Moody’s Investors Service has lowered from stable to negative its outlook for Honda Motor Co. Ltd. over concerns that the Japanese carmaker faces significant challenges in recapturing its market position due to growing competition. According to Moody’s, a series of negative one-time events last year have delayed Honda’s recovery of its profits, which have historically been high and stable.
Moody’s Japan K.K. noted that although Honda still has a good reputation, its rivals have improved their product quality and brand acceptance in the last few years, making the competition in the auto market tougher. Moody’s also noted that Honda has lowered its lowered its guidance for consolidated operating profits from JPY270 billion to JPY200 billion for the fiscal year ending March 2012, due to the Thai floods and the strong yen as well as the earthquake in Japan in March 2011.
The rating service said that effects of the natural disasters that hit Honda are temporary, and the company will see a recovery in its sales thanks to its flagship cars CR-V and Accord.
The service, however, expressed concern that the stiff competition makes it unclear how much market share Honda can regain with the new models. Bloomberg said that Moody’s maintained Honda’s senior unsecured long-term rating at A1, four spots below the top investment grade. Moody’s said Honda's A1 rating is unlikely to be upgraded in the short-term because of the negative outlook.
The service, however, said it would change the outlook to stable if Honda increases its market share and improves its financial profile. Moody’s said it the outlook would be reverted to stable if the carmaker posts an adjusted EBITA margin exceeding 4% in the next fiscal year.
However, the rating would be downgraded if the company instead records an EBITDA margin below 4% in the fiscal year ending March 2013. The outlook change was in sharp contrast with the announcement of Honda President Takanobu Ito that he expects Honda to post record vehicle sales next fiscal year amid a “complete rebound.”