Russian carmaker AvtoVaz's net loss soars three-fold in 2015

By bne IntelliNews February 12, 2016

Russian carmaker AvtoVaz, which is majority-owned by Renault-Nissan, widened its net IFRS loss threefold year-on-year to RUB73.9bn ($930mn) in 2015, the company said on February 12. The company's revenues declined by 8% y/y to RUB176bn in 2015, which it attributed to a 36% contraction of Russia's light commercial vehicle market.

Russia's largest car producer has been hit hard as Russia's economy enters its second consecutive year of recession. In 2015 the sales of AvtoVaz's Lada-branded vehicles declined by 31% y/y to 0.269mn units, below the company's own revised guidance of 0.28mn vehicles and the initial 2015 target of 0.325mn vehicles.

Reportedly Ernst and Young doubts AvtoVaz's ability to sustain continuous operations, Prime reported, citing the auditor's comments to company's 2015 IFRS report. While AvtoVaz group suffered RUB74bn losses, the current liabilities of the company exceed its current assets by RUB68bn, which, along with other circumstances, “indicate a material uncertainty which may cast significant doubt upon the ability of AvtoVaz and its subsidiaries to continue as a going concern,” the auditors warned.

AvtoVaz's own report also notes that it has breached the covenants on some outstanding loans, by not complying with leverage, profitability, and liquidity criteria on about RUB36.6bn worth of borrowings. 

At the same time AvtoVaz received waivers from Societe Generale and Garanti-Bank Moscow, which pledged not to demand repayment ahead of schedule. However, this only accounts for RUB2.7bn of the company's problem loans.

The carmaker hopes that the company's shareholders will “provide the support necessary to finance its operations in the foreseeable future", while it has “no plans to discontinue or substantially scale down operations”.

Renault suffered a €620mn loss on AvtoVaz in 2015, soaring compared to the €182mn loss in 2014, which was attributed to “exceptionally difficult unanticipated operating conditions in Russia (market decline of 35%, average ruble rate decline of 33%, and growing interest rate)".

Nevertheless, Renault CEO Carlos Ghosn told Bloomberg Television on February 12 that the French carmaker will “do whatever it takes to sustain AvtoVAZ and to allow AvtoVAZ to compete when the recovery comes,” adding that Renault has made “decision to prepare ourselves for the recovery of the Russian market because we believe in its potential".

AvtoVaz said it is negotiating future support with Alliance Rostec holding (50% held by Renault, 17% by Nissan, and 33% by Russian state technology agency Rostech) which could mean a further consolidation of Renault's stake.

According to the Kommersant daily, the support might include additional loans from shareholders, postponed payments to suppliers, and factoring of existing liabilities.

VTB Capital commented on February 12 that even given Renault's pledge to support the company, AvtoVaz “remains a growing concern” and “it will be some time before it could become a source of value for minority shareholders”.

Despite AvtoVaz's intensive restructuring efforts, a dramatic decline in sales, inability to adjust fixed costs to declining sales volumes and to reflect rising input costs in prices, have resulted in weak financial performance in 2015, VTB argues. The bank continues to believe that AvtoVAZ's restructuring effort and the model range upgrade will eventually bear fruit, although that “largely hinges on the auto market recovering", which is seen as unlikely in 2016.

VTB agrees that AvtoVaz will either have to increase its leverage further, or require recapitalisation, as it continues to have negative operating cash flows and still has quite high capex requirements.  

AvtoVAZ 2015 IFRS financial highlights

RUB mn 2014 2015 Chng, YoY  2015F, VTBC Diff
Revenues    190,734    176,482 -7%   195,711 -10%
COGS   (169,030)   (172,844) 2%  (178,397) -3%
Gross profit      21,704        3,638 -83%     17,315 -79%
Gross margin 11% 2% -9.3pp 9% -6.8pp
SG&A     (18,559)     (14,965) -19%    (16,111) -7%
EBITDA        2,712     (12,556) n/m          397 n/m
EBITDA margin 1% -7% n/m 0% n/m
Net profit     (25,111)     (73,940) 194%    (11,623) n/m
Net margin n/m n/m   n/m  

 Source: Company data, VTB Capital Research 

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