Home / Markets / Mark To Market /  German fine a medium-term overhang for Bharat Forge

The Bharat Forge Ltd stock has been on investors’ radar, but for the wrong reasons. Even before concerns about new virus impacting its UK business could be allayed, another worry has emerged. A penalty of €32 million has been imposed on Bharat Forge’s subsidiaries by the German fair trade authority.

Germany’s national competition regulator, Bundeskartellamt (Federal Cartel Office), was investigating Bharat Forge Aluminiumtechnik GmbH, Bharat Forge CDP GmbH and Bharat Forge Global Holding GmbH, among other companies, in two matters between 2004 and 2018. In the said matters, the subsidiaries have reached a settlement for the aforementioned amount to be paid over the next five years. The terms of settlement are confidential under applicable laws, it said in a stock exchange filing.

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Source: Bloomberg
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Source: Bloomberg

Analysts at ICICI Direct Ltd have pointed out that the total quantum of penalty works out to around 300 crore and the payout will be progressively gradual. “We assume an exceptional charge of 30 crore, 60 crore, 70 crore for FY21E, FY22E, FY23E, respectively. It will lead to a downward revision in our earnings estimates by ~10% in FY22E and ~7% in FY23E," it said in a report on 24 December.

According to Morgan Stanley, the fine will comprise 6-7% of Bharat Forge’s FY23 consolidated net profit. In simple terms, both events point to pressure on the company’s earnings performance.

Investors should note that Bharat Forge derives about 15% of its overall revenue from the UK and EU markets.

What is also making analysts uncomfortable is the stock’s valuation. Morgan Stanley is under-weight on the stock citing stretched valuations. The stock trades at a one-year forward price-to-earnings multiple of 33 times. Analysts said post the recent run-up, positives of recovery in the automobile sector are already priced in. Investors should note that the stock hit a fresh 52-week high of 567 on the NSE on 16 December.

So, negative news flow coupled with pricey valuations could lead to further downside pressure on the stock, analysts cautioned. ICICI Direct has reduced its target price on Bharat Forge from 550 to 510. The company’s shares fell nearly 6% intraday on the NSE on Thursday, and ended the day’s session at 523, down 3%.

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