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Currency Wars, Weakening 3rd World Sales Undermine Renault

Bernstein Research Downgrades Renault, Doubts Profit Progress

Renault was said to be less of a basket case than its fellow European mass market manufacturers, but some of its advantages accruing from Dacia in third world and cut-price markets are being eroded while foreign currency turmoil is also beginning to hurt the bottom line.

Bernstein Research has downgraded Renault to “Underperform”, saying that the advantages expected from its alliance with Nissan and its benefits from the weaker yen are being overtaken.

“While Nissan will benefit from the weaker Yen, core Renault has a series of more problematic currency and end market relationships. With the sector’s biggest (non-China) emerging markets exposure, Renault has benefitted strongly in recent years from the booming BRICs (Brazil, Russia, India, China) demand. But the prospects for these markets may be turning,” said Bernstein analyst Max Warburton.

“The Brazilian, Indian, Russian and Turkish car markets are all slowing or falling. All four currencies have fallen versus the Euro too”.

“We are trimming our Renault estimates and expect negative free cash flow for the first half of 2013 and fiscal 2013. Consensus forecasts for a significant improvement in core Renault profitability in the second half look far too optimistic to us,” Warburton said.

“Renault remains hugely reliant on emerging markets for profitability, but Dacia will inevitably face new competition in these regions, including from China, in the years to come. Renault is even weaker than hoped in Europe, suffering from poor geographic mix, poor model mix as the Megan fades and ever-tough competition. We fear Renault may have excessive inventories that will result in a working capital bleed, at least in the first half (of 2013,” Warburton said.

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