Jefferies predicts 17% surge for Mahanagar Gas stock – what’s driving this bold forecast?

Investment bank Jefferies Financial Group has raised its target price for Mahanagar Gas Limited, forecasting a significant 17% upside potential for the stock. The revised target price reflects Jefferies’ confidence in the natural gas distributor’s strategic initiatives, recent acquisitions, and overall market performance, which have made Mahanagar Gas a prominent player to watch in India’s city gas distribution sector.

Mahanagar Gas has shown strong growth in 2023, with its stock price increasing by 17% so far. This surge can be attributed to several strategic moves, including the acquisition of Unison Enviro, a private city gas distributor. According to ICICI Securities, this acquisition could add a net present value (NPV) of around Rs 500 crore to Mahanagar Gas. Experts believe this move is essential for the company to expand beyond the Mumbai Metropolitan Region and tap into new growth avenues.

Strategic Moves Drive Market Confidence

Jefferies’ decision to hike the target price for Mahanagar Gas is not an isolated event. Several brokerage firms, including ICICI Securities and Kotak Institutional Equities, have expressed optimism about the company’s growth trajectory. ICICI Securities set a one-year target price of Rs 1,125, while Kotak Institutional Equities pegged the fair value at Rs 1,080. This widespread positive sentiment among analysts is largely due to Mahanagar Gas’ recent strategic acquisition and the potential for increased penetration in existing markets.

Industry experts have highlighted that Mahanagar Gas is well-positioned to leverage its recent acquisition to diversify its customer base. With Unison Enviro under its wing, the company aims to consolidate its position in the city gas distribution sector. ICICI Securities noted that this move could address long-standing concerns regarding the company’s growth potential outside its core market.

Price Hikes and Stock Market Reaction

In July 2024, Mahanagar Gas raised prices for Compressed Natural Gas (CNG) by ₹1.50 per kilogram and Piped Natural Gas (PNG) by ₹1 per standard cubic meter (SCM) in Mumbai. This price adjustment led to a 5.3% increase in the company’s shares on the Bombay Stock Exchange, which reached ₹1,758.60. The price hike is primarily due to a shortfall in domestic gas allocation, requiring Mahanagar Gas to source additional market-priced natural gas. Despite the price increase, the company continues to offer competitive savings compared to traditional fuels like petrol and diesel, which has helped maintain strong demand for its services.

The price hike followed similar moves by other gas distribution companies like Indraprastha Gas Limited and Gujarat Gas. However, Mahanagar Gas’ stock performed well compared to its competitors, reflecting investor confidence in its market strategy and growth prospects.

Financial Performance and Future Outlook

Mahanagar Gas has demonstrated resilience despite facing financial challenges in recent quarters. For the fourth quarter ending March 2024, the company reported a 16.5% decline in net profit, amounting to ₹265 crore, primarily due to rising gas costs. Revenue from operations also dipped slightly, but analysts remain optimistic. They believe that the benefits of the recent acquisition and steady price adjustments will offset the near-term challenges.

ICICI Securities warned that Mahanagar Gas faces downside risks, including the inability to pass on higher gas costs to consumers and potential declines in the prices of alternative fuels like petrol and diesel. However, they also highlighted that increased penetration in existing markets and favorable regulatory changes could provide substantial upside risks.

Expert Opinions Highlight Growth Potential

Market experts suggest that Mahanagar Gas’ recent acquisition and proactive pricing strategy signal a robust growth outlook. Financial analysts believe that the company is strategically positioned to capitalize on its market strengths while mitigating risks associated with gas pricing and supply constraints. Mahanagar Gas’ ability to expand beyond its core market through acquisitions and adapt its pricing strategy shows a clear path to sustained growth in the city gas distribution sector.

Jefferies’ revised target price for Mahanagar Gas reflects growing confidence in the company’s strategic direction. With strong backing from other brokerage firms and a series of calculated moves to expand its market presence, Mahanagar Gas remains a significant player to watch in India’s energy sector.