OREANDA-NEWS. March 23, 2015. Fitch Ratings has revised Nissan Motor Co., Ltd's (Nissan) Outlook to Positive from Stable. The agency has also affirmed Nissan's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating at 'BBB'. Fitch has upgraded the company's Short-Term Foreign and Local Currency IDR to 'F2' from 'F3'.

The Outlook revision to Positive from Stable reflects Nissan's improved profitability outlook and strong cash flow generation over the medium term, which will support its robust financial profile. We believe that Nissan could be upgraded to 'BBB+' within the next 18 months if its industrial operating margin trends towards 5% combined with a further improvement in leverage, in line with our base case.

KEY RATING DRIVERS
Improving Profitability: We expect Nissan's profitability to be strengthened by continued cost-cutting measures, further cost savings from increased synergies with Renault, and an increasingly competitive product portfolio. We expect industrial operating margin to be close to 4% in the financial year ending 31 March 2015 (FY15) before improving to 4%-5% in FY16. Industrial operating margin increased to 3.7% in 9MFY15 (9MFY14: 2.6%) on improved volume/model mix, continued cost reductions, and positive currency effects from a depreciating yen to US dollar, which more than offset higher selling, general and administrative and R&D costs.

Steady Growth Prospects: We expect Nissan to achieve modest sales volume growth of close to 2% in FY15 and 3% in FY16, supported by the success of its current models and a solid product pipeline, despite increased competition in some of its key markets. We expect Nissan to achieve good volume growth in the USA and Europe, compensating for lacklustre growth in China, negative growth in Japan, and continued volatility in emerging markets in FY15.

Reduced FX Exposure, Benefits of Depreciating Yen: Nissan's expansion of overseas production capacity over the past few years has reduced its overall FX exposure, but we still expect its profitability to benefit moderately from a weaker yen against the US dollar in FY15 and FY16.

Sound Product Diversity: In the mass-market segment, Nissan enjoys strong brand value and geographic diversification, and a well-diversified product range. Nissan's premium marque Infiniti, however, remains weak in terms of market share compared with its German premium competitors. Over the medium term, Nissan's business profile and profitability could be further strengthened if it successfully rolls out its re-launched entry-level Datsun marque and expands its premium Infiniti marque.

Robust Financial Profile, Liquidity: We expect Nissan's robust cash flow from operations to contribute to continued positive and increasing free cash flow from industrial operations. We expect Nissan's credit and leverage ratios to improve further as a result, with FFO adjusted net leverage and CFO/total adjusted debt (industrial operations) trending towards 0.5x and 60% respectively by FY16-17. Liquidity ratios are strong and commensurate with a short-term rating of 'F2'.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Sales volume growth averaging 3% per annum in FY15-17
- EBIT margin (industrial operations) of 4%-5% in FY15-17
- Capex/revenue averaging 4.5% in FY15-17 (FY14: 5.1%)
- Moderate increase in dividends FY15-17

RATING SENSITIVITIES
Positive: Future developments that may collectively or individually lead to positive rating actions:
- Industrial operating margin improving towards 5% on a sustained basis (FY14: 3.4%);
- Improvement in FFO adjusted net leverage at or below 0.5x (FY14: 0.8x) and CFO/total adjusted debt at or above 60% on a sustained basis (FY14: 57%)
- Maintaining market share in key regions
Negative: Future developments that may collectively or individually lead to an Outlook revision back to Stable:
- Operational parameters and financial metrics not in line with positive guidelines, as outlined above