(The following statement was released by the rating agency)
Nov 29 -
Summary analysis -- Hitachi Ltd. ---------------------------------- 29-Nov-2012
CREDIT RATING: BBB+/Positive/A-2 Country: Japan
Primary SIC: Electronic
Mult. CUSIP6: 433578
Credit Rating History:
Local currency Foreign currency
09-Jun-2009 BBB+/A-2 BBB+/A-2
21-Feb-2007 A-/A-2 A-/A-2
Our ratings on Japan-based diversified electronics manufacturer Hitachi Ltd. (BBB+/Positive/A-2) reflect Standard & Poor’s assessment of Hitachi’s business risk profile as “strong.” Hitachi is the largest diversified electronics manufacturer in Japan. The company has a solid and extremely wide-ranging business portfolio backed by strong product development in its core information and communication technology (ICT) and infrastructure businesses, and it has close relationships with an extensive global client network. Hitachi’s structural reforms over the past few years have concentrated its management resources on what it calls “Social Innovation Businesses,” including information technology (IT) services and networking systems; power generation, transmission and distribution facilities; railway systems; and industrial machinery. Meanwhile, it has substantially shrunk or sold volatile businesses, including those making flat panel TVs, mobile handsets, hard-disk drives (HDD), and small-to-midsize liquid crystal displays (LCD).
We see an increasing likelihood that Hitachi will be able to continue to maintain its solid performance in fiscal 2012 (ending March 31, 2013). Despite tough business conditions, Hitachi’s EBITDA margin was stable at 10.3% in fiscal 2011, reflecting its efforts to rein in fixed costs and further reform its business. Standard & Poor’s expects the company’s EBITDA margin to remain stable at around 10% over the next one to two years--commensurate with the ratings. Although competition overseas and the strong yen have produced a slightly lower level of profitability at Hitachi than at its overseas ‘A’ rated peers, we expect the company’s restructuring efforts to maintain its current momentum and improve its financial health gradually in the future.
We assess Hitachi’s financial risk profile to be “intermediate.” Although Hitachi continues to have a high debt burden, we have seen gradual improvement in key financial ratios for the company in the past few years. Excluding its financial service business, the ratio of its funds from operations (FFO) to total debt improved to around 29% in fiscal 2011 from 28% in fiscal 2010. The ratio of its total debt to total capital also improved, to around 46% in fiscal 2011 from 50% the previous fiscal year. The ratio of its total debt to EBITDA remained around 2.3x in fiscal 2011.
In our base case scenario, we expect Hitachi’s cash flow adequacy, as measured by FFO to total debt (excluding its financial service business), to improve to around 35% over the next one to two years, and we expect good profitability and more prudent financial policies to improve its debt-to-capital structure (excluding its financial service business) to less than 40% over the next one to two years. Although we forecast that business conditions for Hitachi will remain sluggish over the next one to two years both in Japan and abroad and that the yen’s strength will continue, Standard & Poor’s believes the likelihood that financial ratios for Hitachi will improve in the next one to two years has increased because, in our opinion, the company’s structural reforms have further stabilized its profitability. Furthermore, considering its conservative financial policies, including to slow capital expenditure for noncore business, we expect it to sustain satisfactory operating cash flow and reduce its debt level gradually.
Standard & Poor’s deems Hitachi’s liquidity “adequate” according to our criteria. We assume the company’s liquidity sources for the next year--total cash equivalents, such as deposits and short-term investments; our forecast of around JPY750 billion in FFO; and about JPY400 billion in unused committed credit lines (as of Sept. 30, 2012)--equal more than 1.2x its liquidity uses, including annual debt maturities, capital expenditures, working capital, and dividends to shareholders. As of Sept. 30, 2012, Hitachi had JPY1,042 billion in consolidated debt due to mature by Sept. 30, 2013, along with JPY602 billion in cash, deposits, and short-term securities. Therefore, we believe Hitachi’s ample cash, deposits, FFO, and unused commitment lines sufficiently cover its debt repayments and capital investment needs. In addition, we believe the company faces little risk of tighter liquidity, reflecting its ability to steadily raise funds in capital markets--backed by its ongoing commitment to maintain good relationships with several financial institutions including Mizuho Corporate Bank Ltd. (A+/Negative/A-1) and Bank of Tokyo-Mitsubishi UFJ Ltd. (A+/Stable/A-1).
The positive outlook reflects our expectation that profitability and key financial ratios for Hitachi, excluding its financial business, may continue to improve gradually over the next one to two years if the company keeps up its business reforms and if its external operating environment turns more favorable. This may lead us to consider raising our ratings if the company can make stable net profits and positive free cash flow sufficient to produce financial ratios such as total debt to EBITDA of 2.0x or lower and total debt to total capital of about 40% or lower.
On the other hand, we may consider revising the outlook to stable if the company does not maintain its financial discipline, for example by taking excessive business risks with new investments or conducting large merger or acquisition activities or if it fails to translate its business reforms into profits. This could result in deterioration of the company’s cash flow adequacy and debt-to-capital structure, excluding its financial business, in the order of 3x-or-greater total debt to EBITDA and a 50%-or-higher ratio of total debt to total capital.
2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Industrials: Key Credit Factors: Business And Financial Risks In The Global High Technology Industry, Sept. 18, 2008