The Week That Was: Automotive Stocks

This week, we will review the new developments associated with Volkswagen AG (OTCMKTS:VLKAY), Daimler AG, and Tata Motors (NYSE:TTM), particularly related to their Russia operations. The Russian economy has been struggling this year amid geopolitical issues with Ukraine and collapsing oil prices. Economic weakness in the region, with the ruble depreciating by over 50% against the U.S. dollar this year, has also impacted the country’s automotive market, which was already in decline before the Crimean crisis. Russia suffered a 5.7% decline in annual sales to around 2.6 million units last year, and auto sales have further declined by 12% year-over-year in the first eleven months of this year.

As the ruble continues to lose value, customers in Russia have looked to purchase vehicles, especially in the luxury segment, to turn their savings into something tangible. However, unfavorable currency translations have also prompted automakers to halt or slow down vehicle production in Russia, and shift volumes to other relatively more stable markets. Foreign exchange losses and falling customer demand are expected to impact Volkswagen, Daimler, and Jaguar Land Rover in the near term.

Biggest Winner: Daimler’s stock gained 0.64% in the last week, to register the highest growth among the companies in discussion. Volkswagen and Tata Motors’ stocks slid by 1.8% and 3.6% respectively.

Volkswagen

Russia constitutes approximately 3% of Volkswagen’s net volume sales, and hurt by the weak economic conditions and negative customer sentiment, the company’s volume sales in the country have declined by 13% through November. Owing to falling customer demand and an almost free-falling ruble, Volkswagen’s luxury vehicle division Audi halted sales in Russia on December 16. Audi said that sales will restart once the company revises the prices of its models in the country. Volkswagen and Skoda models were already built in Kaluga, Russia, since 2007, and Audi also started assembling its A6, A7, A8L, Q5, and Q7 models in a semi-knocked-down (SKD) facility at Kaluga last year. Audi’s volumes in the country have declined by 7.5% through November, and the depreciating ruble is expected to dent profits for the company in the near term. ^[1]

We have a $44 price estimate for Volkswagen AG, which is roughly in line with the current market price.

See Our Complete Analysis For Volkswagen AG

Daimler

The impact of the falling ruble is expected to be more heavily felt on Daimler’s Mercedes-Benz, as the luxury brand imports all of its vehicles into Russia, unlike compatriots BMW and Audi, who assemble their models in the country itself. In addition, as Russia pushes for higher localization levels of vehicles, the country could impose an import ban on cars, unless built locally in completely-knocked-down (CKD) units. This could further hurt Mercedes, which was the highest selling premium automaker in Russia last year, selling 44,376 units.

We have an $85 price estimate for Daimler AG, which is roughly in line with the current market price.

See Our Complete Analysis For Daimler AG

Earlier in the year, news that Mercedes is looking to start local assembly of its vehicles in Russia surfaced. Mercedes is the preferred vehicle for state agencies, and as Russia looks to ban state purchases of imported cars unless built locally in CKD units, with a localization level of 50% and above, the automaker’s volumes in the country could drastically decline. Although Russia represented only 3% of the net volumes for Mercedes in 2013, the luxury maker is looking to derive high growth from the BRIC nation in the coming years to compete better with BMW and Audi on a global front.

Daimler already has joint ventures Mercedes-Benz Trucks Vostok OAO and Fuso Kamaz Trucks Rus Ltd., formed in partnership with the Russian truck manufacturer Kamaz OAO in Russia. These joint ventures produce and distribute Mercedes-Benz and FUSO trucks and distribute Mercedes-Benz and Setra buses in Russia, from the plant at Naberezhnye Chelny. Mercedes is now planning to assemble the large-sedan S-Class in Naberezhnye Chelny, extending its partnership with Kamaz. By leveraging its already established partnership with Kamaz, and through local assembling of vehicles, Mercedes could reduce the added costs of exporting, and also evade higher import tariffs.

Tata Motors

Jaguar Land Rover also halted sales in Russia this week, as the depreciating ruble poses a threat to the company’s earnings in the country. Just for reference, BMW is expected to lose approximately $125 million in profits in Q4 if the ruble loses half its value. Importing and selling vehicles that are losing money on account of a weak local currency doesn’t make sense, and that is why automakers are looking to reevaluate their model prices in the country. However, as the ruble continues to be highly volatile, an appropriate upward revision of model prices at which automakers might make money might still be a shot in the dark. On the other hand, higher model prices are expected to negatively impact volume sales in Russia, as the weakening economic conditions might further restrict disposable income growth and consumers might look to avoid unnecessary expenditures.

Trefis’ price estimate for Tata Motors is $47, which is around 10% above the current market price.

See Our Complete Analysis For Tata Motors

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1. Audi sales [↩]