Bharat Forge - A jolt to ESG improvement journey - ICICI Securities

Bharat Forge's (BHFC) German subsidiaries have been fined EUR32mn by Germany's competition regulator, Bundeskartellamt, due to cartelisation. The fine covers a) aluminium and b) steel forgings (yet to be settled) cartelisation case. Key findings (press release) were: a) Five aluminium forging companies were engaged in cartelisation for ~12 years (starting Apr'06) and have been fined EUR 175mn, b) collaborative behaviour was found for product price increases to customers, and c) companies passed on only value creation process benefits to customers and not procurement cost benefits. We have earlier highlighted (Dec'19 Update) the sub-par performance of the international subsidiaries and raised concerns on the deterioration of profitability and sub-par RoCEs. This event raises more questions on the way forward, may cause concerns for key stakeholders, customers and minority shareholders. Maintain REDUCE.

- Details from the order: Three German subsidiaries of Bharat Forge, Aluminiumtechnik GmbH, Bharat Forge CDP GmbH and Bharat Forge Global Holding GmbH have been fined EUR32mn on account of anti-competitive behaviour. Investigations found that from 2006 to 2018, senior executives of the companies referred to as the "Aluminium Forging Group" met on 23 occasions with the purpose of exchanging cost factors information, which are material price components, amongst each other for the purpose of passing-on the cost increases to their customers. The companies were in general agreement that their respective procurement costs and cost increases would be passed on to their customers. At their meetings, senior staff members regularly exchanged information on individual costs incurred in their procurement processes and informed each other on their progress in respect of price increases with customers. They also agreed to calculate lifetime reductions only based on their own value creation process and not to apply such reductions to procurement costs as well.

- Our view: We believe the action taken against Bharat Forge is likely to surprise its customers too, and can have either/or a) long-term relationship impact, b) cause product pricing renegotiations in near term. This could further delay efforts to turnaround loss-making entities. Key points to highlight: These subsidiaries had weak financial performance in the past even with such pricing benefits. As minority investors get more focussed on ESG metrics, this event potentially raises concerns on business ethics, and could negatively impact its future ESG scores. We maintain our valuation multiple at 26x Dec'22E EPS and add Rs42/share fair value (DCF basis) for defence business to arrive at an unchanged target price of Rs482. We maintain our REDUCE rating on the stock.

Shares of BHARAT FORGE LTD. was last trading in BSE at Rs.523 as compared to the previous close of Rs. 538.85. The total number of shares traded during the day was 148251 in over 5246 trades.

The stock hit an intraday high of Rs. 540.5 and intraday low of 510. The net turnover during the day was Rs. 78459608.

Source : Equity Bulls

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