Dabur Shares Fall After U.S., Canada Lawsuits Allege Cancer-Causing Hair Products

Shares of Dabur India Ltd. fell on Thursday after its subsidiaries were sued by consumers in the U.S. and Canada for allegedly selling cancer-causing products.

The company's subsidaries are facing several lawsuits alleging that its hair relaxer caused ovarian cancer, uterine cancer and other health issues even as Dabur insists on the safety of the product, according to an exchange filing. The allegations are based on an "unsubstantiated and incomplete" study, the consumer goods maker said in the filing.

About 5,400 cases against several companies have been filed in the federal and state courts in the U.S. and Canada. The list of companies includes three of its subsidiaries: Namaste Laboratories LLC, Dermoviva Skin Essentials Inc. and Dabur International Ltd., according to the regulatory filing. The units have denied liability and retained counsel to defend them.

"Currently, the cases are in the pleadings and early discovery phases of litigation, which means the parties are challenging the adequacy of the plaintiffs' complaints and, in some cases, exchanging requests for information and documents. There are various motions pending as well," said Dabur India.

The maker of Vatika Shampoo and Chawanprash said it could not determine the financial implications due to the settlement verdict outcome at this stage but expects the defense cost to breach the materiality threshold in the near future.

Dabur International sells over-the-counter hair straightener and relaxer products under various brand names. The Food and Drug Administration is considering a ban on certain hair straightening products containing formaldehyde, saying that they are linked to hormone-related cancers and can cause long-term adverse health effects.

"Dabur draws about 26% of its business from the international segment, but within that, Namaste's contribution is still in single digits," said Shirish Pardeshi, research analyst at Centrum Broking Ltd.

Pardeshi remains positive unless there are any further clarifications from the company on the lawsuits. He further said that there are many levers that would support the company's growth in the long term.

For instance, Dabur's healthcare portfolio could revert to normalised growth levels as the base normalises. It holds the market leadership position in the healthcare segment.

The upcoming winter season is another tailwind for Dabur, with good demand expected for its immunity products, such as chyawanprash and honey.

"So, we need to see what the larger implication in terms of lawsuits could be, but we are not really worried at the moment in terms of sensitivity to the topline."

Emkay Global's research Nitin Gupta, however, said that Dabur could see pressure on margins from the ongoing quarter on account of litigation costs. For Dabur, hair relaxers represent 1% of its consolidated revenue sitting in Namaste Subsidiary, which is 3% of the consolidated revenue.

"What can go worse for Dabur is the ban on hair relaxers, which would mean a 1% impact on its top line, which in our view is unlikely, as for women of African origin, relaxers are essential products," he said in a note. "We may see a relaunch of the offering with a revised formulation, in the worst case".

From a near-term perspective, the litigation costs may bump up other operating costs, said Gupta. The brokerage, however, is awaiting Dabur management's clarity on the quantum of litigation costs, before revising its estimates.

The Dabur stock is expected to remain under lens, as the company got a notice to pay goods and services tax of Rs 321 crore, along with interest and penalty, as per an exchange filing on Oct. 17. The company, however, said there will be no impact on financials, operations or other activities due to this notification of tax being payable.

"The impact will be limited to the extent of final tax liability, as may be ascertained along with interest and penalties, if any," it said, adding that the company will challenge the same before the relevant authorities based on strong merits by way of filing its reply and submissions.

Shares of Dabur India fell 2.53% before paring loss to trade 1.5% lower as of 10:48 a.m., compared to a 0.5% decline in the benchmark Nifty 50.

Over the last month, the stock has fallen 6.26%. The total traded volume so far in the day stood at 3.7 times its 30-day average. The relative strength index was at 27, indicating the stock may be overbought.

Of the 45 analysts tracking the company, 29 maintain a 'buy', 14 suggest a 'hold', and two recommend a 'sell', as per Bloomberg data. The return potential of the stock implies an upside of 16.3%.