Eternal FII cap impact: Passive outflows likely at $700 million, says Nuvama

The proposal by Eternal (erstwhile Zomato Ltd) to cap Foreign Ownership Limit (FOL) from 75 per cent to 49.5 per cent is up for shareholder approval via a postal ballot, with results expected by May 21, 2025. As soon as the approval is in place, the new FII cap implications should be immediate. 

Nuvama Alternative Research estimated approximately $600 million in outflows due to tinkering to MSCI Standard index, equating to 226 million shares or 2.7 days of trading volumes. In the case of changes to FTSE Emerging Markets Index, a $100 million hit is likely, translating to 37 million shares or 0.4 days of trading volume.

While the decision is aimed at aligning Eternal with Indian regulatory norms and enhance operational flexibility, particularly for its quick commerce segment, Blinkit, it may have impact on passive flows on the counter. 

Nuvama said the development by Eternal was widely anticipated by market participants. While MSCI-related outflows may exert short-term pressure, the gradual nature of FTSE adjustments should be not concerning as there is a possibility of pause in reduction if FII headroom moves above 10 per cent, it said.

"A potential price correction of approximately 5 per cent may result from this development. However, I don't perceive this as a significant derating scenario for the stock. Based on my interactions with domestic clients, there's evident interest in accumulating the stock should it decline below Rs 205/210, compared to the current market price of Rs 230," said Abhilash Pagaria of Nuvama Alternative Research. 

At the end of March quarter, FII Holding in Eternal stood at 44.88 per cent. Post-FOL, reduction headroom would be 9.33 per cent. This headroom is below the 10 per cent threshold, potentially triggering adjustments in global passive indices, Nuvama said.

At present, Eternal's weight in MSCI Standard index is Current 1.33 per cent. "With headroom between 7.5% and 15%, MSCI applies a 0.5 adjustment factor, effectively halving the stock's weight in the index. Estimated outflows stand at  approximately $600 million, equating to 226 million shares or 2.7 days of trading volume. MSCI may implement this change as early as May 2025 end (ideally, they should do this) or defer to the August 2025 quarterly review," Pagaria said. 

Purely on the basis of past experience, MSCI's implementation decisions in such cases involve a degree of subjectivity, with feedback from buy-side clients playing an integral role in shaping the outcome, Pagaria added. 

"This could lead to negative price impact of approximately 5 per cent. I don't view this as a significant negative trigger; future price movements are likely to be more influenced by fundamental factors," he said.

Meanwhile, in the case of FSTE EM index, the stock may see complete deletion from the index. At present, its weight stands at 1.17 per cent.  Nuvama noted that FTSE reduces the investability weight by 10 percentage points per quarter when headroom falls below 10 per cent. In this case, outflows are seen to the tune of $100 million, translating to 37 million shares or 0.4 days of trading volume.

Outflows in this case are expected to occur over at least 4 to 5 quarterly reviews, making the impact more gradual and manageable, Nuvama said. Here, the first reduction could occur in the June 2025 review. If headroom improves above 10 per cent (currently it is at 9.33 per cent) before subsequent reviews, FTSE would pause further reductions. 

For FII headroom to move above 10 per cent, FII holding needs to come down to about 44.5 per cent against 44.88 per cent currently, Pagaria said.