SBI FD Rates: SBI slashes FD rates by 40 basis points

SBI slashes FD rates by 40 basis points. And, a cursory view of Nestle India’s stock.
The previous generation has hailed fixed deposits so much that even we find it attractive. Whenever a person in India has got some extra money, the first option that comes to mind is getting an FD done. Reasons for this are also simple – no risk of losing money, a decent rate of return (till now it was slightly more than inflation) and an option to get your money back anytime (compromising the interest). But, latest news from the State Bank of India has put all the FD lovers in dilemma.

SBI has cut FD interest rates by 40 basis points across tenors! This is the second rate cut for the month. And, with this the highest rate offered by SBI on FD now stands at just 5.4% (for fixed deposit that matures in 5 years and up to 10 years). And, the fixed deposit for 7 – 45 days will give only 2.9% return. Besides this, SBI has also slashed the interest rates on bulk deposits (comprising deposits of Rs. 2 crores and more) by 50 basis points. All this has already come into effect.

What Does This Mean?

SBI’s announcement to slash the FD rates has come after RBI announcement to cut the repo rate. Cutting the repo rate was RBI’s step to boost demand. And, it looks like slashing the FD rates is SBI contribution to the same. Expectedly, SBI has got a lot of cash post demonetization and that needs to be used in order to generate returns and that’s impossible with people consistently doing FDs. Also, PSUs have gathered lots of NPAs and they’re under pressure from the government to get rid of this.

It's important to understand that with this announcement, FD has become an unattractive option for people to invest in (with inflation growing faster than the deposit). So, they may look for other investment options. If the capital markets or equity markets gain because of this, it would in turn assist in the economic revival as well. But, will this happen as expected? We’ll have to wait and watch.

Nestle India Limited (NESTLEIND)

Nestle India is one of the strongest brands in the FMCG sector in India offering “good food, good life” to its consumers. It is a subsidiary of Nestle S. A., Switzerland. It has gained experience about behaviour and changing preferences of Indian consumers for more than 100 years and currently operating through its 8 manufacturing units and 4 branch offices. It has its presence in milk & nutrition, beverages, prepared dishes & cooking aids, and confectionery segments.

The products offered are of international standards under its famous brands such as Nescafe, Maggi, KitKat, Milkmaid, Nestea, and MilkyBar, etc. It is continuously applying its nutrition expertise in bringing premium food innovations to the market to meet the needs of the modern consumer.

It has established a deep distribution network across the country delivering its products to increase access to nutrition for everyone, everywhere. It focuses on increasing growth by offering relevant products and solutions to its customers. It has launched around 60 new products in the last 3-4 years with 7 out of 10 successful launches.

E-commerce contributes around 2% ($1.2 billion) of total FMCG sales. With the growing internet and smartphone penetration, the sales are expected to rise to $4 billion by 2022. Nestle is utilizing the rise of digital and online shopping in the retail industry to deliver more personalized products and services directly to consumers. Nestle’s e-commerce sales share has seen an increasing trend with 8.5% (16.61%, 7Yr-CAGR) of its worldwide sales in 2019.

Nestle has shifted from its single strategy for the entire nation to a more focussed approach by forming 15 clusters throughout the country. Leveraging the capacity of its data analytics and consumer insights, it has been able to understand consumer behaviour and preferences by considering different dimensions in a better way and formed clusters to target consumers in a more focussed manner. The company has different strategies for different clusters and adopted the right media mixes (local media channels) to connect with local consumers.

This transformation to bottom-up approach (focus on the consumer first and then decide upon strategies) has helped Nestle to increase its market share, sales growth, improve margins, and establish connect with consumers. It is one of the few companies that showed growth during the slowdown last year. Revenues grew by 10.5% and profits by 33.5% (QoQ) 2QFY20.

Nestle India, with a current market capitalization of ₹ 1,60,582 Crores has created significant value for investors by delivering 20.03% CAGR return in the last 19 years. The company has registered decent sales growth of 10.02% CAGR in the last 3 years by maintaining an average profit margin of 14.06% in the same period. The company’s ROE has improved significantly in the last few years, primarily on account of expansion in net profit margin. Its current ROE stands at 70.3% compared to the 3-year average of 50.73%.

It has excellent efficiency in terms maintaining working capital with an average receivable day of 3.4 days, and payable days 46.48 days (Last 3 years Average) which helps the company to maintain healthy cash reserves. The major part of the profit (around 65.78% as per FY 2019) is used for distributing dividend to shareholders. The company average dividend yield stands at 1.48%

What is good?

• Market leadership:
  With an experience of more than 100 years in the Indian market, it has strong market leadership in 85% of the portfolio. This includes various categories such as Cereals (Cerelac, 96.7% market share), Instant Noodles (Maggi, 59.6% market share), Instant Coffee (Nescafe, 50.9% market share), Confectionaries (KitKat, Munch, and MilkyBar, 64.1% market share), condensed milk (Milkmaid, 70% market share)  as of H1 FY19

• Operating efficiency:
  The transformation to the new bottom-up approach and targeting consumers by forming 15 clusters has helped in connecting with consumers at greater efficiency and increasing sales growth in the domestic market

• Brand loyalty and recall:
  Nestle has successfully targeted urban and upper-middle-class demography and positioned itself as a company providing good quality and healthy food and beverages. Also, It has marked its presence via a plethora of social initiatives

• In-sync with consumer brand:
  Given its largest R&D network facilitating continuous product improvement and frequency of product launches with 7 out of 10 successful launches has helped in establishing better consumer connect in this fast-changing world

What is Bad?

• High expenditure on advertisement and branding activities are affecting its profit margins

• Huge competition from other established players as products can be easily substituted and has limited market share growth opportunity