Eternal shares could see $1.3 billion FII outflow, MSCI exclusion. Jefferies explains why
Shares of
Eternal
, which operates
Zomato
and Blinkit, could come under selling pressure once the company's board starts the process of conversion into Indian Owned & Controlled Company (IOCC). An overwhelming majority of 99% shareholder votes have been in favour of the proposal to impose a cap on foreign ownership, after which the stock can see outflow of $1.3 billion and even MSCI exclusion, according to Jefferies.
At the end of the March quarter, foreign ownership in Eternal stood at 44.8%. "Given the recent upward movement in the stock along with the volumes since the announcement of last shareholding, it may be possible that the FPI holding may have increased to around 46%, in our view," Vivek Maheshwari of Jefferies said.
Under MSCI rules, if the FII holding is within 3% below the maximum permissible limit (in this case 46.5%), the stock comes under the red flag list.
"The exchanges/depositories would then release exact FPI holdings data every evening. If the FPI limit is breached, the foreign investor shall divest their excess holdings within five trading days from the date of settlement of trades, by selling shares only to domestic investors. For eg: if the FPI limit is breached on T day, exchange will notify on T+1 day and foreign buyers (shares bought on T day) would need to unwind their shares over and above the foreign limit (on pro rata basis) within 5 trading days," Jefferies said, explaining the rules.
The global brokerage firm said conversion to IOCC would also lead to either reduction in weight or a complete exclusion from MSCI.
"In this case, based on MSCI's foreign ownership room calculation, Eternal could either face immediate exclusion from the MSCI index—triggering estimated outflows of approximately $1.3bn or there would be a reduction in index weight, leading to outflows of around $650mn during the Aug-25 rebalancing," Maheshwari said.
In case the foreign ownership limit is breached before implementation, then it would lead to a definitive exclusion from MSCI.
Following comments from Jefferies,
Eternal shares
were down around 4% to the day's low at Rs 228.35 on BSE.
Under India's foreign direct investment rules, foreign-funded online marketplaces are not allowed to own inventory or control sellers on their platforms. Due to these restrictions, quick commerce platforms do not directly own the dark stores – micro-warehouses used for 10-minute deliveries – which are instead operated by separate entities.
Eternal had earlier said the IOCC status will enable Blinkit to improve its margins, particularly in fragmented or unbranded categories, as well as in the established fast-moving consumer goods segment, where owning inventory allows for better margins.
The IOCC status would enable it to launch private labels across categories such as home décor, gourmet foods, toys, pooja items and seasonal merchandise. 'By offering working capital support directly to small brands and manufacturers, and/or using our balance sheet to own inventory, Blinkit can help drive growth across many such product categories,' it said.
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