Jefferies has raised its target price for Mahanagar Gas Ltd (MGL) to Rs 2,120 from Rs 1,990, reiterating its 'Buy' recommendation. The new target price indicates a 17 percent upside for the stock.
Jefferies remains optimistic about MGL's growth path. The volume growth outlook for the company is also improving driven by an accelerated pace of outlet additions and a healthy industrial volume growth, Jefferies said in a note.
In the previous session, September 11, shares of MGL closed nearly 3 percent lower at Rs 1,810. The stock has gained nearly 38 percent in the past six months, outperforming the Nifty 50 index which gained 12 percent during the same period.
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Falling Administered Price Mechanism (APM) gas allocations present structural challenges for city gas distributors (CGDs) such as MGL, pointed out Jefferies.
Falling APM gas allocations present structural challenges for CGDs because APM gas, sourced from nomination blocks of Oil and Natural Gas Corp (ONGC) and Oil India (OIL), is priced by the government at lower rates compared to market-priced natural gas, such as spot LNG. This pricing system sets both a floor and ceiling for the rates at which exploration companies can sell gas to CGDs like Mahanagar Gas.
As APM gas allocations fall, CGDs are forced to buy more expensive gas from the open market. This drives up their costs, puts pressure on margins, and leads to higher prices for end consumers.
Jefferies, however, believes that MGL is better positioned to defend its margins compared to peers due to its lower dependence on costly spot LNG. As a result, MGL continues to be Jefferies' top pick in the CGD sector.
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