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Profitable Again, PSA Peugeot Citroën Sets Its Sights On India

Europe's No. 2 automaker is confident that it can expand sales and production in the developing world, though analysts say the French carmaker is still too reliant on European demand.

(em2me)

PARIS - With the auto industry crisis finally behind them, executives at PSA Peugeot Citroën, Europe's second largest carmaker, are now focusing their attention on growth opportunities in emerging markets.

But first, the numbers: after two years of heavy losses, the French automaker posted net profits of 1.1 billion euros for 2010, while sales grew by 15.8% to 56.1 billion euros. The fiscal year "is an excellent starting point for restoring our ongoing profitability," says PSA Peugeot Citroën CEO Philippe Varin.

Car sales have set new records (3.6 million units) and the automotive branch itself is now turning a profit margin of 1.5%, bolstering other generally more profitable business sectors, including transportation and auto financing. The group strengthened its cash flow position, managing to free up available cash to the order of $ 1.1 billion.

With this extra cash, PSA -- like rival Renault -- plans on paying off the remaining 2 billion euros of a three-billion-euro bailout loan issued by the government during the crisis. The two groups, which had already paid off one billion euros last year, will each pay another billion in both February and April to avoid paying heavy interests.

Now more than ever, the real opportunities for development are found on international markets. After signing its second partnership in China and launching a new factory in Russia, PSA is now turning its attention to India. After some research, the group has decided to build a new manufacturing plant for its future economy sedan there, with orders already promised to the Vigo plant in Spain starting in 2012, as well as one in China.

It is a risky bet, after Renault's failed attempt to launch the Logan, a car far too big for the "super-economy" market. And PSA has not forgotten its own failure in India, when in the mid-1990s, it started a short-lived local production for the 309 model. Much remains to be decided about PSA's future venture, including the location and the production capacity of the plant.

Philippe Varin is reluctant to commit to a timetable. As far as the targets of his "performance plan" for 2010-2012 are concerned though, PSA's CEO is more than confident. Varin now anticipates an improvement in pre-tax earnings of 3.7 billion euros, versus the 3.3 billion previously estimated. A number of different strategies (including purchasing policies for components, upgrading of vehicles, and sales strategies) had already contributed to an improvement of 1.5 billion euros in pre-tax earnings last year, over the expected 1.1 billion.

But this good news did little to boost stock prices, which instead dropped 4.46% after the report. Analysts like Bernstein and Merrill Lynch say they're disappointed by the automotive division's performance. And they consider prospects for 2011, which include an increase in pre-tax earnings for each division, to be too vague.

According to Barclays Capital, the real problem is that Peugeot and Citroen are still far too reliant on a Western European market that is expected to suffer this year. "We expect the French market to contract about 13% in 2011, which we fear will escalate price wars and prevent PSA from reaping the benefits of its upscale products," said a Barclays statement. The bank also predicts an annual decline in the small-car sector. PSA dismisses these doubts as baseless. The company is satisfied with its push towards globalization, as car sales outside of Europe have already increased from 32% to 39%. The next goal is to reach 50% by 2015.

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