Adjustment (SSA) because the price of its generic Lenalidomide dropped in the US market. Lenalidomide was a blockbuster generic for the company in FY24 and FY25. As more players entered the market, the inevitable price erosion happened. That single item wiped 5.3% off revenue growth and 9.9% off the pre-tax margin.

CAR-T write-off: The company discontinued certain R&D programs in CAR-T (Chimeric Antigen Receptor T-cell) therapy, recognizing a loss of Rs. 135 Cr. Painful, but it reflects rational capital allocation. Clinical programs that are not working should be shut down, not funded indefinitely.

Eftilagimod Alfa failure: Their partner Immutep ran a clinical trial for a cancer drug that failed interim futility analysis. Dr. Reddy's wrote off Rs. 91 Cr tied to this. Not something they controlled, and unlikely to recur.

Russia VAT liability: An additional Rs. 114 Cr was provided for following a multi-year tax audit in Russia.

Strip all of this out, and the underlying business grew full-year revenues by approximately 4.6% year-on-year. Not spectacular, but not a disaster either.

What I Actually Like About This Quarter

Six things that give me confidence in the long-term thesis.

The Semaglutide Play Is Real

This is the most exciting development in the report for me. Dr. Reddy's launched generic Semaglutide injection in India under the brand Obeda, and they did it on Day 1 of market formation after patent expiry. They also received approvals for Semaglutide tablets from the DCGI and a Notice of Compliance in Canada.

Semaglutide is the active ingredient in Ozempic and Wegovy, the blockbuster weight-loss and diabetes drugs from Novo Nordisk. The global demand for this molecule is enormous. Getting in early on the Indian market, and building toward Canada and potentially other geographies, is a meaningful long-term revenue opportunity.

This is exactly the kind of pipeline bet I want Dr. Reddy's making.

India Business Is Genuinely Strong

India revenues grew 20% year-on-year in Q4 and 16% for the full year. Dr. Reddy's outperformed the Indian Pharmaceutical Market index, with secondary sales growth of 15.2% compared to IPM growth of 11.6% on a Moving Quarterly Total basis. They launched 28 new brands in FY26.

For a company often seen primarily as a US generics and export story, the India business is quietly becoming a meaningful and growing contributor. Brand-building in domestic markets is harder to replicate than filing ANDAs.

Emerging Markets Momentum

Emerging Markets revenue grew 23% year-on-year for FY26. Russia specifically grew 34% full-year. Europe grew 55% year-on-year for FY26 (partly aided by the NRT Consumer Healthcare acquisition, but still). This geographic diversification matters because it reduces dependence on the increasingly competitive US generics market.

Biosimilars Pipeline Moving Forward

The BLA (Biologics License Application) for their abatacept biosimilar (IV presentation) was accepted for review by the USFDA. Biosimilars are a multi-decade opportunity for Indian pharma companies. The regulatory and manufacturing complexity of biologics creates a much higher moat than small-molecule generics. Dr. Reddy's has been building this capability for years, and seeing the pipeline inch toward commercialization in the US is encouraging.

FCPA Overhang Lifted

For years, an investigation by the US SEC and DOJ over alleged improper payments in Ukraine sat as an undisclosed risk in the company's disclosures. In Q4 FY26, both the SEC and DOJ closed their respective probes with no enforcement action. This removes a tail risk that was hard to price and was a genuine source of uncertainty for me as a shareholder.

Cash Position Strengthened

Cash and investments stood at Rs. 9,851 Cr (approximately USD 1.05 billion) as of March 2026, up from Rs. 6,830 Cr a year ago. Operating cash flow for FY26 was Rs. 5,676 Cr. The balance sheet is in good shape, which gives management flexibility for acquisitions, buybacks, or R&D investment.

Dividend Announced

The Board recommended a final dividend of Rs. 8 per share for FY26. Record date is July 10, 2026. Not a game-changing yield, but consistent with the company's track record of returning capital.

My Concerns Going Into FY27

Being a long-term investor does not mean being uncritical. Here is what I am watching.

Margin Compression Is Not Entirely One-Off

Full-year FY26 gross margins came in at 52.8%, down from 58.5% in FY25. Even adjusting for one-offs, some of this compression reflects structural realities: North America generics prices are under pressure, and the cost of revenues grew faster than revenues (Rs. 15,867 Cr in FY26 versus Rs. 13,511 Cr in FY25, a 17.4% increase against 3.2% revenue growth). Management needs to show margin recovery in FY27, not just flag one-offs.

North America Revenue Is in Structural Decline

North America revenues fell 22% year-on-year for FY26, and 51% in Q4 alone (even adjusted for the Lenalidomide SSA, it was still down 38% in Q4). The US generics market is a difficult one: Price erosion is relentless, the FDA backlog makes timing unpredictable, and the market is dominated by large buyers with significant purchasing power. Dr. Reddy's filed only 15 new ANDAs in FY26 and had 77 pending approvals. The quality of those 77 pending filings matters a lot for FY27.

Lenalidomide Cannot Be Replaced Overnight

Lenalidomide was a disproportionate revenue contributor at peak. Finding another product of that scale in the near term is unlikely. The pipeline needs to deliver on multiple fronts to compensate.

SG&A Costs Are Rising

Selling, General and Administrative expenses grew to Rs. 10,676 Cr in FY26 from Rs. 9,387 Cr in FY25, an increase of about 13.7%. As a percentage of revenues, SG&A went from 28.8% to 31.8%. Part of this was the Russia VAT provision and New Labour Codes adjustment (Rs. 117 Cr), but the underlying trend still bears watching.

R&D Spend Declined

R&D expenses fell from Rs. 2,738 Cr in FY25 to Rs. 2,406 Cr in FY26. For a pharma company, this is a yellow flag. Dr. Reddy's has been rationalizing its pipeline (CAR-T discontinuation, Eftilagimod write-off), which is the right move in isolation, but I want to see the R&D engine rebuilt with sharper bets, particularly in biosimilars and branded specialty drugs.

Where I Stand as a Long-Term Holder

Not selling. Not adding aggressively. Here is why.

I am not selling. But I am not adding aggressively either, not until I see evidence that margins are recovering and the North America pipeline is delivering approvals.

The Semaglutide story, the India business strength, the Emerging Markets growth, and the improving biosimilars pipeline give me confidence in the 3-5 year thesis. Dr. Reddy's has a track record of navigating difficult cycles, and management under G V Prasad has consistently been candid about challenges. The FCPA resolution is a genuine positive.

But FY27 needs to show two things: gross margin recovery toward 55%+, and meaningful North America ANDA approvals from the 77 pending filings. If those materialize, this quarter will look like a washout year in a long compounding story. If they do not, the bear case gets harder to ignore.

For investors who are new to analyzing pharma stocks, I would recommend reading how to evaluate competitive moats first, and how to read annual reports to understand how to look past one-off charges in financial statements.

Key Takeaways

Q4 FY26 PAT fell 86% YoY, but most of the damage was driven by identifiable one-off charges (Lenalidomide SSA, CAR-T write-off, drug trial failure, Russia VAT).
Full-year revenue still grew 3.2% YoY; adjusted for the SSA, growth was approximately 4.6%.
India business (up 16% FY26) and Emerging Markets (up 23% FY26) are genuinely strong and provide geographic diversification.
The Semaglutide launch in India on Day 1 of market formation is a significant strategic signal.
The US SEC and DOJ FCPA investigations are closed with no enforcement action, removing a long-standing overhang.
Concerns: North America structural pressure, gross margin contraction beyond one-offs, rising SG&A costs, and declining R&D spend.
FY27 watchpoints: gross margin recovery, ANDA approvals from the 77 pending pipeline, and biosimilar commercialization progress in the US.

This article reflects the personal views of the author as a shareholder of Dr. Reddy's Laboratories. It is not investment advice. Please do your own research and consult a SEBI-registered financial advisor before making any investment decisions. All financial data is sourced from Dr. Reddy's official exchange filing dated May 12, 2026.

Source

Dr. Reddy's Laboratories: Outcome of Board Meeting and Audited Financial Results, Q4 and FY26 (May 12, 2026)