Nuvama Institutional Equities has cut its target price on Mahanagar Gas Ltd (MGL) to ₹1,224 (from ₹1,305 earlier), while retaining its Reduce rating, citing concerns over deterioration in sourcing mix, potential margin pressure, and policy uncertainties in the City Gas Distribution (CGD) sector.

Following its recent analyst interaction with MGL management, Nuvama said that while healthy volume growth momentum is likely to continue in the near term, structural headwinds remain.

Volume growth to remain strong

MGL’s management expects double-digit volume growth to sustain, driven by several initiatives:

• Ongoing expansion of gas infrastructure — targeting addition of 180 km of steel pipelines and 250 new CNG stations by 2030
• Marketing incentives for CNG — where MGL is partly covering the capital cost of vehicle conversion to CNG
• Offering a 10 percent discount to fuel oil prices for new PNG industrial customers for three years
• CNG price competitiveness — with CNG currently 47 percent cheaper than petrol and 12 percent cheaper than diesel, leaving headroom to cut prices if needed
• Gradual pickup in LNG fuelling for long-haul trucks, as capital costs decline over time.

In addition, MGL sees further potential upside from:

• The merger of fast-growing UEPL
• Greater utilisation of exclusive CNG fuelling infrastructure for BEST buses
• Possible regulatory tailwinds if ICE vehicle phase-out recommendations in Mumbai Metropolitan Region are implemented
• Development boost from the ramp-up of Navi Mumbai airport.

Rising sourcing costs to weigh on margins

However, Nuvama cautions that MGL’s gas sourcing mix is deteriorating faster than expected:

• The share of Administered Pricing Mechanism (APM) gas is declining, as more gas gets reclassified under New Well Gas (NWG), which is priced at a 20 percent premium.
• The shift, previously occurring at 7–8 percent annually, is now expected to accelerate to 10–12 percent per year.
• As a result, input gas costs will rise, putting pressure on margins.

Industry-wide, Nuvama expects greater consolidation as lower profitability forces smaller or non-core players to divest CGD assets. MGL, with its net cash balance sheet, is open to inorganic growth opportunities if valuations are attractive.

Valuation de-rating risk due to policy overhang

Nuvama further notes that policy uncertainty and ad-hoc government interventions could lead to valuation de-rating across the CGD sector, similar to the trend seen in Oil Marketing Companies (OMCs), which trade at a significant discount.

As a result of these headwinds, Nuvama has cut its FY26–27 EBITDA estimates for MGL by 2 percent and lowered its target price to ₹1,224.

“We retain our Reduce rating, as the sector faces margin headwinds, input cost pressures, and policy- uncertainties,” the brokerage said.

Disclaimer: The views and target prices mentioned in this article are as stated by Nuvama Institutional Equities. They do not represent the opinions or recommendations of this publication. Readers are advised to consult their financial advisors before making any investment decisions.