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May 13 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Panasonic Corporation's (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and local-currency senior unsecured ratings to 'BBB-' from 'BB+'. The Outlook is Stable. Simultaneously, its Short-Term Foreign- and Local-Currency IDRs have been upgraded to 'F3' from 'B'.
The upgrade in the ratings reflects Panasonic's strong financial results in the financial year ended 31 March 2014 (FY14) following restructuring efforts. Panasonic has improved margins and reduced debt, which bolsters its credit profile. However, the company continues to face challenges in its consumer electronics business.
KEY RATING DRIVERS
Margin Improvement: Panasonic improved its profitability and operating performance in FY14, a trend that Fitch expects to continue. The company's on-going restructuring efforts, including downsizing of unprofitable businesses (TVs, mobile phones and semiconductors), consolidation of manufacturing facilities and labour force rationalization contributed to a healthy margin. EBIT margin increased to 3.9% in FY14 from 2.2% a year earlier.
Significant Deleveraging: Improved cash generation, controlled working capital and modest capex spending are likely to contribute to a stronger balance sheet in the medium term. Panasonic's leverage significantly improved during FY14 as the company paid down debt. Gross debt was reduced to JPY642bn as at FYE14 from JPY1,143bn a year earlier. We expect FFO-adjusted leverage to be at around 2.5x at FYE15 (FYE14: 2.3x).
Robust Operations Continue: We believe Panasonic will continue to report solid earnings. The Eco Solutions and automotive-related businesses are the main profit growth drivers for the company, with operating margins in these businesses more than doubling in FY14 from FY13. Panasonic reported strong operating results in FY14 with revenue and EBIT at JPY7,737bn and JPY305bn (FYE2013: JPY7,303 and JPY161bn), respectively.
Weak Consumer Electronics Outlook: Risks to Panasonic's operations continue to linger in its consumer electronic businesses which face intense competition and an expected increase in consumption tax. Panasonic plans to focus more on the business-to-business segment and shift away from consumer retail products, which should mitigate this risk and reduce volatility in its operating margin.
Operating profit generated from non-consumer businesses accounted for more than half of total profit during FY14.
Structural Reform Continues: Panasonic's announcement that it will continue to restructure its operations is a positive development as it will enable the company to deal with operating difficulties more efficiently. Panasonic has reduced the number of its divisions to 43 from 49 and transferred all of its consumer electronics businesses to the Appliance division. However, Fitch expects the reorganization costs to be smaller than in the previous year because most of the major changes - mainly eliminating unprofitable businesses - were made during 2014.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- EBIT margins below 3.5%
- FFO-adjusted leverage above 3.5x.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- EBIT margin greater than 4.5%
- FFO-adjusted leverage falling below 2.5x