OREANDA-NEWS. Fitch Ratings has upgraded Panasonic Corporation's (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and local-currency senior unsecured ratings to 'BBB' from 'BBB-'. The Outlook is Stable. Its Short-Term Foreign- and Local-Currency IDRs are simultaneously upgraded to 'F2'.

The upgrade reflects Fitch's expectations of improved margins and reduced debt, which continues to bolster its credit profile. Panasonic's strength in its core products, lower exposure to the volatile consumer electronics businesses, streamlined cost structure, lower gross leverage and net cash position make its financial profile more resilient to deteriorating macro conditions.

KEY RATING DRIVERS
Generating Stable Earnings: Panasonic's improved business structure will contribute to stable margins and cash generation in the medium term. We believe earnings stability has improved in its electronics business as a result of a strategic shift to business-to-business (B2B) solutions and a streamlined cost structure. Reduction in restructuring charges and impairment losses should also result in more stable margins. We feel Panasonic should be able to produce an EBIT margin of around 5% over the rating horizon (FYE15: 4.95%).

Further Deleveraging: Improved cash generation, controlled working capital and modest capex spending will lead to a conservative balance sheet in the medium term. We expect the company to maintain positive free cash flow (FCF), with operating cash flow sufficiently covering rising capex requirements. We expect FFO-adjusted leverage to fall to around 2.0x by FYE16 (FYE15: 3.0x).

Seeking Growth: We remain cautious on Panasonic's growth initiatives, as this will involve substantial upfront investment and expansion in overseas operations. Management is currently pursuing a growth strategy in the businesses where it is dominant, including automotive-related products, and plans to boost its overall sales to JPY10bn by FYE19 (FYE15: JPY7.7trn). The company's ability to maintain its current financial profile while undertaking investment activity related to its growth strategy will be among the key factors monitored by Fitch

Macro Threats: We believe Panasonic's momentum in boosting profitability and cash flow generation could be challenged by slower economic growth in China, weaker housing-related demand in Japan, and lower gasoline prices. Slow sales in China and Japan affected Panasonic's 3QFYE16 results, although the negative impact was offset by the benefits of cost-cutting measures. Lower gasoline prices may also reduce the appeal of plug-in vehicles, affecting the demand for the company's lithium-ion batteries.

Rising Investment: We expect Panasonic's capex to increase over the next three to four years, driven mainly by its investment in Tesla Motors, Inc.'s Gigafactory. In addition to regular capex, the company plans to spend JPY1trn - which includes a budget for M&A and R&D expenditure. We believe Panasonic will still be able to maintain a conservative capital structure, but further improvement in post-M&A FCF is likely to ease off.

KEY ASSUMPTIONS
- Revenue to decrease by the low-single-digits in FYE16, due mainly to the weak air-conditioner business in China and slow recovery in domestic housing-related segments.
- EBIT margin to stay around 5% - similar to the previous year (FYE15: 4.95%) - as most business segments are generating stable margins.
- Capex to increase to around JPY280bn, as indicated by management, and is likely to increase further in the medium term.
- FCF to remain positive for the next few years, although higher capex may reduce the FCF margin to 2% in the medium term (FYE15: 3%)

RATING SENSITIVITIES
Positive Rating Guidelines: Developments that may, individually or collectively, lead to positive rating action include:
- operating EBIT margin sustained above 5.5%
- FFO-adjusted leverage sustained below 1.5x.

Negative Rating Guidelines: Developments that may, individually or collectively, lead to a stabilisation of the Outlook include:
- operating EBIT margin sustained below 4.5%
- FFO-adjusted leverage sustained above 2.0x.

FULL LIST OF RATING ACTIONS
The full list of rating actions is below:
Long-Term Foreign- and Local-Currency IDRs upgraded to 'BBB'; Outlook Stable
Local-currency senior unsecured rating upgraded to 'BBB'
Short-Term Foreign- and Local-Currency IDRs upgraded to 'F2'.