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Jan 23 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Panasonic Corporation a€™s (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and local-currency senior unsecured ratings to 'BB+' from 'BB'. The Outlook is Stable. A full list of rating actions is at the end of this release.
The upgrade reflects the recovery in Panasonica€™s profitability and improvement in its leverage measures, mainly due to on-going extensive restructuring measures, particularly in the unprofitable TV and smartphone businesses.
KEY RATING DRIVERS
Margin Improvement: Panasonic has achieved meaningful improvement in operating performance in the past three quarters, which Fitch expects to continue. We expect Panasonica€™s operating margin to expand further with scheduled downsizing of its unprofitable businesses (plasma TVs, retail mobile phone and semiconductor businesses) and on-going restructuring efforts, including consolidation of manufacturing facilities and labour force rationalization. EBIT margin increased to 4% in the first half of its financial year that ends March 2014 (1HFYE14), from 2.7% a year earlier.
Shifting Business Focus: Panasonic will make the automotive- and housing-related segments its key growth drivers, while scaling down the unprofitable consumer technology segment. The company is the top supplier for automotive infotainment systems and car lithium-ion batteries. Panasonic also dominates the domestic housing system market, particularly in electrical construction materials. We believe the company has the ability to generate further growth from these segments.
Growth Opportunity in Automotive Business: Greater demand for hybrid and all-electric vehicles will drive Panasonica€™s automotive business in the future. Panasonic will be the key beneficiary of growing hybrid electric vehicle (HEV) demand as it is the major vendor to Toyota Motor Corporation (Toyota, A/Stable), the worlda€™s leading HEV manufacturer. Panasonic also received orders from Tesla Motors to supply 2bn lithium-ion battery cells during 2014-2017, which is a significant increase from the previous agreement (0.2bn cells during 2012-2013).
Weak Consumer Electronics Outlook: A risk to Panasonica€™s operations still lingers in its consumer electronic businesses (LCD TVs and digital cameras) as competition remains intense. To mitigate this risk, Panasonic plans to focus more on the business-to-business segment and shift away from consumer retail products. This should reduce operating margin volatility. Operating profit generated from non-consumer focused business accounted for around 69% of total profit during 1HFYE14.
Debt Reduction Continues: Gradual improvement in leverage is likely in the near term. We expect Panasonic to have positive free cash flow in FYE14, underpinned by its robust operating performance, controlled working capital and modest capex. Debt reduction also benefitted from the sale of non-core assets such as healthcare business. We expect FFO-adjusted leverage to decline to around 3.6x by FYE14 (FYE13: 4.6x) as debt reduction and operating cash generation improvement continues.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Slower-than-expected margin recovery leading to EBIT margins below 2.5% on a sustained basis
- FFO-adjusted leverage sustained above 4.0x.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Sustained EBIT margin of greater than 3.5%
- FFO-adjusted leverage falling below 3.5x on a sustained basis
FULL LIST OF RATING ACTIONS
Long-Term Foreign- and Local-Currency IDRs upgraded to 'BB+'. Outlook is Stable.
Local-currency senior unsecured rating upgraded to 'BB+'
Short-Term Foreign- and Local-Currency IDRs affirmed at 'B'