PGCIL, a Navratna public sector enterprise, is a notified Central Transmission Utility. It is the largest power transmission utility globally, with 79,556ckm of transmission network.

With funds infusion via the FPO, we expect PGCIL to comfortably meet its targeted capex of Rs550bn for the XIth Plan - of which it has already spent Rs254bn in the first three years and plans to spend Rs300bn more over FY11 and FY12. PGCIL plans to more than double its XIIth Plan capex target to Rs1.2trn.

Since PGCIL's earnings are linked to its capex, a ramp-up in capitalization will translate into improved earnings. We expect capitalization to improve to Rs130bn in FY12 versus Rs29bn in FY10. During H1 FY11, the company already commissioned projects worth Rs51bn. This should translate into 22% PAT CAGR over FY11-13.

Recently, CERC accorded approval for creating nine High Capacity Transmission Corridors with HVDC lines. Total investment planned in these projects is Rs580bn.

We expect its regulated equity base to grow at 25% CAGR over FY10-13.

With a core RoE of 20% and P/BV of 1.8x FY12E book, we believe the stock trades cheap - below its historical average of 2.5x one year forward P/BV, we recommend BUY for a target price of Rs115/share.