OREANDA-NEWS.  Fitch Ratings says Sony Corporation's (Sony; BB-/Stable) device segment - including its market-leading image sensor business - will continue to fare better than its other electronics businesses and drive overall margin recovery. In addition, we expect benefits from the company's on-going restructuring to steadily feed through to a lower cost structure in the medium term.

Sony's latest upward revision in earnings forecast for the year ending March 2015 (FYE15) and improved profitability of its electronics businesses were underpinned by higher device and game revenues and the steady progress with its restructuring.

Image sensors will be increasingly important in driving Sony's profitability in the next two to three years and may help offset stiff competition in Sony's other key products. Image sensors accounted for 43% of Sony's device revenue in FYE14 and the device segment generally commands higher margins. Excluding impairment charges, operating EBIT margin of the device segment expanded to 13% in 9MFYE15, from 5% in 9MFYE14, driven by increased sales of image sensors and camera modules as well as favourable exchange rates.

We expect Sony to maintain its market-leading position in high-end image sensors. It is focusing on an expanding market for mobile, IP security cameras and automotive cameras. The company announced capacity expansion plan to boost image sensor capacity by 33% by FYE16 to 80,000 wafers per month, which should help Sony to capture growing market demand.

Fitch expects Sony's on-going restructuring to, at least, stabilise margins at their current level. Driven primarily by cost reduction, its LCD TV business has reported profits for the past three consecutive quarters, even outperforming its peer Panasonic (BBB-/Stable) during the same period. Operating EBIT of the LCD TV business for 9MFYE15 totalled JPY22bn. Management now sees a higher chance of meeting its break-even target for TVs in FYE15, a target which we previously viewed as a significant challenge.

Management's resolve to take additional steps to streamline the cost structure of its mobile business should be credit-positive, though corresponding restructuring cost of JPY30bn will hit FYE15 and FYE16 operating EBIT. Nevertheless, Sony's smaller scale will struggle against the big two, Apple and Samsung (A+/Stable), and will also face competition in the premium market from LG Electronics (BBB-/Stable), HTC and Nokia.

Fitch revised Sony's Outlook to Stable from Negative in November 2014, reflecting our belief that steady benefits from product mix improvement and cost reductions would halt the deterioration in its credit quality.

We would upgrade Sony's ratings if it achieves sustained operating EBIT margin above 1% (FYE14: -2.1%) and sustained funds from operations (FFO)-adjusted leverage below 4.5x (FYE14: 7.6x), all excluding Sony Financial Holdings. Regaining investment-grade ratings would be contingent on Sony further strengthening its image sensor market position, reclaiming technology leadership in other key products and further capitalising on its brand, which we believe still carries latent appeal for customers.