I disagree with you. Manchester City is still favourite to win the league because Pep has an almost unchanged squad. Gundogan is the player whose absence would be greatly missed, he was their captain and was carrying the team on his shoulders in every games. Another player being rumoured to leave is Mahrez. He's been restricted to the bench, and sometimes when he comes in he produces something spectacular but I don't really see how his departure would affect the team.
Gundogan left and perhaps Mahrez will leave Manchester City but he will not be the only star player will leave Etihad in this summer. Manchester City still have very strong squad to be competitive enough in Premier League and they have high chance to protect their title. However they will be challenged more by competitors like Arsenal, Liverpool, Chelsea and perhaps Manchester United as well as Newcastle United. They are champions in Champions League and they will carry a task to protect it too. I think pressure to succeed in Champions League will continue to impact their performance in Champions League.
Pep is also recruiting good players to strengthen the team like the acquisition of Kovacic from Chelsea and Josko Gvardiol from Leipzig, so they still pose a threat to other teams.
Kovacic and Gvardiol will help Manchester City to have better defense. Kovacic will support Rodri in the midfield and Gvardiol will bring both strength for their defense but also will help them to have more proactively attacking from their back line.