OREANDA-NEWS. Fitch Ratings has upgraded Japan-based Nissan Motor Co., Ltd's (Nissan) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating to 'BBB+' from 'BBB'. The Outlook is Stable. Fitch has affirmed the company's Short-Term Foreign- and Local-Currency IDRs at 'F2'.

The upgrade reflects the increased resilience of Nissan's cash flow generation and its improved profitability prospects from a leaner cost structure and continuing cost-base gains from synergies with Renault. We also expect the company's capital structure to continue strengthening in the financial year ending 31 March 2016 (FY16) and FY17.

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 a competitive product portfolio. We expect industrial operating margin of at least 4.5% in FY16 before improving to 5% or above in FY17-18.

Industrial operating margin increased to 4.9% in 1HFY16 (1HFY15: 3.3%) due to an 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 expenses and R&D costs.

Steady Growth Prospects: We expect Nissan to achieve modest sales volume growth in the low single digits 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 robust volume growth in the US, moderate growth in Europe and modest growth in China - despite more challenging market conditions - which will compensate for a decline in Japan and continued volatility in emerging markets.

Reduced FX Exposure; Weak Yen Benefits: Nissan's expansion of overseas production capacity over the past few years has reduced its overall FX exposure, but its profitability still benefitted from a weaker yen in 1HFY16 and in FY14-FY15. In FY16, and in line with management guidance, we expect emerging-market currency depreciation to offset the positive impact on group operating profit from a continued weak yen to US dollar.

Sound Product Diversity: Nissan enjoys strong brand value and geographic diversification, and a well-diversified product range in the mass-market segment. 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. Under our base case scenario, we expect FFO-adjusted net leverage to remain below 0.5x (FY15: 0.5x) and CFO/total adjusted debt (industrial operations) above 60% (FY15: 73%) in FY16-FY17. 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 in the US and Europe offsetting declines in Japan and emerging markets in FY16;
- EBIT margin on industrial operations of at least 4.5% in FY16;
- Capex/revenue of around 4.5% in FY16 (FY15: 4.3%)

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Industrial operating margin below 4% on a sustained basis;
- FFO-adjusted net leverage above 1.0x on a sustained basis;
- CFO-to-adjusted total debt below 50% on a sustained basis;
- Sustained market erosion in key markets.

Positive: An upgrade of the ratings would only be considered when there is significantly increased stability in operating margins, which may come from greater product diversification, especially through the successful and profitable expansion of the premium Infiniti marque.

FULL LIST OF RATING ACTIONS

Nissan Motor Co., Ltd
Long-Term Foreign-Currency IDR upgraded to 'BBB+' from 'BBB', Outlook Stable
Long-Term Local-Currency IDR upgraded to 'BBB+' from 'BBB', Outlook Stable
Senior unsecured rating upgraded to 'BBB+' from 'BBB'
Short-Term Foreign-Currency IDR affirmed at 'F2'
Short-Term Local-Currency IDR affirmed at 'F2'