Investing.com -- S&P Global Ratings has revised its outlook for France-based carmaker Renault (EPA: RENA ) S.A. to positive from stable, citing strong free operating cash flow (FOCF) prospects. The ratings agency affirmed the company’s ’BB+’ long-term and ’B’ short-term ratings. The revision comes as Renault’s successful execution of its "Renaulution" plan generated S&P Global Ratings-adjusted FOCF exceeding €4 billion over 2023-2024.

The ratings agency believes Renault’s product pipeline, along with its disciplined approach to pricing, costs, and investments, will support an S&P Global Ratings-adjusted EBITDA margin of 7%-8% from 2026. The positive outlook suggests that the ratings on Renault could be raised in the next six to 12 months if the company secures EBITDA margins close to 8%, with FOCF to sales around 2% and an increased penetration of its electric cars in Europe.

Renault is expected to maintain its EBITDA margin of 7%-8% from 2026, despite a higher share of battery electric vehicles (BEVs) in its mix. The carmaker plans to launch seven new cars in 2025 across all brands (Renault, Dacia, Alpine, and Mobilize) and powertrains. In 2024, Renault’s market share in Europe consolidated at 10.7%, outperforming the European market growth by 180 basis points.

The company’s Dacia Sandero was the best-selling car in Europe in 2024, with 271,000 units sold. Renault’s order book was about two months at the end of December 2024, in line with the company’s internal targets.

For 2025, S&P expects Renault’s EBITDA margin to decline to 6.5%-7.5%, mainly due to the increased share of electric vehicles in its sales mix. However, the recovery in 2026 is expected to be driven by the full availability of products launched this year, stringent cost management, and a positive EBIT swing at Ampere, Renault’s electric vehicle and software company.

As part of the Renaulution plan, Renault has significantly reduced its production costs and operates at an average 90% capacity utilization rate. This has aided in improving the company’s auto EBIT margin to 5.9% in 2024 from 3.3% in 2021. Over the next couple of years, Renault aims to further lower its breakeven by reducing manufacturing, logistics, and research and development costs.

The EU’s extended timeframe to achieve carbon dioxide emissions reduction targets is seen as positive for Renault. The company, with close to 80% of its sales coming from Europe, is highly exposed to the Corporate Average Fuel Economy (CAFE) regulation. The relaxation of the carbon dioxide rules removes the risk of penalties over the next couple of years and alleviates the need to push BEV sales through discounts this year if consumer demand for electric vehicles remains soft.

At the end of December 2024, Renault had an S&P Global Ratings-adjusted automotive net cash position of about €3.7 billion. The ratings agency expects Renault to retain ample financial headroom with its forecasts of cumulated FOCF of €3 billion-€4 billion over 2025-2026.

The outlook could revert to stable if Renault’s operating performance weakens, resulting in an adjusted EBITDA margin sustainably in the 6%-7% range and adjusted FOCF to sales staying in the 0%-2% range. This scenario could materialize as a result of new entrants in the European electric vehicle (EV) space, which would lead to an increase in competition.

S&P could raise its rating on Renault if the company establishes a durable and competitive EV position against intensifying competition from incumbents and new players in the European market. This would be supported by competitive model launches and the development of a reliable EV supply chain.

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