Renault Sees Emerging Market Growth Waning on Russia Drop

Renault SA, part of the biggest automaking group in Russia, forecast car sales in the country to drop further amid turmoil stemming from the Ukraine crisis.

Renault said the Russian vehicle market may be even weaker than its estimate of a 10 percent drop for the full year, accelerating a first-half decline of 7.6 percent. Europe’s third-largest carmaker fell the most in more than three months.

“We’re probably a little too optimistic; there’s a risk that it will be worse,” Chief Performance Officer Jerome Stoll said today. “We’re in a political and economic environment that is absolutely uncertain.”

Growth in emerging markets has slowed and in some cases contracted for the automotive industry, which was counting on gains there to bolster the gradual recovery in debt-saddled Europe. Renault is particularly exposed to Russia, because along with Japanese partner Nissan Motor Co., it controls OAO AvtoVAZ, the maker of Lada models and the country’s largest carmaker. The U.S. and European Union may move as soon as today to impose tougher sanctions in response to the conflict with Ukraine.

“We’re in a situation where it’s complicated to know what sanctions will be implemented and what their impact will be,” Stoll said at a press conference at Renault headquarters in the Paris suburb of Boulogne-Billancourt. “We’ve had relatively high volatility of the ruble over the last few weeks whenever tensions rise.”

Stock Drops

Renault dropped as much as 4.4 percent, the steepest intraday decline since April 14, and was trading down 3 percent at 67.44 euros as of 2:54 p.m. in Paris. That pared the stock’s gain this year to 15 percent, valuing the carmaker at 19.9 billion euros ($26.8 billion).

“This is hitting Renault comparatively hard because of their relatively high exposure in Russia, not only through AvtoVAZ but also earnings from Russia directly,” said Sascha Gommel, a Frankfurt-based analyst at Commerzbank AG. “They have a large production facility near Moscow, and Russia was a very profitable market for Renault. They’re suffering right now.”

Renault was already predicting a further contraction in second-half industrywide emerging-market car sales after its own sales outside Europe fell 8.9 percent in the first six months. Brazil’s gross domestic product growth this year is estimated at less than 1 percent, while China’s may be the slowest since 1990, according to economists’ projections.

‘Mixed Bag’

“In the short term, the second half will bring a mixed bag of risks and opportunities,” Renault Chief Financial Officer Dominique Thormann said at the press briefing. “The main risk identified for the rest of the year remains the downward trend and lack of visibility in our main emerging markets. We forecast a further decline in Brazil and Russia. We have very limited visibility on Turkey, Algeria and, above all, Argentina.”

In contrast to competitors’ push into higher-end models, Renault’s deliveries have been bolstered by no-frills cars produced by its Romanian unit Dacia. First-half earnings before interest, taxes and one-time items, which the company calls its operating margin, jumped 25 percent from a year earlier to 729 million euros, the carmaker said in a statement.

Deliveries in the first half advanced 4.7 percent to 1.37 million cars and light commercial vehicles. Revenue fell 3 percent to 19.8 billion euros, hurt by currency effects and a drop in invoiced volume because of independent dealers’ inventory adjustments. Sales missed the 20.9 billion-euro average of nine analyst estimates compiled by Bloomberg. Automotive-unit free cash flow was a negative 360 million euros versus minus 31 million euros a year earlier.

‘Uncertain Time’

Renault wasn’t alone in cautioning about the volatile situation in Russia and other emerging economies. Michelin & Cie. said growth markets aside from China are facing a “slowdown” in the second half, while French car-parts maker Faurecia said putting economic pressure on Russia could hurt automakers.

If new sanctions are imposed, “clearly the pattern could worsen during a certain period,” Faurecia’s Chief Financial Officer Michel Favre said on Bloomberg TV today. “It is a time of uncertainty.”

Before it's here, it's on the Bloomberg Terminal.