Moody's upgraded Daikin Industries Ltd.'s issuer rating and senior unsecured bond rating to A2 from A3 and changed the outlook on the Japanese company to stable from positive.

The upgrade reflects Daikin's steadily improving financial profile, the rating agency said. Since fiscal 2012, the air conditioning products-maker has kept positive free cash flow, enabling it to cut its outstanding debt, while its overseas acquisitions have supported profit through diversification.

Moody's could consider upgrading Daikin's rating if leverage stays at a very low level over a prolonged period, such that debt to EBITDA is below 1.0x and EBITA margin is above 15% on a sustained basis.

On the other hand, the ratings would be under pressure if Daikin conducts large debt-funded acquisitions or shows signs of negative free cash flow, Moody's said.