OREANDA-NEWS. February 11, 2010. Sollers and Fiat are set to establish a car-making joint-venture. The JV will be capable of assembling 500,000 cars a year, with up to 50% of the parts produced domestically. This manufacturing capacity is set to be attained by 2017. A joint-venture with Fiat should positively affect Sollers’ operations, and the company could get a chance to expand its market share by 300-400%. In addition, to implement the project, Sollers plans to raise government funding at a subsidized interest rate, which will make it possible to cut back on funding costs.

On February 10, details were published about the creation of a joint-venture between Sollers and Fiat. The respective memorandum is to be signed on February 11 during prime-minister Putin’s vision to Sollers-Naberezhnye Chelny plant. The JV is to manufacture 9 car models of various classes on Fiat and Chrysler chassis. The rated capacity the new joint-venture is 500,000 cars a year, of which 10% are to be exported. Up to 50% of the auto parts for the enterprise are to be produced domestically. Total investments in the project are scheduled at around EUR 2.4 billion. To run the project, Sollers plans to attract additional long-term funding from the federal budget at a subsidized interest rate.

We assess this news as positive for Sollers. At present, Sollers can organize the assembly of new cars without any large-scale capital expenditures, as in 2009, its plant in Naberezhnye Chelny ran at just 30% capacity. The launch of new vehicle models should help Sollers load up idle capacity and become more efficient. As for the project’s high domestic localization, in our opinion, investments in localization will fully pay for themselves if the plant attains a manufacturing rate of at least 150,000 cars a year. As far as the arrangements to finance 80-90% out of a government loan at a subsidized interest rate are concerned, if this plan comes to fruition, there will be almost no need for Sollers to invest any funds of its own in the project, or to suffer any difficulties in the servicing of debts. After the project is implemented, Sollers could expand its market share to 17-20% by 2017 from 4.2% in 2009.

The fair price for Sollers (RTS: SVAV) is USD 22.90 per share with a 56% upside and a BUY rating.