DBRS Confirms Komatsu Ltd. at A (low) and R-1 (low)

In DBRS’s view, Komatsu Ltd.’s (Komatsu or the Company) ratings will remain on course and the Company’s Senior Unsecured Debt and Short-Term Debt ratings have been confirmed at A (low) and R-1 (low), respectively. The Company continues to benefit from strong demand for heavy mining and construction machinery, which has also strengthened its financial profile. Despite this, DBRS recognizes that the global economy has shown some indications of slowdown, particularly in residential housing construction, and Komatsu is highly sensitive to economic conditions, which constrains its rating potential.

The surge in commodities prices in recent years has bolstered demand for mining machinery and Komatsu continues to be well positioned to capitalize on this trend. Furthermore, the Company has substantially expanded its production capacity to meet accelerated demand, and has broadened its product line-up and continued to invest in new technology. For example, Komatsu’s leading-edge “ecot3” engine technology has cleared new emissions standards in Japan, Europe, and the United States. In addition, Komatsu has benefited from rapid economic growth in China that has resulted in robust infrastructure spending. However, DBRS is cautious that production capacity expansion was not excessive, as currently firm demand levels are likely to taper off over the near term. Additionally, Komatsu’s Japanese revenue (a major revenue source) continues to exhibit gradual growth, while growth rates in the United States, China and Europe are high.

Overall, Komatsu’s financial results were strong for the 12 months ended September 30, 2006. The Company continued to demonstrate prudent balance sheet management as it reduced debt substantially and generated solid cash flow from operations of over JPY233 billion (USD2 billion approximately). Profits were driven primarily by solid price increases, which also helped the Company achieve its goal of 10% operating profit margin ahead of schedule. However, DBRS expects Komatsu will still face rising input costs (such as steel) that can potentially inhibit further margin expansion.

Komatsu could see rating improvement if it gained market share on its chief rival, Caterpillar Inc., through the development of unique technology or new products, and a strengthened distribution network.

Notes:
All figures are in Japanese yen unless otherwise noted.
These ratings are based on public information.