OREANDA-NEWS. July 19, 2010. Russian Technologies, Renault and Troika Dialog announced an agreement on Thursday to increase the equity of AvtoVAZ. Renault will contribute EUR240m in technology and equipment, while Russian Technologies will add RUB12bn, reported the press-centre of OTKRITIE Financial Corporation.

 As a result, Renault will maintain its 25%+1 share stake in AvtoVAZ, with the share of Russian Technologies rising to 29%. Troika Dialog will see a slight reduction in its stake. In addition, AvtoVAZ reported 2Q10 IFRS net income of approximately RUB1bn, slightly below its RAS figure.

View: We view the IFRS data and equity news as neutral. It is yet unclear whether the contribution from Russian Technologies will be in the form of a cash infusion or a pay down of part of the RUB40bn debt AvtoVAZ owes to the state. Most likely it will be the debt conversion. The prospect of launching new models based on the Renault chassis is tenuous, which does not inspire optimism regarding the future of AvtoVAZ. With regard to the significant growth in 2Q10 sales, the company has to officially report these upbeat numbers, hence it is premature to make assumptions regarding further dynamics of the company’s financials.

Valuation: AvtoVAZ  has been operating with negative margins, so whether the company can turn a profit for FY10 remains to be seen. Thus, we remain cautious on AvtoVAZ, awaiting further evidence that it has turned the corner towards profitability. We don't have a rating for the stock.