Dr Reddy's Q2FY27: consolidated PAT drops 32% YoY as margins compress on NA erosion

Dr Reddy's consolidated PAT (Ind AS, pre-minority) came in at ₹913 Cr for Q2FY27, down 31.7% year-on-year even as revenue was roughly flat at ₹8,698 Cr (-1.5% YoY). Basic EPS fell to ₹11.10 from ₹16.18 a year ago. Against street consensus (chartmill.com: EPS ~₹9.35, revenue ~₹8,642 Cr), the print beat on both counts — EPS came in ~19% above estimate and revenue ~0.6% ahead — but the beat sits against a YoY decline, so it reads as 'better than a weak bar' rather than genuine strength. Adjusting for the one disclosed in-quarter one-off (a ₹71 Cr revenue reduction from a Semaglutide batch recall in Canada, added back at the quarter's ~25.6% effective tax rate), PAT would have declined a still-steep ~27.7% YoY against ~31.7% reported — the underlying story is margin erosion, not a one-off distortion. The margin bridge is clear: gross margin fell 254bps YoY to 52.1% (management's own disclosure) as North America revenue dropped 23% YoY to ₹2,490 Cr on continued gRevlimid (lenalidomide) erosion — the same headwind management flagged on the Q1FY27 call. PBT margin compressed to 14.2% from 20.8% a year ago. Against prior guidance of ~20% EBITDA margin, the quarter met the mark at 20.6% (IFRS basis), so despite the YoY slide the company held its own margin target. Growth guidance fared better: India revenue grew 17% YoY (ahead of the 15%+ guided) and Emerging Markets grew 24% YoY (ahead of the guided double-digit), both outgrowing the drag from North America and Europe (+1% YoY, PSAI -12% YoY). The 110% QoQ jump in PAT (₹913 Cr vs ₹436 Cr in Q1FY27) is largely mechanical — Q1FY27 had absorbed a ₹240 Cr one-off Semaglutide API provision — rather than organic improvement; NPM of 10.5% this quarter is still well below the 14.6% of a year ago, so the sequential number should not be read as a turnaround. Co-Chairman & MD G V Prasad's framing — 'double-digit base business growth and EBITDA margins of over 20%' — is consistent with the segment data once North America is excluded, which is itself the story: the reported YoY decline is concentrated in one business line (Revlimid-driven US erosion), not broad-based. Ongoing items to carry into next quarter: three USFDA Form 483 observations at the Srikakulam API unit and four at the Bachupally formulations site (both disclosed this quarter) add regulatory overhang, alongside the still-unresolved Semaglutide API quality issue that triggered both the Q1 provision and the Canada recall.