The revised outlook on the ratings on Honda and related entities reflects
Standard & Poor's view that Honda's operating performance has bottomed out in
fiscal 2011 and is returning to a steady growth path driven by a rapid
recovery in production and sales of automobiles. While the strong yen against
other major currencies is likely to continue to pressure Honda's
profitability, we believe the automaker should continue recovering its
profitability (excluding financial services operations) over the next two
years to around 7%-8% in operating and 10%-11% in EBITDA margins, which should
be largely comparable to the levels the company had maintained before the
financial crisis in 2008.
In 2011, Honda suffered from significant productions cuts resulting from
supply chain disruptions after the Great East Japan Earthquake in March and
the Thai floods in October. In particular, a shortage of microchip controllers
after the earthquake had materially constrained the company's recovery in
sales after the financial crisis in 2008 and, again, supply disruptions
related to the Thai floods hit just as Honda was returning to full production
in the wake of the March 11, 2011, quake. As a result, Honda projects that its
consolidated sales and net profit for the fiscal year ending March 31, 2012,
will be weak at JPY7,850 billion and JPY215 billion, respectively, down 12% and
60% from the previous fiscal year.
However, we view Honda is already returning to a steady growth path, which the
company had to give up temporarily in fiscal 2011 due to natural disasters.
Honda's global unit sales of automobiles has shown a steady recovery in recent
quarters: 547,000 units in April 2011-June 2011, followed by 772,000 in July
2011-September 2011 and 830,000 in October 2011-December 2011, and Honda plans
to increase the figure for the January 2012 to March 2012 quarter to around 1
million units. We view this as a clear sign of Honda's full recovery and
expect Honda's annual unit sales of automobiles in the fiscal year ending
March 2013 to reach 4 million globally. We believe Honda's competitive
position remains solid in major global auto markets and expect the company to
regain some of its lost market share in the U.S., which is the largest market
for Honda, in 2012 and thereafter.
We view continuous pressure on profitability from the strong yen and
intensifying global competition as the major threats to Japanese automakers.
Still, we believe Honda's good product competitiveness and strong engineering
expertise support its strong market positions in both automobiles and
motorcycles. We also believe Honda has amongst the strongest flexibility and
resilience against negative impacts from currency fluctuations among major
Japanese automakers, based on its long history of manufacturing and
Honda maintained its modest financial risk profile throughout 2011, when the
company faced challenges caused by earthquake and floods, and we expect
Honda's strong capital structure, liquidity and a conservative financial
policy should continue to support the company's financial strengths. Honda has
virtually no debt at its nonfinancial services operations and has substantial
cash at hand. Honda's credit metrics are likely to remain very strong over the
next two years, with the ratio of funds from operations (FFO) to debt
significantly above 100% and the ratio of debt to EBITDA of far below 1.0x, on
a fully adjusted basis.
We also view Honda's liquidity as strong. Honda maintains ample liquidity to
weather the increasingly challenging business environment, including sizeable
cash holdings and the ability to tap various funding sources. In addition,
Standard & Poor's believes Honda's historically strong relationships with
major Japanese banks preserves its access to additional sources of liquidity,
even during times of stress in capital markets. As of Dec. 31, 2011, the
company's industrial operations had JPY1.12 trillion in cash and cash
equivalents, compared with total industrial debt of JPY406.7 billion.
The stable outlook reflects our expectation of Honda's strong recovery
prospects in sales and profits over the next two years from the weak
performance in the fiscal year ending March 2012. In addition, we expect Honda
to solidly maintain its modest financial risk profile even in the increasingly
challenging operating environment for global automakers.
We may consider an upgrade if we are convinced that Honda is highly likely to
fully restore and even exceed its historical profitability that the company
had demonstrated before the financial crisis in 2008 and further strengthen
its business risk profile by, for instance, diversifying geographically across
major global auto markets, while further improving the level and stability of
its cash flow. Still, we consider that the chance of an upgrade is remote at
least in the next two years, given the continuous pressure from the strong yen
and increasingly fierce global competition.
On the other hand, we may lower the ratings if Honda fails to stay on a steady
growth path due to, for instance, a resurgence of the yen against other major
currencies and increased competition. In particular, if the recovery prospects
in profit to around 7%-8% in operating and 10%-11% in EBITDA margins over the
next two years materially weaken, we are likely to view it as a major
obstacle, which may prompt us to lower the ratings on Honda.