DBRS Confirms Honda Motor Co., Ltd. at A (high), Trend Remains Stable

DBRS Limited (DBRS) has today confirmed the long- and short-term ratings of Honda Motor Co., Ltd. (Honda or the Company) and its related companies at A (high) and R-1 (middle), respectively, with Stable trends. The confirmation reflects the Company’s strong business profile, with Honda’s automotive products consisting of highly efficient technologies in both conventional internal combustion engines and alternative powertrains. Honda also enjoys modest diversification benefits from its motorcycles segment and financial services operations.

Honda’s profitability in fiscal 2014 (F2014, ending March 31, 2014) improved year over year, reflecting higher sales and positive currency effects. Through the six-month period ending September 30, 2014, sales increased further although industrial earnings growth was undermined by higher selling, general and administrative expenses. Going forward, profitability is likely to continue trending higher amid global automotive conditions that (despite some headwinds across certain markets) in aggregate remain rather favourable.

DBRS notes that Honda is undergoing a phase of substantial investment in technology development and growth activities, with the Company having incurred significantly higher capital expenditures (capex) and research and developmental expenses (relative to historical norms) in recent years. While some of the planned capacity additions have been delayed given headwinds in certain markets (notably Latin America and Thailand), the Company’s expansion in emerging markets is expected to result in a total production capacity likely exceeding 5.4 million units by year-end 2015. DBRS observes that such growth objectives are imperative for Honda, with automotive original equipment manufacturers being under pressure to attain sufficient scale to compete in the industry, where escalating costs linked with product development and tightening emissions legislation render it challenging for modestly sized auto companies to effectively compete.

Given the above, the Company’s free cash flow generation has been moderately negative in recent years, although Honda’s credit metrics throughout this period nonetheless remained wholly consistent with the assigned ratings. Furthermore, as per its business plan, Honda’s capex levels have peaked and will progressively decline going forward, which, amid projected earnings growth, should support free cash flow generation.

DBRS acknowledges that the recent considerable declines in fuel prices could be interpreted as a potential headwind for the Company in the important U.S. market; however, DBRS does not expect Honda’s North American sales to be significantly adversely impacted. Moreover, the Company’s future growth plans are focused on emerging markets, where compact vehicles dominate.

DBRS expects the ratings to be constant over the near to medium term. DBRS will continue to monitor Honda’s exposure to the ongoing airbag vehicle recall crisis at Takata Corporation. While currently DBRS deems it highly unlikely that this crisis would result in any rating action involving Honda, unforeseen developments could nonetheless potentially trigger an event-driven review of the ratings.

Notes:
All figures are in Japanese yen unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Automotive Manufacturing Industry, which can be found on our website under Methodologies.

The ratings for Honda Canada Finance Inc. are supported by Honda Motor Co., Ltd. through a Keep Well Agreement.