Ever ordered dinner at midnight without a second thought? Chances are the app you used is now catching the eye of a global brokerage house. Jefferies has turned bullish on the stock, setting a target price of Rs 435 and a ‘Buy’ tag. This implies as much as 59% upside from current levels.
The company in focus here is Swiggy, the food delivery and quick-commerce platform millions of Indians use almost on autopilot. According to the brokerage report, the key focus is ownership structure, foreign investment rules, and a business model shift that could reshape the company’s margins.
Let’s take a look at Jefferies’ investment rationale –
The ownership change at the centre
Swiggy shareholders have approved a proposal to cap aggregate foreign ownership at 49.5%. More than 99% of the votes cast were in favour of the proposal.
Jefferies noted, “Swiggy’s IOCC transition moves a step closer with shareholder approval of the 49.5% foreign ownership cap.”
This is part of what is called the IOCC transition – short for Indian Owned and Controlled Company.
The company still needs to complete the implementation process. According to Jefferies, notifying depositories such as the National Securities Depository (NSDL) and Central Depository Services (India) (CDSL) could take around two to three weeks.
Why does Instamart matters?
Here is where the operational opportunity comes in. Instamart currently operates through a marketplace structure. After the transition, it could also directly own and sell inventory under a first-party, or 1P, model.
This model is already used by Eternal’s Blinkit.
What could change for Swiggy?
The brokerage house noted that the 1P model could give Instamart greater control over sourcing, product assortment and inventory management.
The brokerage estimates this could result in around 80 basis points of improvement in contribution margin.
Jefferies said the “IOCC status would allow Instamart to directly own and sell inventory through a 1P (inventory-led) model.”
Management expects the transition to take place over the next two to four quarters.
Swiggy: Near-term risks to watch
The ownership cap could create another issue for Swiggy. Foreign ownership is already close to the proposed 49.5% limit. As per Jefferies report, foreign ownership stood at 49.5% as of August 2, while domestic ownership was 50.5%.
Here’s where index rules enter. Under MSCI (Morgan Stanley Capital International) guidelines, if foreign portfolio investor, or FPI, holding comes within 3% of the permitted ceiling — in this case 46.5% – the stock gets red-flagged. Once that happens, exchanges start publishing exact FPI holding figures every evening. And if the limit is actually breached, foreign investors have just five trading days to sell down their excess shares, and only to domestic buyers.
Could Swiggy see Rs 400 million outflow?
This is the key near-term concern. Jefferies estimates Swiggy could see passive outflows of more than $400 million from MSCI and FTSE indices if the stock is excluded.
The brokerage noted, “…Once the new foreign ownership limit is updated with the depositories, benchmarks will likely exclude the stock within 2-3 business days.”
What investors need to watch
Jefferies believes the ownership transition could eventually provide greater flexibility to Instamart and support margins.
It also expects the operational transition to happen without major disruption to customers or suppliers.
Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.