On Monday, Mahanagar Gas Ltd (NS:MGAS) experienced a shift in its stock outlook as Jefferies downgraded the company's rating from Hold to Underperform. This change comes with a significant reduction in the price target, now set at INR1,130.00, a decrease from the previous target of INR1,740.00.
The downgrade by Jefferies reflects concerns over Mahanagar Gas's margin profile due to rising feedstock costs. The company has been noted for its strong execution on margins, which has supported earnings per share (EPS) growth despite volume growth being hampered by infrastructure bottlenecks in Mumbai.
However, recent developments have cast a shadow on the company's cost structure. The Indian government has reduced the Administered Price Mechanism (APM) allocation to compressed natural gas (CNG) providers for the second consecutive month, this time by approximately 20%.
This reduction suggests that more expensive domestic gas supplies might soon replace the currently cheaper options, potentially impacting the margins of Mahanagar Gas.
Jefferies highlighted the impact of the lower APM allocation on Mahanagar Gas, indicating that the sharp increase in feedstock costs would be detrimental to the company's margin profile. This cost pressure is a critical factor behind the downgrade and the lowered price target for the company's stock.
The revised price target of INR1,130.00 from Jefferies takes into account the anticipated challenges Mahanagar Gas faces in maintaining its profitability amidst the changing gas supply dynamics. The firm's analysis points to a more cautious outlook for the company's financial performance in the near future.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.