Renault/VW: De Meo shows greater realism than Diess with Russia exit

How do you double the value of a Lada? Fill the petrol tank up. The quality of the Russian-made cars has improved since that joke — and many like it — were coined in the 1970s. The sale by Renault of its Russian assets, including a stake in Lada maker Avtovaz for a token sum, underlines the painful choices facing western businesses once active in the country.

Renault boss Luca de Meo has shown a better grasp of political reality than Herbert Diess. The Volkswagen chief sparked predictable outrage by calling for a “negotiated settlement” with Russia last week. The tide is running against foot draggers. McDonald’s set out plans to sell its Russian restaurants on Monday.

Renault will transfer its 67.7 per cent stake in Avtovaz to Russia’s state-owned automotive research institute. The factory making the French company’s own marques will go to the City of Moscow.

Chart showing that Russian exposure is driving valuations. Share price (% change since Feb 18 2022) and Russia/Ukraine assets at end of 2021 (% of total) for companies such as Renault, L’Occitane, Carlsberg, Fortum, Hyve, Pirelli, Solvay, Equinor, Raute, Nokian Tyres, Uniper, Raiffeisen Bank, Mondi and Global Fashion.

Renault confirmed the €2.2bn writedown, first announced in March, and said it expected operating margins of 3 per cent this year, down from 4 per cent before Russia’s invasion of Ukraine. Renault has an option to buy back the businesses over the next six years if political conditions improve.

When Russia invaded Ukraine, markets quickly marked down businesses with Russian exposure. Renault shares have fallen 35 per cent to date. Production in the country ground to a halt but Renault continued to pay some 45,000 employees.

Two charts. First shows Avtovaz financials. Share of Renaultautomotive revenues (%) and Operating profit (€mn), 2017 to 2021.Second chart shows that Renault worth the same as its Nissan stake. Renault versus Nissan Motor 43 per cent stake, 2017 to 2022.

An exit eases that pressure. But Avtovaz had been a promising division with sales and profits rising until the pandemic struck. Using a conservative 10 times trailing ebit multiple, it would have been worth €2.5bn a matter of months ago.

Shares have discounted that and more. Renault’s market value of under €7bn ascribes just €350mn of value to its remaining businesses, excluding the group’s 43 per cent stake in Nissan.

De Meo must focus on shedding Renault’s reputation as the sick man of European car making without support from Avtovaz. Jokes about rusty old clunkers now apply more pertinently to Renault than they do to Lada cars.

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